<PAGE> 1
PART I.
ITEM 1. BUSINESS
Corus Bankshares, Inc. (formerly known as River Forest Bancorp, Inc.),
incorporated in Minnesota in 1958, is a bank holding company registered under
the Bank Holding Company Act of 1956. Bankshares provides consumer and
corporate banking products and services through its wholly-owned banking
subsidiary, Corus Bank, N.A.
The bank has twelve branches in the Chicago metropolitan area and offers
general banking services such as checking, savings, money market and time
deposit accounts; commercial, mortgage, home equity, student and personal
loans; trust services; safe deposit boxes and a variety of additional services.
The bank also provides clearing, depository and credit services to more than
400 currency exchanges in the Chicago area.
Bankshares owns an operations subsidiary, Bancorp Operations Company, that
comprises an insignificant portion of Bankshares' total assets and net income.
Bancorp Operations Company provides item processing, bookkeeping and other
ancillary bank support services to Bankshares' bank subsidiary.
COMPETITION
All of Bankshares' principal business activities are highly competitive.
Bankshares competes actively with other financial services providers offering a
wide array of financial products and services. The competitors include other
banks, savings and loan associations, credit unions, brokerage firms, finance
companies, insurance companies, mutual funds and mortgage bankers. Competition
is generally in the form of interest rates and points charged on loans,
interest rates paid on deposits, service charges, banking hours, fiduciary
services and other service-related products.
EMPLOYEES
At Dec. 31, 1996, Bankshares employed a total of 704 full-time equivalent
persons, consisting of 125 executives, management and supervisory personnel and
579 clerical and secretarial employees.
SUPERVISION AND REGULATION
General
Bankshares is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the Act), and is registered as such with the
Board of Governors of the Federal Reserve System (the Federal Reserve Board).
The Act requires every bank holding company to obtain the prior approval of the
Federal Reserve Board before acquiring, merging with or consolidating into
another bank holding company, acquiring substantially all the assets of any
bank, or acquiring direct or indirect ownership or control of 5% or more of the
voting shares of any bank or bank holding company.
The Act also prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of 5% or more of the voting
shares of any company which is not a bank and from engaging in any business
other than that of banking, managing and controlling banks or furnishing
services to banks and their subsidiaries. However, Bankshares may engage in
and own shares of companies engaged in certain businesses determined by the
Federal Reserve Board to be closely related to banking or managing or
controlling banks.
The Illinois Bank Holding Company Act of 1957 (the Illinois Act), as amended,
permits Bankshares to acquire banks located anywhere in Illinois. Other
amendments of the Illinois Act authorize combinations between banks
1
<PAGE> 2
and bank holding companies located in Illinois and banks and bank
holding companies located in another state if that other state has passed
legislation granting similar privileges to Illinois banks and bank holding
companies. Effective December 1, 1990, holding companies from any state were
permitted to acquire Illinois banks and bank holding companies if the other
state allows Illinois bank holding companies the same privilege. In June 1993,
the Illinois Act was amended to eliminate all branch restrictions.
Accordingly, banks located in Illinois are permitted to establish branches
anywhere in the state.
Bankshares' subsidiary bank is a national bank and, as such, is supervised,
examined and regulated by the Office of the Comptroller of the Currency under
the National Bank Act. Since a national bank is also a member of the Federal
Reserve System and its deposits are insured by the Federal Deposit Insurance
Corporation (FDIC), the subsidiary bank is also subject to the applicable
provisions of the Federal Reserve Act, the Federal Deposit Insurance Act, and,
in certain respects, to state laws applicable to financial institutions.
The subsidiary bank is subject to FDIC deposit insurance assessments. Under
the FDIC's risk-based assessment system, the assessment rate is based on
classification of a depository institution in one of nine risk assessment
categories. Such classification is based upon the institution's capital level
and upon certain supervisory evaluations of the institution by its primary
regulator.
Effective January 1, 1997, the assessment rate schedule creates a spread in
assessment rates ranging from 0.27% per annum on the amount of deposits for
banks classified as weakest by the FDIC down to no assessment for banks
classified as strongest by the FDIC. In 1997, an additional billing of 1.296
basis points per annum on the amount of deposits will occur for all depository
institutions regardless of assessment classification as a result of the Deposit
Insurance Act of 1996.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
initiated new intense regulation for the financial services industry. FDICIA
made significant changes in the legal environment for insured banks, including
reductions in insurance coverage for certain types of deposits, increases in
consumer-oriented requirements, and substantial revisions in the supervision,
examination and audit processes. FDICIA also required new reporting by banks
and mandated adoption of new regulations concerning capital, liquidity,
internal controls, safety and soundness and prompt corrective action.
Capital Adequacy
The Federal Reserve Board established risk-based capital guidelines that
require bank holding companies to maintain minimum ratios. The main objective
of the risk-based capital requirements is to provide a fair and consistent
framework for comparing capital positions of all banking institutions. Under
these guidelines, capital consists of two components, core capital elements
(Tier 1 capital) and supplementary capital elements (Tier 2 capital). Assets
and off-balance-sheet items are assigned broad risk categories. The aggregate
dollar value of each category is multiplied by a risk weight associated with
this category.
In 1992, the FDIC adopted new regulations which defined five capital categories
for purposes of implementing the requirements under FDICIA. The five capital
categories, which range from "well-capitalized" to "critically
under-capitalized", are based on the level of risk-based capital measures. The
minimum risk-based capital ratios for Tier 1 capital to risk-weighted assets
and total risk-based capital to risk-weighted assets are 4.0% and 8.0%,
respectively. The minimum risk-based capital ratios for Tier 1 and total
risk-based capital to be classified as well-capitalized are 6.0% and 10.0%,
respectively. At Dec. 31, 1996, Bankshares' Tier 1 capital and total
risk-based capital ratios were 13.5% and 14.8%, respectively.
In addition, bank regulatory agencies established a leverage ratio to
supplement the risk-based capital guidelines. The leverage ratio is intended
to ensure that adequate capital is maintained against risks other than credit
risk. A
2
<PAGE> 3
minimum required ratio of Tier 1 capital to total assets of 3.0% is
required for the highest quality bank holding companies that are not
anticipating or experiencing significant growth. All other banking
institutions must maintain a leverage ratio of 4.0% to 5.0% depending upon an
institution's particular risk profile. At Dec. 31, 1996, Bankshares' leverage
ratio was 9.7%.
Interstate Banking
The Riegle-Neal Interstate Bank and Branching Efficiency Act of 1994 (IBBA)
permits bank holding companies that are adequately capitalized and managed to
acquire banks located in any other state after September 29, 1995, subject to
certain statewide and nationwide deposit concentration limits. States may also
prohibit acquisition of banks that have not been in existence for at least five
years.
The interstate branching by merger provisions are effective on June 1, 1997,
unless a state takes legislative action prior to that date. States may pass
laws to either "opt-in" before June 1, 1997, or to "opt-out" by expressly
prohibiting merger transactions involving out-of-state banks, provided
legislative action is taken before June 1, 1997. The effects on Bankshares of
such changes in interstate banking and branching laws cannot be predicted.
However, it is likely that there will be increased competition from national
and regional banking firms headquartered outside of Illinois.
STATISTICAL DATA
Pages 3 through 10 contain supplemental statistical data. This data should be
read in conjunction with Bankshares' Management's Discussion and Analysis of
Financial Statements and the Consolidated Financial Statements and notes
thereto of the 1996 Annual Report to Shareholders (1996 Annual Report),
incorporated herein by reference in response to Items 7 and 8 hereof.
CHANGES IN INTEREST INCOME AND EXPENSE
The following table shows the changes in interest income and expense by major
categories of assets and liabilities attributable to changes in volume or rate
or both, for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------
(thousands) Volume Rate Total
----------- ---------- -----------
<S> <C> <C> <C>
Interest Income:
Interest-earning deposits with banks $ (845) $ 8 $ (837)
Federal funds sold (254) (253) (507)
Taxable securities (2,480) (2,618) (5,098)
Tax-advantaged securities (145) (9) (154)
Trading account securities (151) (151) (302)
Loans, net of discount 30,056 (3,623) 26,433
------- --------- ------
Net Increase (Decrease) 26,181 (6,646) 19,535
------- --------- ------
Interest Expense:
NOW and money market deposits 1,208 (3,309) (2,101)
Savings deposits (615) (47) (662)
Time deposits 7,476 432 7,908
Short-term borrowings 564 (334) 230
Federal Home Loan Bank advances 820 819 1,639
------- --------- -------
Net Increase (Decrease) 9,453 (2,439) 7,014
------- --------- -------
Increase (Decrease) in Net Interest Income $16,728 $(4,207) $12,521
======= ========= =======
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
Year Ended December 31, 1995
------------------------------------------
Volume Rate Total
------ ---- -----
<S> <C> <C> <C>
Interest Income:
Interest-earning deposits with banks $ 748 $ (34) $ 714
Federal funds sold (219) 663 444
Taxable securities 3,363 3,790 7,153
Tax-advantaged securities (172) (422) (594)
Trading account securities (769) 50 (719)
Loans, net of discount 29,980 19,386 49,366
------ ------- -------
Net Increase 32,931 23,433 56,364
------ ------- -------
Interest Expense:
NOW and money market deposits 17,421 6,166 23,587
Savings deposits (976) (53) (1,029)
Time deposits (467) 4,490 4,023
Short-term borrowings (128) 434 306
Subordinated debentures (19) (19) (38)
------ ------- -------
Net Increase 15,831 11,018 26,849
------ ------- -------
Increase in Net Interest Income $17,100 $12,415 $29,515
======= ======= =======
</TABLE>
The tax-equivalent adjustment for interest income on tax-advantaged loans and
securities is reflected through the rate column based on a marginal corporate
income tax rate of 35%. Volume variances are computed using the change in
volume multiplied by the previous year's rate. Rate variances are computed
using the changes in rate multiplied by the previous year's volume. The change
in interest due to both rate and volume has been allocated between the factors
in proportion to the relationship of the absolute dollar amounts of the change
in each.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is the fluctuation in earnings resulting from changes
in market interest rates. Management's primary objective regarding
asset/liability management is to position Bankshares such that changes in
interest rates do not have a material adverse impact on net income. Bankshares
utilizes off-balance-sheet financial instruments, such as interest rate swaps
and floors, as a tool for preventing adverse swings in net interest income.
4
<PAGE> 5
Management uses a variety of techniques to measure interest rate sensitivity.
One technique is interest rate gap analysis. The following table represents
the interest rate gap analysis for Bankshares at Dec. 31, 1996:
<TABLE>
<CAPTION>
Maturing or Repricing
-----------------------------------------------------------------
1-90 91-180 181-270 271 Days
(thousands) Days Days Days to 1 Year
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Earning Assets:
Federal funds sold $ 98,500 $ - $ - $ -
Securities available for sale 148,158 61,778 15,011 14,998
Securities held to maturity - 452 400 100
Loans, net of unearned discount 866,238 12,059 9,681 312,903
Noninterest-earning assets - - - -
-----------------------------------------------------------------
Total assets 1,112,896 74,289 25,092 328,001
Interest-bearing deposits:
Savings and NOW (293,444) - - -
Money market (925,365) - - -
Certificates of deposit (174,105) (114,448) (31,763) (73,539)
-----------------------------------------------------------------
Total interest-bearing deposits (1,392,914) (114,448) (31,763) (73,539)
Short-term borrowings (6,317) - - -
Federal Home Loan Bank
advances (40,000)
Noninterest-bearing deposits - - - -
Noninterest-bearing liabilities
and shareholders' equity - - - -
-----------------------------------------------------------------
Total liabilities and
shareholders' equity (1,439,231) (114,448) (31,763) (73,539)
Interest rate swaps 195,355 11,100 - -
-----------------------------------------------------------------
Interest sensitivity gap $ (130,980) $ (29,059) $ (6,671) $ 254,462
=================================================================
Cumulative interest sensitivity gap $ (130,980) $ (160,039) $ (166,710) $ 87,752
=================================================================
Cumulative gap as a percentage
of total assets (5.90)% (7.21)% (7.51)% 3.96%
=================================================================
Maturing or Repricing
------------------------------------------------------
Over 1 Year Nonsensitive and
(thousands) to 5 Years Over 5 Years Total
------------------------------------------------------
<S> <C> <C> <C>
Earning Assets:
Federal funds sold $ - $ - $ 98,500
Securities available for sale 37,710 101,374 379,029
Securities held to maturity 2,497 7,805 11,254
Loans, net of unearned discount 111,794 310,470 1,623,145
Noninterest-earning assets - 106,600 106,600
------------------------------------------------------
Total assets 152,001 526,249 2,218,528
Interest-bearing deposits:
Savings and NOW - - (293,444)
Money market - - (925,365)
Certificates of deposit (92,638) (53) (486,546)
------------------------------------------------------
Total interest-bearing deposits (92,638) (53) (1,705,355)
Short-term borrowings - - (6,317)
Federal Home Loan Bank
advances (40,000)
Noninterest-bearing deposits - (195,324) (195,324)
Noninterest-bearing liabilities
and shareholders' equity - (271,532) (271,532)
------------------------------------------------------
Total liabilities and
shareholders' equity (92,638) (466,909) (2,218,528)
Interest rate swaps - (206,455) -
-------------------------------------------------------
Interest sensitivity gap $ 59,363 $ (147,115) $ -
======================================================
Cumulative interest sensitivity gap $147,115 $ - $ -
======================================================
Cumulative gap as a percentage
of total assets 6.63% - -
======================================================
</TABLE>
This table is not necessarily indicative of the impact on Bankshares from
changes in interest rates. The repricing of certain assets and liabilities may
not reprice at the same time or in the same magnitude due to different bases.
The repricing of assets and liabilities are also subject to competition and
other pressures.
5
<PAGE> 6
SECURITIES PORTFOLIO
Carrying Value of Securities by Category
The carrying value of securities held by Bankshares were as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------
(thousands) 1996 1995 1994
-------- ------- ----------
<S> <C> <C> <C>
Trading Account
U.S. Government and agencies $ --- $ --- $ 74,432
======== ========== ==========
Available for sale
U.S. Government and agencies $183,404 $ 226,200 $ 309,360
Common stocks 92,611 34,761 19,107
Other 103,014 103,443 77,212
-------- ---------- ----------
Total $379,029 $ 364,404 $ 405,679
======== ========== ==========
Held to maturity
U.S. Government and agencies $ --- $ --- $ 1,044
State and municipal 5,201 8,199 11,096
Other 6,053 6,368 7,113
-------- ---------- ----------
Total $ 11,254 $ 14,567 $ 19,253
======== ========== ==========
</TABLE>
Maturities of Securities
The scheduled maturities by security type as of Dec. 31, 1996 were as follows:
<TABLE>
<CAPTION>
From one From five Not due at
(thousands) One year through five through ten After a single
or less years years ten years maturity Total
-------- ----------- ----------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
and agencies $165,683 $17,721 $ --- $ --- $ --- $183,404
State and municipal 952 2,497 1,252 500 --- 5,201
Common stocks --- --- --- --- 92,611 92,611
Other 74,263 19,989 814 --- 14,001 109,067
-------- ------- ------ ----- -------- --------
Total $240,898 $40,207 $2,066 $ 500 $106,612 $390,283
======== ======= ====== ===== ======== ========
</TABLE>
6
<PAGE> 7
The weighted average yield for each range of maturities of securities at Dec.
31, 1996 was as follows:
<TABLE>
<CAPTION>
From one From five Not due at
One year through five ten through After a single
or less years years ten years maturity Total
--------- ----------- ----------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
and agencies 5.23% 5.60% -- % -- % -- % 5.26%
State and municipal 9.55 9.17 9.30 10.58 -- 9.41
Common stocks -- -- -- -- N/M N/M
Other 5.53 5.65 6.53 -- 7.19 5.77
N/M - Not meaningful.
</TABLE>
Actual maturities may differ from those scheduled due to prepayments from
issuers. Common stock yields are not considered meaningful for purposes of
this analysis. Yields on tax-advantaged securities reflect a tax equivalent
adjustment based on a marginal corporate tax rate of 35%.
LOAN PORTFOLIO
Classification of Loans
Bankshares' loans were as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------
(thousands) 1996 1995 1994 1993 1992
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Commercial real estate $655,793 $582,331 $354,893 $296,075 $232,493
Student 402,859 379,129 354,073 290,635 286,391
Residential first mortgage 286,042 317,787 233,437 251,159 255,919
Home equity 188,755 170,793 57,093 37,578 30,489
Commercial 61,852 78,469 68,620 75,504 91,525
Consumer 27,844 30,273 32,393 27,880 34,353
---------- ---------- ---------- --------- --------
Total $1,623,145 $1,558,782 $1,100,509 $978,831 $931,170
========== ========== ========== ======== =========
</TABLE>
Maturities of Loans and Sensitivity to Changes in Interest
The following table classifies the scheduled maturities for the following loan
portfolio categories at Dec. 31, 1996:
<TABLE>
<CAPTION>
One year From one After
(thousands) or less to five years five years Total
--------- ------------- ---------- --------
<S> <C> <C> <C> <C>
Commercial real estate $80,501 $305,169 $270,123 $655,793
Commercial 35,919 19,115 6,818 61,852
</TABLE>
Of the loans maturing after one year, $273.2 million have fixed rates. To
manage the interest rate exposure of specific, fixed-rate commercial real
estate loans and other loans, Bankshares has entered into interest rate swap
and floor agreements. For additional information on such financial
instruments, see Note 11 to the Consolidated Financial Statements on pages 29
through 30 of the 1996 Annual Report, incorporated herein by reference in
response to Item 8 hereof.
7
<PAGE> 8
RISK ELEMENTS IN THE LOAN PORTFOLIO
Nonaccrual and Past Due Loans
Nonaccrual loans were as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------
(thousands) 1996 1995 1994 1993 1992
----- ------- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $7,427 $8,536 $2,389 $3,098 $4,525
Nonaccrual loans to total loans 0.46% 0.55% 0.22% 0.32% 0.49%
</TABLE>
Interest income that should have been recorded under the original terms of
these loans totaled $588,000 for the year ended Dec. 31, 1996. There was no
interest income recorded for these loans in 1996.
Loans past due 90 days or more, including nonaccrual loans, were as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------
(thousands) 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $50,368 $32,714 $20,620 $14,281 $18,432
Less guaranteed student loans 15,163 13,913 13,252 8,231 10,260
------- ------- ------- ------- -------
Net loans past due 90 days or more $35,205 $18,801 $7,368 $6,050 $8,172
Net loans past due 90 days or more ======= ======= ======= ======= =======
as a percentage of total loans 2.17% 1.21% 0.67% 0.62% 0.88%
======= ======= ======= ======= =======
</TABLE>
Guaranteed student loans that are greater than 90 days past due are classified
as performing due to the principal and accrued interest on such loans being
guaranteed by individual state or private non-profit agencies.
Potential Problem Loans
In addition to those loans disclosed under the preceding "Nonaccrual and Past
Due Loans" section, management identified, through their problem loan
identification system, certain other loans in the portfolio that exhibit a
higher than normal credit risk. However, these loans were not classified as
nonperforming loans. These other loans include loans that are past maturity
more than 45 days, have recent adverse operating cash flow or balance sheet
trends, or have general risk characteristics that the loan officer feels might
jeopardize the future timely collection of principal and interest payments. At
Dec. 31, 1996, the principal amount of these loans was $12.6 million. This
amount generally includes loans that were classified for regulatory purposes.
8
<PAGE> 9
Analysis of the Allowance for Possible Loan Losses
The activity in the allowance for possible loan losses was as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------
(thousands) 1996 1995 1994 1993 1992
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $25,640 $20,157 $19,552 $17,490 $14,697
Allowance of acquired subsidiaries --- --- --- 1,000 ---
Provision for possible loan losses 16,000 5,779 --- 1,176 4,432
Less charge-offs:
Commercial real estate loans 206 284 65 804 269
Student loans 4,605 81 45 107 983
Residential first mortgage loans 1 4 20 96 630
Home equity loans 6,421 28 --- --- ---
Commercial loans 92 269 35 515 735
Consumer loans 16 153 148 330 562
------- ------- ------- ------- -------
Total charge-offs 11,341 819 313 1,852 3,179
------- ------- ------- ------- -------
Add recoveries:
Commercial real estate loans 1,026 44 210 296 61
Student loans 80 105 100 596 1,071
Residential first mortgage loans --- 5 5 7 128
Home equity loans 375 --- --- --- ---
Commercial loans 770 69 303 537 51
Consumer loans 118 300 300 302 229
------- ------- ------- ------- -------
Total recoveries 2,369 523 918 1,738 1,540
------- ------- ------- ------- -------
Net (charge-offs) recoveries (8,972) (296) 605 (114) (1,639)
------- ------- ------- ------- -------
Balance at end of year $32,668 $25,640 $20,157 $19,552 $17,490
======= ======= ======= ======= =======
Net (charge-offs)/recoveries to average loans
outstanding (0.56%) (0.02%) 0.06% (0.01%) (0.18%)
======= ======= ======= ======= =======
</TABLE>
Allocation of the Allowance for Loan Losses
The allocation of the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------
(thousands) 1996 1995 1994 1993 1992
------- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial real estate $2,575 $ 2,934 $5,801 $5,596 $4,540
Student 3,608 11,489 1,202 1,424 1,430
Residential first mortgage 1,034 1,327 2,451 2,233 2,560
Home equity 21,460 1,000 827 483 425
Commercial 45 445 1,368 1,168 1,600
Consumer 643 476 291 378 860
Unallocated 3,303 7,969 8,217 8,270 6,075
------- -------- -------- ------ -------
Total $32,668 $25,640 $20,157 $19,552 $17,490
======= ======== ======== ======= ========
</TABLE>
9
<PAGE> 10
Loan Portfolio Composition
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
December 31
------------------------------
(thousands) 1996 1995 1994 1993 1992
----- ----- ------ ---- ----
<S> <C> <C> <C> <C> <C>
Commercial real estate 40% 38% 33% 30% 25%
Student 25 24 32 30 31
Residential first mortgage 18 20 21 26 27
Home equity 11 11 5 3 3
Commercial 4 5 6 8 10
Consumer 2 2 3 3 4
--- --- --- --- ---
Total 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
For further review of the loan loss provision and the allowance for possible
loan losses, reference is made to pages 18 through 19 of Management's
Discussion and Analysis of Financial Statements of the 1996 Annual Report,
incorporated herein by reference in response to Item 7 hereof.
DEPOSITS
The scheduled maturities of time deposits in denominations of $100,000 and
greater was as follows at Dec. 31, 1996:
<TABLE>
(thousands)
<S> <C>
Maturing within 3 months $ 77,375
After 3 but within 6 months 50,377
After 6 but within 12 months 43,931
After 12 months 118,227
--------
Total $289,910
========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table presents certain ratios relating to Bankshares' equity
and assets:
<TABLE>
<CAPTION>
December 31
------- ---------- ----
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Return on average total assets 2.0% 1.8% 1.5%
Return on average common shareholders' equity 20.4 20.4 15.9
Dividend payout ratio 15.4 14.3 18.5
Average equity to average total assets 9.9 8.4 9.4
</TABLE>
10
<PAGE> 11
ITEM 2. PROPERTIES
Bankshares utilizes the building facilities of its Irving Park branch, which is
located at 3959 N. Lincoln Avenue, Chicago, Illinois, for its executive
offices. Bankshares owns the property and buildings on which ten of the twelve
bank branch locations are located. The other two branch locations are leased
from unrelated parties.
ITEM 3. LEGAL PROCEEDINGS
Bankshares is involved in various legal and regulatory proceedings, many
involving matters that arose in the ordinary course of business. The
consequences of these proceedings are not presently determinable but, in the
opinion of management, the ultimate liability in excess of reserves recorded
will not have a material effect on the results of operations, financial
position, liquidity or capital resources of Bankshares, except for possibly the
matter discussed below.
As disclosed previously, Bankshares discovered that certain former employees in
the student loan servicing area had falsified some records of telephone calls,
from late 1993 to April 1994, to students whose loans were delinquent. The
telephone calls are a required action to maintain the enforceability of a
student loan's government guarantee. Bankshares terminated the employees
involved and informed the U.S. Department of Education immediately upon
discovery of the problem and the Department commenced an investigation.
Bankshares believes that the Department's investigation has been expanded to
include a review of whether Bankshares' student loan division has engaged in
improper practices from 1988 to April 1994, including whether information
contained on guarantee claim forms may have been falsified. If it is
ultimately determined that Bankshares acted illegally or violated Department
policy or regulations, Bankshares could (i) lose its government guarantees with
respect to certain student loans and (ii) be required to repurchase a
substantial amount of delinquent student loans for which Bankshares previously
received guarantee payments. In addition, Bankshares or individual employees
could be subject to substantial penalties.
Shortly after reporting the problem, Bankshares entered into an interim
agreement with the Department pursuant to which it agreed, pending the
conclusion of the investigation, not to request payment from any guarantor or
the Department on any loans that Bankshares is unable to state with certainty
were not affected by incorrect servicing history documentation. As a result of
this agreement, at December 31, 1996, there were $6.7 million of nonaccrual
student loans for which Bankshares has agreed not to seek guarantee payments.
In addition, management charged off $4.0 million of student loans during 1996
that were subject to the interim agreement. The ultimate collectibility of the
loans is uncertain.
Management is unable to predict what actions, if any, the Department will take
following the completion of its investigation, and therefore cannot estimate
the amount or range of any liability that Bankshares will ultimately incur.
Bankshares does not condone or permit such improper practices and is
cooperating fully with the Department's investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 12
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Bankshares' common stock trades on the NASDAQ National Market tier of The
NASDAQ Stock Market under the symbol: CORS. The high and low prices for the
common stock for the calendar quarters indicated, as reported by NASDAQ, are
listed on page 35 of the 1996 Annual Report, incorporated herein by reference
in response to Item 7 hereof.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of February 28, 1997, there were 516 shareholders owning Bankshares'
common stock which has a par value of $0.05 per share. Shareholders that own
stock in nominee (i.e., street) name are excluded from the number of security
holders of record.
DIVIDENDS ON COMMON STOCK
Quarterly cash dividends per common share for the last two years are included
on page 35 of the 1996 Annual Report, incorporated herein by reference in
response to Item 7 hereof. Dividends were declared and paid on a quarterly
basis. The declaration of dividends is at the discretion of Bankshares' Board
of Directors and depends upon, among other factors, earnings, capital
requirements and the operating and financial condition of Bankshares.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
Refer to page 35 of the 1996 Annual Report, incorporated herein by reference
for additional selected financial data.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------
(thousands, except per share data) 1996 1995 1994 1993 1992
--------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Interest income $ 190,950 $ 171,114 $ 114,541 $ 101,325 $ 110,481
Interest expense 79,611 72,597 45,748 35,573 41,814
---------- ---------- ---------- ---------- -----------
Net interest income 111,339 98,517 68,793 65,752 68,667
Provision for possible loan losses 16,000 5,779 -- 1,176 4,432
---------- ----------- ----------- ---------- -----------
Net interest income after provision
for possible loan losses 95,339 92,738 68,793 64,576 64,235
Noninterest income, excluding
securities gains (losses) 19,436 15,443 12,572 12,869 9,698
Securities gains (losses), net 3,316 (1,332) 663 (330) (69)
Noninterest expense 50,181 51,650 45,222 38,626 37,911
Income tax expense 24,005 19,429 12,790 13,167 12,675
---------- ---------- ---------- ---------- ----------
Net income available to common
shareholders $ 43,905 $ 35,770 $ 24,016 $ 25,322 $ 23,278
========== ========== ========== ========== ==========
Earnings per share $ 2.93 $ 2.35 $ 1.57 $ 1.66 $ 1.53
========== ========== ========== ========== ==========
Cash dividends declared per
common share $ 0.48 $ 0.36 $ 0.30 $ 0.27 $ 0.24
========== ========== ========== ========== ==========
Assets $2,218,528 $2,125,092 $1,889,445 $1,441,762 $1,333,318
========== ========== ========== ========== ==========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained under the caption "Management's Discussion and
Analysis of Financial Statements" on pages 8 through 19 of the 1996 Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Bankshares, including the notes
thereto, and other information on pages 20 through 35 of the 1996 Annual Report
are incorporated herein by reference.
13
<PAGE> 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On February 12, 1997, the Audit Committee and Board of Directors of Bankshares
recommended that the shareholders ratify Arthur Andersen LLP at the annual
meeting as independent accountants of Bankshares for fiscal 1997. This
recommendation caused the dismissal of KPMG Peat Marwick LLP (KPMG) as the
independent accountants of Bankshares upon the completion of the audit of
Bankshares' financial statements as of and for the year ended December 31, 1996
and the issuance of their report thereon.
For the two years ended December 31, 1996, KPMG's reports on the financial
statements did not contain an adverse or a disclaimer of opinion nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
For the two years ended December 31, 1996 and from December 31, 1996 through
the effective date of the dismissal, there were no disagreements between KPMG
and Bankshares on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or any reportable events.
Bankshares has requested that KPMG furnish a letter addressed to the United
States Securities and Exchange Commission stating whether KPMG agrees with the
preceding statements. A copy of KMPG's letter dated March 25, 1997 is filed as
Exhibit 16 hereto.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of Bankshares is
incorporated herein by reference to the descriptions under "Elections of
Directors and Ownership of Shares" on pages 2 through 3 of the 1997 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to
the material under the caption "Executive Compensation" on pages 4 through 14
of the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the material under the headings
"Outstanding Voting Securities and Principal Shareholders" and "Election of
Directors and Ownership of Shares" on pages 1 through 2 and 3, respectively, of
the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference to the material in Note 4 on pages 26 through
27 of the 1996 Annual Report and to the material under the heading
"Transactions with Management and Others" on page 14 of the 1997 Proxy
Statement.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules:
(13) The portions of Registrant's 1996 Annual Report incorporated by reference
into Part I or Part II of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
<TABLE>
<Caption.
Index
-----
Pages
-----
<S> <C>
Consolidated Statements of Condition 20
Consolidated Statements of Income 21
Consolidated Statements of Changes of Shareholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24-35
Independent Auditors' Report 36
</TABLE>
(16) Letter regarding change in certifying accountant.
(b) Reports on Form 8-K:
Registrant filed Current Report dated February 12, 1997 (Items 4 and 5).
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Michael J. McClure /s/ First Vice President & Chief
Accounting Officer March 25, 1997
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Joseph C. Glickman /s/ Chairman of the Board of Directors March 25, 1997
Robert J. Glickman /s/ President, Chief Executive Officer
& Director March 25, 1997
Timothy H. Taylor /s/ Senior Vice President & Chief
Financial Officer March 25, 1997
Michael J. McClure /s/ First Vice President & Chief
Accounting Officer March 25, 1997
Karl H. Horn /s/ Director March 25, 1997
Michael Levitt /s/ Director March 25, 1997
Rodney D. Lubeznik /s/ Director March 25, 1997
Michael Tang /s/ Director March 25, 1997
William H. Wendt, III /s/ Director March 25, 1997
</TABLE>
16
<PAGE> 1
Management's Discussion and Analysis
of Financial Statements
EARNINGS SUMMARY
- --------------------------------------------------------------------------------
CORUS BANKSHARES achieved a record year of earnings in 1996. This marked the
twentieth year of record earnings out of the last twenty-one years. Earnings in
1996 totaled $43.9 million, compared with $35.8 and $24.0 million in 1995 and
1994, respectively.
Return on average common equity was 20.4% for 1996 and 1995 and 15.9% for 1994.
The return on average assets was 2.0% in 1996, compared with 1.8% and 1.5% in
1995 and 1994, respectively. These consistent returns continue to increase
shareholder value at double-digit levels and remain strong in comparison to
Bankshares' peers.
A main contributor to 1996 earnings was a $12.8 million, or 13.0%, increase in
net interest income to $111.3 million. This increase was primarily due to an
increase in average earning assets. Average loans increased $286.2 million, or
21.8%, for the year. Net interest margin, on a fully taxable equivalent basis,
increased 4 basis points to 5.45%.
Net Interest Income
The major source of earnings for Bankshares is net interest income. Net interest
income provided 83.0%, 87.5% and 83.8% of net revenues during 1996, 1995 and
1994, respectively. The related net interest margin represents the net interest
income as a percentage of average assets during the period. The table on the
following page sets forth certain information relating to Bankshares'
consolidated average statements of condition and income and reflects the average
yield on assets and cost of liabilities for the last three years. The yields and
costs are adjusted for the accretion or amortization of deferred fees. Interest
income on nonaccrual loans is reflected in the year that it is collected. Such
amounts are not material to net interest income or the net change in net
interest income in any year. Nonaccrual loans are included in the average
balances and do not have a material effect on the average yield.
Changes in net interest income result from changes in the volume and the rate of
net earning assets. The following table displays the impact that volume and rate
had on Bankshares' net interest income on a fully taxable equivalent basis.
- ---------------------------------------------------------
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in Thousands)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Changes attributable to: 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Volume $16,728 $17,100
Rate (4,207) 12,415
- --------------------------------------------------------
Total $12,521 $29,515
- --------------------------------------------------------
</TABLE>
The increase in 1996 net interest income from 1995 was primarily due to a $217.4
million, or 11.8%, increase in average earning assets. The increase in net
interest income in 1995 was primarily due to a 23.8% increase in average earning
assets and income from previously nonperforming student loan pools.
For the year ended December 31, 1996, Bankshares recognized $13.2 million of
interest income from the accretion of acquisition discount related to several
groups of purchased, previously nonperforming student loan pools, compared with
$13.5 and $3.5 million in 1995 and 1994, respectively. The accretion of
acquisition discount into interest income is expected to significantly decrease
in 1997. This decrease will be partially offset by an increase in the amount of
gains on dispositions of these loans which is included in other income.
Excluding the accretion of the acquisition discount, the fully taxable
equivalent net interest margin was 4.81%, 4.68% and 4.49% for 1996, 1995 and
1994, respectively. In 1994, income from interest rate floors and caps totaled
$2.3 million. There was no income from interest rate floors and caps during 1996
and 1995.
- --------------------------------------------------------------------------------
8
<PAGE> 2
Average Statements of Condition and Net Interest Margin
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/ Average
Balance Interest Cost Balance Interest Cost Balance Interest
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Interest-bearing deposits
with banks $ 11,528 $ 723 6.27% $ 25,000 $ 1,560 6.24% $ 13,041 $ 846
Federal funds sold 47,907 2,508 5.24% 52,507 3,015 5.74% 57,080 2,571
Taxable securities 395,801 20,875 5.27% 440,322 25,973 5.90% 378,425 18,880
Tax-advantaged securities(1) 7,103 510 7.18% 9,116 664 7.28% 10,883 1,198
Trading account securities -- -- -- 4,135 302 7.30% 14,714 1,021
Loans, net of unearned
discount(1)(2)(3) 1,601,269 167,397 10.45% 1,315,105 140,964 10.72% 1,016,696 91,598
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets 2,063,608 192,013 9.30% 1,846,185 172,478 9.34% 1,490,839 116,114
Noninterest-earning assets
Cash and due from
banks--noninterest-bearing 69,461 68,964 71,592
Allowance for possible loan
losses (32,301) (21,157) (19,848)
Premises and equipment, net 24,496 22,012 27,551
Other assets, including
goodwill 48,824 41,975 37,074
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $2,174,088 $1,957,979 $1,607,208
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits--interest-bearing
NOW and money market
deposits $1,033,053 $ 46,253 4.48% $1,007,196 $ 48,354 4.80% $ 626,377 $ 24,767
Savings deposits 209,468 5,480 2.62% 232,590 6,142 2.64% 269,955 7,171
Time deposits(3) 458,850 25,344 5.52% 323,571 17,436 5.39% 334,890 13,413
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,701,371 77,077 4.53% 1,563,357 71,932 4.60% 1,231,222 45,351
Short-term borrowings 15,987 895 5.60% 7,266 665 9.15% 10,177 359
Federal Home Loan Bank
advances 28,778 1,639 5.70% -- -- -- -- --
Subordinated debentures -- -- -- -- -- -- 399 38
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,746,136 79,611 4.56% 1,570,623 72,597 4.62% 1,241,798 45,748
Noninterest-bearing
liabilities and
shareholders' equity
Noninterest-bearing deposits 189,317 198,918 192,553
Other liabilities 23,040 21,178 20,509
Minority interest 437 1,835 1,862
Shareholders' equity 215,158 165,425 150,486
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,174,088 $1,957,979 $1,607,208
- ---------------------------------------------------------------------------------------------------------------------------
Interest income/average
earning assets $2,063,608 $192,013 9.30% $1,846,185 $172,478 9.34% $1,490,839 $116,114
Interest expense/average
interest-bearing liabilities 1,746,136 79,611 4.56% 1,570,623 72,597 4.62% 1,241,798 45,748
- ---------------------------------------------------------------------------------------------------------------------------
Net interest spread $112,402 4.74% $ 99,881 4.72% $ 70,366
- ---------------------------------------------------------------------------------------------------------------------------
Net yield on average earning
assets 5.45% 5.41%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------
Average
Yield/
Cost
- --------------------------------------
<S> <C>
ASSETS
Earning Assets
Interest-bearing deposits
with banks 6.49%
Federal funds sold 4.50%
Taxable securities 4.99%
Tax-advantaged securities(1) 11.01%
Trading account securities 6.94%
Loans, net of unearned
discount(1)(2)(3) 9.01%
- -----------------------------
Total earning assets 7.79%
Noninterest-earning assets
Cash and due from
banks--noninterest-bearing
Allowance for possible loan
losses
Premises and equipment, net
Other assets, including
goodwill
- -----------------------------
Total assets
- -----------------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits--interest-bearing
NOW and money market
deposits 3.95%
Savings deposits 2.66%
Time deposits(3) 4.01%
- -----------------------------
Total interest-bearing
deposits 3.68%
Short-term borrowings 3.53%
Federal Home Loan Bank
advances --
Subordinated debentures 9.52%
- -----------------------------
Total interest-bearing
liabilities 3.68%
Noninterest-bearing
liabilities and
shareholders' equity
Noninterest-bearing deposits
Other liabilities
Minority interest
Shareholders' equity
- -----------------------------
Total liabilities and
shareholders' equity
- -----------------------------
Interest income/average
earning assets 7.79%
Interest expense/average
interest-bearing liabilities 3.68%
- -----------------------------
Net interest spread 4.11%
- -----------------------------
Net yield on average earning
assets 4.72%
- -----------------------------
</TABLE>
(1) Interest income on loans and tax-advantaged securities reflects a
tax-equivalent adjustment based on a marginal income tax rate of 35%.
(2) Unremitted interest on nonaccrual loans is not included in the amounts.
(3) Includes net interest income derived from interest rate floor and swap
contracts.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 9
<PAGE> 3
Since the repricing and maturity characteristics of interest-earning assets and
interest-bearing liabilities differ, changes in interest rates may result in a
change in net interest income. Bankshares actively monitors and manages its
overall interest rate exposure. Bankshares utilizes off-balance-sheet financial
instruments as a tool for managing this exposure. Refer to notes 1 and 11 to the
consolidated financial statements for further information.
EARNING ASSET COMPOSITION At December 31, 1996, earning assets as a percentage
of total assets were 95.2%, compared with 92.5% and 91.1% at December 31, 1995
and 1994, respectively. Bankshares' level of net interest margin is dependent
upon its composition of earning assets. Generally, loans have higher
yields than securities or short-term investments. The composition of earning
assets was as follows:
- ---------------------------------------------------------
COMPOSITION OF EARNING ASSETS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Loans:
Commercial real estate 31.1% 29.6% 20.6%
Student 19.1 19.3 20.6
Residential first
mortgage 13.5 16.2 13.6
Home equity 8.9 8.7 3.3
Commercial 2.9 4.0 4.0
Consumer 1.3 1.5 1.9
- -----------------------------------------------------------
Total loans 76.8 79.3 64.0
Securities 18.5 19.3 29.0
Short-term investments 4.7 1.4 7.0
- -----------------------------------------------------------
Total earning assets 100.0% 100.0% 100.0%
- -----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE> 4
- --------------------------------------------------------------------------------
NONINTEREST INCOME
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996/1995 1995/1994
1996 1995 1994 Change Change
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 9,590 $ 9,686 $ 9,712 (1.0)% (0.3)%
Gain on dispositions of loans 8,134 2,292 1,083 254.9 111.6
Trust services 492 477 435 3.1 9.7
Safe deposit box rental 425 451 436 (5.8) 3.4
Other 795 2,240 1,555 (64.5) 44.1
- ----------------------------------------------------------------------------------------------------------------------
Noninterest income, excluding securities gains
(losses), net 19,436 15,146 13,221 28.3 14.6
Trading account gains (losses), net -- 297 (649) NM NM
Securities gains (losses), net 3,316 (1,332) 663 NM NM
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest income $22,752 $14,111 $13,235 61.2% 6.6%
- ----------------------------------------------------------------------------------------------------------------------
NM - Not meaningful
</TABLE>
Noninterest Income
In 1996, noninterest income, excluding securities gains and losses, increased
$4.3 million, or 28.3%. The gain on dispositions of loans increased $5.8 million
to $8.1 million. These gains are the result of payments from guarantee agencies
for student loan borrowers that defaulted and represent the remaining discount
on loans that were acquired at a substantial discount. When the payment is
received from the guarantee agency, the remaining discount is accreted into
noninterest income over the estimated life of the related portfolio. Management
anticipates that gains on dispositions of loans will also increase in 1997 due
to the high level of guarantee payments that continue to be received on the
portfolios with substantial discounts. Other income decreased $1.4 million in
1996 primarily due to a $713,000 gain on the sale of a portion of a bank parking
lot and gains on sales of other real estate owned properties in 1995.
In 1995, noninterest income, excluding securities gains and losses, increased
$1.9 million, or 14.6%. This increase was primarily due to a $1.2 million
increase in the gain on dispositions of loans and the sale of the portion of the
parking lot described in the preceding paragraph.
Bankshares may acquire securities with the objective of enhancing earnings by
taking advantage of interest rate spread opportunities and inefficiencies and
aberrations that may occur in the capital markets. These securities are
classified as trading account securities with realized and unrealized gains and
losses recorded in noninterest income. During 1996, there were no trading
activities. In 1995, total trading account income was $297,000, compared with a
loss of $649,000 in 1994.
In 1996, Bankshares had a $3.3 million net gain from the sale of available for
sale securities and financial instruments. The net gain was primarily the result
of $2.3 million of gains from the sale of bank stocks in Bankshares' portfolio
and a $1.3 million gain from interest rate swaps that did not qualify for hedge
accounting treatment. The swap agreements were terminated in the first quarter
of 1996. In 1995, losses from the sales of available for sale securities and the
swap agreements were $401,000 and $931,000, respectively.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 11
<PAGE> 5
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996/1995 1995/1994
1996 1995 1994 Change Change
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 25,483 $ 25,116 $ 21,251 1.5% 18.2%
Net occupancy 3,975 3,917 4,528 1.5 (13.5)
Data processing 2,417 2,175 2,988 11.1 (27.2)
FDIC insurance 10 1,857 2,946 (99.5) (37.0)
Other 15,218 15,581 10,930 (2.3) 42.6
- ------------------------------------------------------------------------------------------------------------------------
Noninterest expense, excluding goodwill
amortization and minority interest 47,103 48,646 42,643 (3.2) 14.1
Goodwill amortization 2,896 2,257 2,031 28.3 11.1
Minority interest 182 747 548 (75.6) 36.3
- ------------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 50,181 $ 51,650 $ 45,222 (2.8)% 14.2%
- ------------------------------------------------------------------------------------------------------------------------
Net overhead(1) $ 27,667 $ 33,500 $ 29,422
Average total assets 2,174,088 1,957,979 1,607,208
Net overhead ratio(2) 1.3% 1.7% 1.8%
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Net overhead represents "Noninterest expense, excluding goodwill
amortization and minority interest" less "Noninterest income, excluding
securities gains (losses), net".
(2) Net overhead ratio is net overhead as a percentage of average total assets.
Noninterest Expense
In 1996, noninterest expense, excluding goodwill amortization and minority
interest, decreased $1.5 million, or 3.2%. The decrease was attributable to a
$1.8 million decrease in FDIC insurance and a decrease in other expenses. These
decreases were partially offset by increases in salaries and employee benefits,
net occupancy and data processing expenses.
In 1995, noninterest expense, excluding goodwill amortization and minority
interest, increased $6.0 million, or 14.1%. The increase was attributable to
compensation and other expenses increasing $3.9 and $4.7 million, respectively.
These increases were partially offset by decreases in net occupancy, data
processing and FDIC insurance expenses.
SALARIES AND EMPLOYEE BENEFITS In 1996, salaries and employee benefits increased
$367,000, or 1.5%. The increase in salaries was partially offset by a reduction
in bonuses for residential lending officers, which was primarily due to an
increase in home equity loan charge-offs. The compensation of commercial and
residential real estate lending officers is subject to performance-based
compensation plans.
In 1995, salaries and employee benefits increased $3.9 million, or 18.2%. This
increase was due to the implementation of the performance-based compensation
plans for lending officers and increased staffing in the lending operations.
Management continues to effectively control compensation expense by paying a
limited number of talented people a premium over market salaries rather than
staffing at higher peer-group levels. This policy allows Bankshares' employees
to have higher compensation and more responsibilities than their peers. This
atmosphere appears to result in higher employee productivity and an increased
willingness to accept more responsibility in carrying out Bankshares' goals and
objectives.
NET OCCUPANCY In 1996, net occupancy expense increased $58,000, or 1.5%. In
1995, net occupancy expense decreased $611,000, or 13.5%. The decrease was due
to a onetime charge of $652,000 for the closing of a mini-branch in 1994.
Excluding the write-off, occupancy expenses increased $41,000, or 1.1%, in 1995.
- --------------------------------------------------------------------------------
12
<PAGE> 6
DATA PROCESSING In 1996, data processing expense increased $242,000, or 11.1%.
Excluding expenses related to merging the subsidiary banks from 1996 and 1995,
data processing expense increased $5,000, or 0.2%, in 1996.
In 1995, data processing expense decreased $813,000, or 27.2%. This decrease was
primarily due to the cancellation of a data processing contract in 1994 for one
of Bankshares' subsidiary banks that was using a different data processing
service than the other subsidiary banks. The cancellation of the contract
resulted in a onetime charge of approximately $300,000 in 1994 and ongoing
savings of an additional $300,000. Excluding the cancellation, data processing
expense decreased approximately 8% due to Bankshares' technology upgrades and
ongoing consolidation of operations.
FDIC INSURANCE Effective June 1, 1995, the FDIC reduced its premium rate to 4
cents from 23 cents per $100 of deposits for Bankshares' subsidiary banks. The
premium rates were further reduced effective January 1, 1996 and Bankshares was
required to only pay administrative fees in 1996. Effective January 1, 1997,
FDIC insurance premiums will be reinstated at an annual premium rate of 1.3
cents per $100 of deposits.
OTHER EXPENSES In 1996, other expenses decreased $363,000, or 2.3%, primarily
due to lower loan and advertising expenses. Loan expenses decreased due to a
reduction in residential real estate lending. Advertising expenses decreased
primarily due to lower expenditures for the promotion of the Ultimate Money
Market Account. These reductions were partially offset by onetime charges of
$442,000 for merger and name change costs and $210,000 for the write-down and
demolition costs of a building at Bankshares' headquarters location.
In 1995, other expenses increased $4.7 million, or 42.6%, primarily due to
higher loan and advertising expenses. Loan expenses increased due to the
significant increase in lending volume. Advertising expenses increased primarily
due to the promotion of the Ultimate Money Market Account.
COST MANAGEMENT Cost management is a fundamental element of Bankshares' culture.
Management constantly reviews operating expenses to ensure that they are
minimized while maintaining a high level of quality customer service. Bankshares
remains committed to identifying additional reductions in net overhead costs
while maintaining superior customer service and stringent internal controls.
NET OVERHEAD AND EFFICIENCY RATIOS Bankshares has successfully maintained a
favorable net overhead ratio at or below 1.8% for the last seven years. By
comparison, Bankshares' Midwest-based bank holding company peer group has
averaged a net overhead ratio of over 2.0%. The difference in the net overhead
ratio between Bankshares and the peer group underscores the importance of
management's emphasis on cost management and their consistent ability to
transform the net overhead rate of acquired banks to a level below that of
peers.
The banking industry also uses a standard known as the "efficiency ratio" to
measure a bank's operational efficiency. The ratio is derived by dividing gross
operating expenses less goodwill amortization by fully taxable equivalent net
interest and other income less securities activities. Bankshares' efficiency
ratio was 35.9%, 42.9% and 51.7% in 1996, 1995 and 1994, respectively. By
comparison, the peer group average was 60% or higher each of the last three
years.
GOODWILL AMORTIZATION In 1996, goodwill amortization increased $639,000, or
28.3%. In 1995, goodwill amortization increased $226,000, or 11.1%.
During the first half of 1996, $1.9 million of goodwill was recorded for the
purchase of the minority interests in Bankshares' subsidiary banks. Also,
additional goodwill for the 1993 acquisition of Belmont National Bank totaling
$754,000 and $3.0 million was recorded in 1996 and 1995, respectively. The
additional goodwill recorded for Belmont was the result of the settlement of
contingencies related to the purchase. The original purchase price was
contingent upon the performance of certain specified loans and other assets.
MINORITY INTEREST In 1996, the minority interest portion of net income decreased
$565,000, or 75.6%. This was due to Bankshares' purchase of the remaining
minority interest in Bankshares' subsidiary banks during the first half of 1996.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 13
<PAGE> 7
Income Taxes
Income tax expense was $24.0 million in 1996, compared with $19.4 and $12.8
million in 1995 and 1994, respectively. The effective tax rate for 1996 was
35.3%, compared with 35.2% and 34.7% in 1995 and 1994, respectively.
Bankshares' net deferred tax asset was $1.5 million at December 31, 1996,
compared with $4.8 million at December 31, 1995. The decrease in the net
deferred tax asset was primarily due to the increase in unrealized gains from
available for sale securities.
Management believes that the gross deferred tax asset of $13.0 million at
December 31, 1996 could be realized through the carryback of taxable income
against prior years. Therefore, no valuation allowance was necessary.
Inflation
The impact of inflation on a financial institution differs significantly from
that of an industrial company, as virtually all assets and liabilities of a
financial institution are monetary in nature. Monetary items, such as cash,
loans and deposits, are those assets and liabilities which are or will be
converted into a fixed number of dollars regardless of changes in prices.
Management believes the impact of inflation on financial results depends upon
Bankshares' ability to react to changes in interest rates. Interest rates do not
necessarily move in the same direction, or at the same magnitude, as the prices
of other goods and services. Management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against wide
interest rate fluctuations, including those resulting from inflation.
- --------------------------------------------------------------------------------
14
<PAGE> 8
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
Assets
Total assets and earning assets were $2.22 and $2.11 billion, respectively, at
December 31, 1996, compared with $2.12 and $1.97 billion, respectively, at
December 31, 1995. The percentage of earning assets to total assets was 95.2 %
and 92.5% at December 31, 1996 and 1995, respectively. Refer to page 10 for the
composition of the earning asset portfolio.
LOANS In 1996, total loans, net of unearned discount, increased $64.4 million,
or 4.1%. The composition of the loan portfolio was as follows:
- ---------------------------------------------------------
LOAN PORTFOLIO
(Dollars in Thousands)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Commercial real estate $ 655,793 $ 582,331
Student 402,859 379,129
Residential first
mortgage 286,042 317,787
Home equity 188,755 170,793
Commercial 61,852 78,469
Consumer 27,844 30,273
- ---------------------------------------------------------
Total $1,623,145 $1,558,782
- ---------------------------------------------------------
</TABLE>
Commercial real estate loans increased $73.5 million, or 12.6%, in 1996. Most of
the commercial real estate loans are in the form of first mortgage loans on
properties that have verifiable cash flows. At December 31, 1996, construction
loans included in the commercial real estate portfolio were $41.3 million, or
6.3% of the total portfolio. The composition of the commercial real estate loan
portfolio by type of collateral securing the loan was as follows:
- ---------------------------------------------------------
COMMERCIAL REAL ESTATE PORTFOLIO
BY COLLATERAL SECURING THE LOAN
(Dollars in Thousands)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Investor-owned
residential
real estate $287,342 $262,263
Healthcare/Nursing 92,241 47,994
Retail 89,901 105,938
Office 74,552 55,670
Industrial 56,847 65,588
Other 54,910 44,878
- --------------------------------------------------------
Total $655,793 $582,331
- --------------------------------------------------------
</TABLE>
At December 31, 1996, approximately 70% of Bankshares' commercial real estate
portfolio was secured by property located in the Chicago metropolitan area and
the concentrations in the five largest states were as follows:
- ---------------------------------------------------------
<TABLE>
<CAPTION>
State Percent
- ----------------------------------------------------
<S> <C>
Illinois 72.9%
Indiana 8.6
California 4.6
Florida 3.9
Minnesota 2.8
- ----------------------------------------------------
</TABLE>
The student loan portfolio increased $23.7 million, or 6.3%, in 1996. This
growth was due to a record $68.5 million of loan originations and $3.1 million
of purchases. Bankshares' student loan originations have increased at a
declining rate of growth over the last few years due to the introduction of the
Federal Direct Student Loan Program in 1993. Direct loans, which are originated
directly by the Federal government, accounted for 36% of all student loan
originations during the 1995-1996 school year.
In the past few years, nonperforming student loans were purchased at a
substantial discount to the face value of the loans. Bankshares attempts to
convert the loans to performing status and reinstate their government
guarantees. The excess of performing loans converted over the cost of the
portfolio is accreted into income over the estimated lives of the loans using
the level-yield method. At December 31, 1996, the total discount to be accreted
into income in future years totaled $20.3 million.
In 1996, residential first mortgage loans decreased $31.7 million, or 10.0%, as
management strengthened the residential mortgage underwriting guidelines which
led to a significant reduction in loan originations. Only adjustable-rate
residential first mortgage loans are offered. Long-term, fixed-rate products are
not offered. This minimizes prepayment and interest rate risk.
In 1996, home equity loans increased $18.0 million, or 10.5%. Bankshares offers
two home equity products. One product provides financing up to 80% of the
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 15
<PAGE> 9
appraised value of the home. The second product provides financing up to 100% of
the home's appraised value. The interest rate charged on the 100% home equity
loan product is on average about 3.6% higher than the interest rate charged on
the 80% rate product to compensate for accepting collateral with less borrower
equity in the property. Management also strengthened the underwriting guidelines
for home equity loans in 1996. This led to a significant reduction in loan
originations.
Commercial and consumer loans decreased $19.0 million, or 17.5%, in 1996 as
Bankshares continues to focus, with the exception of medical finance lending, on
other lending areas.
SECURITIES Bankshares' current asset/liability management philosophy is that all
security purchases are classified as available for sale or trading. This is due
to management's belief that virtually all securities should be available to be
sold in conjunction with prudent asset/liability management strategies or other
reasons.
Bankshares' objectives in managing the securities portfolio are driven by the
dynamics of the balance sheet and the interest rate environment. At December 31,
1996, federal funds sold and securities increased $95.3 and $11.3 million,
respectively, from the comparable 1995 amounts. At December 31, 1996, 86.2% of
the carrying value of the available for sale portfolio with stated maturities
was scheduled to mature within one year and 99.7% within five years. The short
maturity schedule of the securities portfolio is consistent with Bankshares'
overall asset/liability philosophy and provides significant liquidity.
At December 31, 1996, Bankshares held $92.6 million of investments in equity
securities of publicly-traded bank holding companies, which were included in the
available for sale securities classification. These securities represented
minority investments in 38 companies with unrealized gains of $24.2 million. In
1996 and 1995, gains of $2.3 and $1.3 million, respectively, were recognized on
sales of these securities.
Refer to notes 1 and 3 to the consolidated financial statements for further
information concerning the securities portfolio.
Liabilities
DEPOSITS In 1996, total deposits increased $2.1 million, or 0.11%. The
composition of Bankshares' deposit base was as follows:
- ---------------------------------------------------------
COMPOSITION OF DEPOSITS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1996 1995 1994
- ---------------------------------------------------------
<S> <C> <C> <C>
Demand 10% 11% 12%
Savings 10 12 15
NOW 5 5 7
Money Market 49 48 48
Certificates of Deposit 26 24 18
- ----------------------------------------------------------
Total 100% 100% 100%
- ----------------------------------------------------------
</TABLE>
In 1996, money market deposits and certificates of deposit increased $14.2 and
$33.7 million, respectively. These increases more than offset a decrease of
$45.8 million in demand, savings and NOW accounts. The growth of the money
market deposits can be attributed to the continued marketing of the Ultimate
Money Market Account. This product is indexed to the 91-day U.S. Treasury bill
rate. The increase in certificates of deposit was due to an increase in retail
certificates of deposit obtained from brokers. At December 31, 1996 and 1995,
retail certificates of deposit totaled $227.3 and $169.3 million, respectively.
FEDERAL HOME LOAN BANK ADVANCES In 1996, Bankshares borrowed $40.0 million of
Federal Home Loan Bank advances. The advances have a term of 5 years and pay
interest of 3-month LIBOR quarterly. Management intends to continue to utilize,
as necessary, outside funding sources to support loan growth.
Shareholders' Equity
At December 31, 1996, Bankshares' common shareholders' equity increased $40.9
million, or 21.0%, to $235.6 million, compared with $194.7 million at December
31, 1995. At December 31, 1996 and 1995, the unrealized holding gain net of
income taxes on available for sale securities was $15.8 and $6.4 million,
respectively. The 1996 earnings retention ratio was 84.0% and has averaged 83.7%
for the last five years. Management believes that this level of earnings
retention is financially prudent for financing internal growth and providing
support to pursue acquisitions.
- --------------------------------------------------------------------------------
16
<PAGE> 10
Previously, Bankshares' Board of Directors authorized management to repurchase
up to 1 million shares of its common stock from time to time at market prices.
During 1996 and 1995, Bankshares repurchased 207,000 and 215,500 shares at an
average price of $26.05 and $22.05 per share, respectively. In February 1997,
the Board of Directors canceled the 1 million share repurchase authorization and
approved a new 750,000 common share repurchase program. This authorization
provides management with flexibility in managing Bankshares' strong capital
position.
In September 1995, Bankshares effected a two-for-one stock split in the form of
a 100% stock dividend.
Various measures of capital were as follows:
- ----------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995
December 31 Amount Rate Amount Rate
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Common equity(1) $235,590 10.6% $194,726 9.2%
Tangible common
equity(2) 223,399 10.1 182,423 8.6
Tier 1 risk-based
capital(3) 207,632 13.5 177,966 12.6
Total risk-based
capital(4) 227,182 14.8 195,579 13.9
Leverage(5) 207,632 9.7 177,966 9.2
- ----------------------------------------------------------------
</TABLE>
(1) Common equity is computed in accordance with generally accepted accounting
principles, which includes unrealized gains (losses) on securities available
for sale. The ratio is common equity to total year-end assets.
(2) Common equity less goodwill; computed as a ratio to total year-end assets
less goodwill.
(3) Shareholders' equity and minority interest less goodwill and unrealized
gains on securities available for sale; computed as a ratio to risk-adjusted
assets.
(4) Tier 1 capital plus qualifying loan loss allowance; computed as a ratio to
risk-adjusted assets.
(5) Tier 1 capital; computed as a ratio to average fourth-quarter assets less
goodwill.
Bankshares' risk-based capital ratios far exceed the minimum required leverage,
tier 1 and total risk-based capital ratios in order to be considered well-
capitalized of 5.0%, 6.0% and 10.0%, respectively. Management is not aware of
any uncertainties that could have a material adverse effect on Bankshares'
results of operations, financial position, liquidity or capital resources,
except for possibly the investigation by the U.S. Department of Education that
is discussed in note 12 to the consolidated financial statements.
Liquidity
PARENT COMPANY The main source for parent company liquidity has been dividends
from its subsidiary bank. At December 31, 1996, the bank subsidiary had $13.7
million available to pay in dividends to the parent company without prior
regulatory approval while maintaining well-capitalized status. In addition, the
parent company had $97.0 million of cash and marketable equity securities
available for possible liquidity needs at December 31, 1996.
SUBSIDIARY BANK Bankshares' liquidity policy is to ensure the availability of
sufficient funds to accommodate the needs of borrowers and depositors at all
times. This objective is achieved primarily through the maintenance of liquid
assets. Liquid assets are defined as cash and marketable securities that can be
sold quickly without a material loss of principal. Liquid assets represent
available funding to meet new credit demands and depositor withdrawals. At
December 31, 1996, cash and marketable securities that were available for
liquidity needs totaled $442.4 million, or 20.8%, of the subsidiary bank's total
assets.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 17
<PAGE> 11
- --------------------------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $25,640 $20,157 $19,552 $17,490 $14,697
Allowance of acquired subsidiaries -- -- -- 1,000 --
Provision for possible loan losses 16,000 5,779 -- 1,176 4,432
Charge-offs (11,341) (819) (313) (1,852) (3,179)
Recoveries 2,369 523 918 1,738 1,540
- ---------------------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries (8,972) (296) 605 (114) (1,639)
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of year $32,668 $25,640 $20,157 $19,552 $17,490
- ---------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses as a percentage
of total loans 2.01% 1.64% 1.83% 2.00% 1.88%
Net (charge-offs) recoveries as a percentage of:
Provision for possible loan losses (56.08)% (5.12)% N/A (9.69)% (36.98)%
Total loans (0.55)% (0.02)% 0.05% (0.01)% (0.18)%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Credit Risk and Asset Quality
ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is
based on management's analysis of individual loans, prior and current loss
experience, overall growth in the portfolio, delinquency levels, current
economic conditions, and other factors.
In 1996, net charge-offs of home equity loans were $6.0 million. Home equity
loans that were originated at up to 100% of a property's value are charged off
when they become delinquent 120 days past due. Management anticipates that there
will continue to be significant charge-offs of home equity loans in 1997. The
underwriting guidelines for home equity loans were strengthened in 1996 which
resulted in a significant decrease in loan originations.
During 1996, $4.0 million was charged off for a portion of the student loans
that Bankshares has agreed not to seek guarantee payments under an interim
agreement with the U.S. Department of Education until the conclusion of the
Department's investigation. Refer to note 12 to the consolidated financial
statements for further information. Net recoveries of commercial and commercial
real estate loans totaled $1.5 million.
At December 31, 1996, the allowance for possible loan losses as a percentage of
total loans increased to 2.01% of total loans from 1.64% of total loans at
December 31, 1995. Management believes that the level of the allowance for
possible loan losses was adequate at December 31, 1996.
NONPERFORMING ASSETS Nonperforming loans are nonaccrual loans, restructured
loans and 90 days or more past due loans still accruing interest. Nonperforming
assets were as follows:
- ------------------------------------------------------
NONPERFORMING ASSETS
(Dollars in Thousands)
- ------------------------------------------------------
December 31 1996 1995
- ------------------------------------------------------
Nonperforming loans:
Residential first mortgage $22,687 $ 7,828
Commercial real estate 1,139 1,973
Commercial 12 381
Home equity 2,844 1,119
Student 7,114 6,837
Consumer 1,409 663
- ------------------------------------------------------
Total nonperforming loans 35,205 18,801
Other real estate owned 2,691 1,589
- ------------------------------------------------------
Total nonperforming assets $37,896 $20,390
- ------------------------------------------------------
Nonaccrual loans included
in nonperforming loans
above $ 7,427 $ 8,536
Nonperforming loans/Total
loans 2.17% 1.21%
Nonperforming assets/Total
assets 1.71% 0.96%
Allowance for possible loan
losses/Nonperforming loans 92.79% 136.38%
- ------------------------------------------------------
In 1996, nonperforming assets increased $17.5 million. This increase was
primarily due to increases in nonperforming residential first mortgage loans.
During 1996, the underwriting guidelines for residential first mortgage loans
were strengthened. As a result, loan originations have decreased significantly.
The collateral securing the mortgage loans is primarily owner-occupied single
family residences.
- --------------------------------------------------------------------------------
18
<PAGE> 12
Excluded from the table are student loans that Bankshares has no reason to
believe have lost their guarantees. The book value of guaranteed student loans
more than 90 days past due and not included in the table was $15.2 and $13.9
million at December 31, 1996 and 1995, respectively.
At December 31, 1996, there were $6.7 million of nonaccrual student loans for
which management has agreed not to seek the guarantee payment under an interim
agreement with the U.S. Department of Education. Refer to note 12 to the
consolidated financial statements for further information.
INDEPENDENT LOAN REVIEW During 1993, management contracted for an independent
loan review function of its commercial and commercial real estate loan
portfolio. This function reviews Bankshares' loan grading system and problem
loan identification system. The loan review function is performed by an
independent accounting firm and provides verification that risk assessments and
problem loan identification systems are functioning adequately. Since 1993,
annual reviews have been completed on over 50% of Bankshares' commercial and
commercial real estate loans. There were no significant loan grading differences
or losses recommended by the independent firm.
Accounting Developments
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting guidance for sales, securitizations and servicing of
receivables and other financial assets, and for secured borrowing and collateral
transactions and extinguishment of liabilities. Some of the provisions of SFAS
No. 125 will be effective for 1997 transactions with the remaining provisions
effective for 1998 transactions. The adoption of SFAS No. 125 is expected to
have no impact on Bankshares' results of operations, financial condition or cash
flows.
In January 1997, the U.S. Securities and Exchange Commission issued final rules
on derivative, financial instruments and market risk disclosures. The new rules
require (i) more information on the accounting policies used for various
derivative transactions, and (ii) quantitative and qualitative disclosures about
market risk inherent in derivatives and other financial instruments in
management's discussion and analysis. The new rules will be effective for
Bankshares' 1997 Annual Report and will have no impact on results of operations,
financial condition or cash flows.
Forward-Looking Statements
Statements made about Bankshares' future economic performance, strategic plans
or objectives, revenue or earnings projections, or other financial items and
similar statements are not guarantees of future performance, but are
forward-looking statements. 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 Bankshares' actual
results to differ materially include, but are not limited to, the following:
- - Federal and state legislative and regulatory developments, including the
ultimate resolution of the student loan investigation by the U.S. Department
of Education;
- - Changes in management's estimate of the adequacy of the allowance for possible
loan losses;
- - Changes in the level and direction of loan delinquencies and write-offs;
- - Interest rate movements and their impact on customer behavior and Bankshares'
net interest margin;
- - Changes in the overall mix of Bankshares' loan and deposit products;
- - The impact of repricing and competitors' pricing initiatives on loan and
deposit products;
- - Bankshares' ability to adapt successfully to technological changes to meet
customers' needs and developments in the marketplace;
- - Bankshares' ability to access cost-effective funding; and
- - Economic conditions.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 19
<PAGE> 13
Consolidated Statements of Condition
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks -- noninterest-bearing $ 57,508 $ 104,805
Federal funds sold 98,500 3,170
Interest-bearing deposits with banks -- 25,000
Securities:
Available for sale, at fair value 379,029 364,404
Held to maturity, at amortized cost (fair value $11,554
and $15,072) 11,254 14,567
- -----------------------------------------------------------------------------------------------
Total Securities 390,283 378,971
Loans, net of unearned discount 1,623,145 1,558,782
Less: Allowance for possible loan losses 32,668 25,640
- -----------------------------------------------------------------------------------------------
Net Loans 1,590,477 1,533,142
Premises and equipment, net 28,650 26,794
Accrued interest receivable and other assets 40,919 40,907
Goodwill, net of accumulated amortization of $21,856 and
$18,960 12,191 12,303
- -----------------------------------------------------------------------------------------------
Total Assets $2,218,528 $2,125,092
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 195,324 $ 209,881
Interest-bearing 1,705,355 1,688,659
- -----------------------------------------------------------------------------------------------
Total Deposits 1,900,679 1,898,540
Short-term borrowings 6,317 1,828
Federal Home Loan Bank advances 40,000 --
Accrued interest payable and other liabilities 35,942 28,071
- -----------------------------------------------------------------------------------------------
Total Liabilities 1,982,938 1,928,439
Minority interest -- 1,927
Commitments and contingent liabilities
Shareholders' equity:
Preference stock -- --
Common stock, $0.05 par value, 50,000,000 shares
authorized;
14,820,242 and 15,026,842 shares issued 741 751
Surplus 4,140 4,188
Retained earnings 214,941 183,403
Net unrealized gains on available for sale securities 15,768 6,384
- -----------------------------------------------------------------------------------------------
Total Shareholders' Equity 235,590 194,726
- -----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,218,528 $2,125,092
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
20
<PAGE> 14
Consolidated Statements of Income
(Thousands, except per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $164,871 $137,706 $ 88,319
Tax-advantaged 1,642 2,120 2,133
Deposits with banks 723 1,560 846
Federal funds sold 2,508 3,015 2,571
Securities:
Taxable 20,875 26,033 18,880
Tax-advantaged 331 378 771
Trading account -- 302 1,021
- -------------------------------------------------------------------------------------------------------
Total Interest Income 190,950 171,114 114,541
- -------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 77,077 71,932 45,351
Short-term borrowings 895 665 359
Federal Home Loan Bank advances 1,639 -- --
Subordinated debentures -- -- 38
- -------------------------------------------------------------------------------------------------------
Total Interest Expense 79,611 72,597 45,748
- -------------------------------------------------------------------------------------------------------
Net Interest Income 111,339 98,517 68,793
Provision for possible loan losses 16,000 5,779 --
- -------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Possible Loan
Losses 95,339 92,738 68,793
- -------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 9,590 9,686 9,712
Gain on dispositions of loans 8,134 2,292 1,083
Trust services 492 477 435
Other income 1,220 2,691 1,991
Trading account gains (losses), net -- 297 (649)
Securities and other financial instruments gains
(losses), net 3,316 (1,332) 663
- -------------------------------------------------------------------------------------------------------
Total Noninterest Income 22,752 14,111 13,235
- -------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and employee benefits 25,483 25,116 21,251
Net occupancy 3,975 3,917 4,528
Data processing 2,417 2,175 2,988
FDIC deposit insurance 10 1,857 2,946
Goodwill amortization 2,896 2,257 2,031
Other expenses 15,400 16,328 11,478
- -------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 50,181 51,650 45,222
- -------------------------------------------------------------------------------------------------------
Income before income taxes 67,910 55,199 36,806
Income tax expense 24,005 19,429 12,790
- -------------------------------------------------------------------------------------------------------
Net Income $ 43,905 $ 35,770 $ 24,016
- ---------------------------------------------------------------------------------------------------
Net Income per Common Share $ 2.93 $ 2.35 $ 1.57
- ---------------------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding 14,994 15,241 15,292
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 21
<PAGE> 15
Consolidated Statements of Changes of Shareholders' Equity
(Thousands, except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Net unrealized
gains/(losses)
Common Retained on available for
Stock Surplus Earnings sale securities Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $758 $2,997 $138,641 $ 992 $143,388
Net income -- -- 24,016 -- 24,016
Shares issued under the stock
option plan, 150,000 common shares 7 1,976 -- -- 1,983
Retirement of 60,000 common shares (3) (709) (376) -- (1,088)
Cash dividends declared on common
stock, $0.295 per common share -- -- (4,495) -- (4,495)
Net change in unrealized losses on
available for sale securities -- -- -- (6,945) (6,945)
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 762 4,264 157,786 (5,953) 156,859
Net income -- -- 35,770 -- 35,770
Retirement of 215,500 common shares (11) (76) (4,664) -- (4,751)
Cash dividends declared on common
stock, $0.363 per common share -- -- (5,489) -- (5,489)
Net change in unrealized gains on
available for sale securities -- -- -- 12,337 12,337
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 751 4,188 183,403 6,384 194,726
Net income -- -- 43,905 -- 43,905
Shares issued under the stock
option plan, 400 common shares -- 9 -- -- 9
Retirement of 207,000 common shares (10) (57) (5,325) -- (5,392)
Cash dividends declared on common
stock, $0.475 per common share -- -- (7,042) -- (7,042)
Net change in unrealized gains on
available for sale securities -- -- -- 9,384 9,384
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $741 $4,140 $214,941 $15,768 $235,590
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
22
<PAGE> 16
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,905 $ 35,770 $ 24,016
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for possible loan losses 16,000 5,779 --
Depreciation and amortization 3,247 2,540 2,084
Accretion of investment and loan discounts (19,276) (13,493) (3,487)
Goodwill amortization 2,896 2,257 2,031
Deferred income tax benefit (1,740) (4,010) (1,752)
Net securities and other financial instruments
(gains) losses (2,916) 401 (663)
Decrease (increase) in trading account
securities -- 74,729 (75,081)
Trading account (gains) losses, net -- (297) 649
Gains on dispositions of loans (8,134) (2,292) (1,083)
(Increase) decrease in accrued interest
receivable and other assets (12) 3,076 (6,805)
Increase (decrease) in accrued interest payable,
other liabilities and minority interest 4,965 (5,009) 8,000
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating
Activities 38,935 99,451 (52,091)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held to maturity
securities 3,313 5,222 14,074
Proceeds from maturities of available for sale
securities 328,855 25,535 245,953
Proceeds from sales of available for sale
securities 3,377,908 2,191,004 2,113,067
Purchases of available for sale securities (3,699,277) (2,156,151) (2,504,060)
Maturities (purchases) of interest-bearing
deposits with banks 25,000 -- (25,000)
Purchases of loans (22,550) (4,486) (31,658)
Net increase in loans (29,463) (438,971) (84,845)
Purchases of premises and equipment, net (5,103) (2,066) (2,465)
Purchases of minority interest and additional
consideration for bank subsidiaries (4,139) (54) (606)
- ----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (25,456) (379,967) (275,540)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposit accounts 2,139 200,042 430,717
Increase (decrease) in short-term borrowings 4,489 (8,337) (3,392)
Proceeds from Federal Home Loan Bank advances 40,000 -- --
Repayments of subordinated debentures -- -- (1,185)
Issuance of common shares under stock option plan 9 -- 1,983
Retirements of common shares (5,392) (4,751) (1,088)
Cash dividends paid on common shares (6,691) (5,128) (4,413)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 34,554 181,826 422,622
- ----------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents 48,033 (98,690) 94,991
Cash and Cash Equivalents at Beginning of Year 107,975 206,665 111,674
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 156,008 $ 107,975 $ 206,665
- ----------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $ 77,523 $ 71,191 $ 45,217
Income taxes paid 27,914 22,642 14,691
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 23
<PAGE> 17
Notes to Consolidated Financial Statements
1.Summary of Significant
Accounting Policies
The consolidated financial statements include the accounts of CORUS BANKSHARES,
Inc. (formerly known as River Forest Bancorp, Inc.) and its wholly-owned
subsidiaries, CORUS BANK, N.A. and Bancorp Operations Company. Bankshares,
through its subsidiary bank, provides banking services primarily in the Chicago
metropolitan area. In the preparation of the consolidated financial statements,
management is required to make certain estimates and assumptions that affect the
reported amounts contained in the consolidated financial statements. Management
believes that the estimates made are reasonable; however, changes in estimates
may be required if economic or other conditions change significantly beyond
management's expectations.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of Bankshares and all of its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, due from banks
and federal funds sold which have an original maturity of 90 days or less.
SECURITIES Securities are classified based on management's intention at time of
purchase. Trading securities, which are generally held in anticipation of short-
term gains, are carried at their fair value. Realized and unrealized gains and
losses on trading account securities are included in trading account income.
Available for sale securities are those securities to be held for indefinite
periods of time. These securities include those that management intends to use
as part of its asset/liability management strategy and may be sold in response
to changes in interest rates, market conditions or other reasons. These
securities are carried at fair value. The difference between amortized cost and
fair value, less deferred income taxes and minority interest, is reflected as a
component of shareholders' equity.
Securities held to maturity represent securities that Bankshares has the ability
and positive intent to hold to maturity. These securities are carried at
amortized cost.
Interest and dividend income, including amortization of premiums and accretion
of discounts, are included in interest income. Realized gains and losses are
determined on a specific identification basis. Provisions are made to write down
the value of securities for declines in value that are other than temporary.
LOANS Loans are reported at the principal amount outstanding, net of any
unearned discount. Interest income is generally recognized using the level-yield
method. Loan origination fees, net of direct costs related to the origination,
are deferred and amortized as a yield adjustment over the lives of the related
loans.
The accrual of interest income is discontinued on any loan when there is
reasonable doubt as to the payment of interest or principal. Nonaccrual loans
are returned to accrual status when the financial position of the borrower
indicates there is no longer any reasonable doubt as to the payment of principal
or interest.
Nonaccrual commercial and commercial real estate loans are considered to be
impaired loans. Impairment is measured by determining the fair value of the loan
based on the present value of expected cash flows, the market price of the loan,
or the fair value of the underlying collateral. If the fair value of the loans
is less than the book value, a valuation allowance is established as a component
of the allowance for possible loan losses.
Nonperforming student loans purchased at a substantial discount from their face
value are accounted for using the cost-recovery method. The excess of
- --------------------------------------------------------------------------------
24
<PAGE> 18
loans converted to performing status over the cost of the portfolio is accreted
into interest income over the estimated lives of the loans using the level-yield
method. For loans that default after being converted to performing status and as
payments from guarantee agencies are received, the remaining discount on such
loans is accreted into other income over the life of the related portfolio.
ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is
available to absorb losses inherent in the loan origination process. Loan losses
are charged against the allowance for possible loan losses when they are deemed
to be uncollectible. Recoveries of previously charged-off amounts are credited
to the allowance for possible loan losses.
The allowance for possible loan losses is based upon comprehensive quarterly
reviews. These reviews include consideration of the risk rating of individual
credits, prior loss experience, delinquency levels, economic conditions and the
growth and composition of the loan portfolio. Additions are made to the
allowance through a charge against earnings to the provision for possible loan
losses.
PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less
accumulated depreciation. Depreciation on premises is computed primarily using
the straight-line method over the estimated useful life. Depreciation on
furniture and equipment is computed using accelerated methods. Expenditures for
normal repairs and maintenance are charged to expense as incurred.
OTHER REAL ESTATE OWNED Other real estate owned includes properties acquired
through foreclosure. These properties are recorded at the lower of cost or
estimated fair value, less estimated selling costs. Gains and losses on the sale
or periodic revaluation of other real estate owned are included in other income.
The net costs of maintaining these properties are included in operating
expenses.
GOODWILL Goodwill, which is the cost of investments in subsidiaries in excess of
the fair value of the net assets acquired, is being amortized over periods of 12
to 15 years. An impairment assessment is performed periodically for these
assets.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Bankshares utilizes various
off-balance-sheet financial instruments to manage the interest rate exposure
associated with its financial assets and liabilities. The counterparties to
these instruments are major financial institutions with credit ratings of
primarily A or better.
Amounts receivable or payable under interest rate swap and floor agreements that
qualify for hedge accounting treatment are accrued and reported in income. The
related accrued interest receivable or payable for the interest rate swaps is
included in other assets or liabilities. The cost of interest rate floor
agreements is amortized as an offset to interest income on loans over the life
of the agreements.
Interest rate swap agreements that do not qualify for hedge accounting treatment
are carried at fair value. Changes in fair value are included in securities and
other financial instrument gains and losses.
NET INCOME PER COMMON SHARE Net income per common share is computed by dividing
net income by the weighted average number of common shares and common share
equivalents (dilutive stock options) outstanding.
2. Accounting Change
Effective January 1, 1996, Bankshares adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 establishes a fair value-based method of accounting for stock-based
compensation plans. However, the standard also allows companies to continue to
measure compensation costs for such plans as prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
Bankshares has elected to continue to measure stock-based compensation in
accordance with APB Opinion No. 25. Due to this election, SFAS No. 123 requires
pro forma disclosures of net income and earnings per share as if the fair
value-based method of accounting had been applied. These disclosures are
contained in note 13. The adoption of SFAS No. 123 had no impact on Bankshares'
results of operations, financial position or cash flows.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 25
<PAGE> 19
3. Securities
The amortized cost, gross unrealized gains and losses, and fair value of
securities were as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Gross
Unrealized
Amortized ---------------- Fair
December 31, 1996 Cost Gains Losses Value
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and
agencies $183,350 $ 59 $ (5) $183,404
Common stocks 68,430 24,209 (28) 92,611
Other 102,990 27 (3) 103,014
- ------------------------------------------------------------------
Total $354,770 $24,295 $ (36) $379,029
- ------------------------------------------------------------------
Held to maturity:
State and municipal $ 5,201 $ 190 $ (15) $ 5,376
Other 6,053 128 (3) 6,178
- ------------------------------------------------------------------
Total $ 11,254 $ 318 $ (18) $ 11,554
- ------------------------------------------------------------------
December 31, 1995
- ------------------------------------------------------------------
Available for sale:
U.S. Government and
agencies $225,577 $ 747 $(124) $226,200
Common stocks 25,550 9,292 (81) 34,761
Other 103,456 23 (36) 103,443
- ------------------------------------------------------------------
Total $354,583 $10,062 $(241) $364,404
- ------------------------------------------------------------------
Held to maturity:
State and municipal $ 8,199 $ 306 $ (12) $ 8,493
Other 6,368 211 -- 6,579
- ------------------------------------------------------------------
Total $ 14,567 $ 517 $ (12) $ 15,072
- ------------------------------------------------------------------
</TABLE>
The scheduled maturities for securities were as follows at December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Available for sale Held to maturity
-------------------- -------------------
Amortized Fair Amortized Fair
Due in Cost Value Cost Value
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
One year or less $239,890 $239,946 $ 952 $ 965
After one year
through five years 37,694 37,710 2,497 2,572
After five years
through ten years 743 749 1,317 1,356
After ten years -- -- 500 546
- ---------------------------------------------------------------------
278,327 278,405 5,266 5,439
Securities not due at
a single maturity 76,443 100,624 5,988 6,115
- ---------------------------------------------------------------------
Total $354,770 $379,029 $11,254 $11,554
- ---------------------------------------------------------------------
</TABLE>
Actual maturities may differ from those scheduled due to prepayments by the
issuers.
Gross gains realized on sales of available for sale securities, totaled $2.6,
$1.6 and $1.0 million during 1996, 1995 and 1994, respectively. Gross losses
realized on sales of available for sale securities totaled $658,000, $2.0
million and $368,000 during 1996, 1995 and 1994, respectively. At December 31,
1994, the net unrealized loss from trading account securities was $428,000.
During 1995, two securities were transferred from the held to maturity
classification to the available for sale classification. These securities had a
carrying and fair value of $550,000. The Financial Accounting Standards Board
issued a special report in 1995 that allowed these transfers within a certain
time frame.
At December 31, 1996, Federal Home Loan Bank stock with a book value of $8.0
million was pledged as collateral for Federal Home Loan Bank advances.
Securities having an aggregate carrying value of $37.6 and $56.2 million at
December 31, 1996 and 1995, respectively, were pledged as collateral to secure
public deposits and for other purposes required or permitted by law.
4. Loans
Total loans, net of unearned discount of $20.3 and $30.0 million at December 31,
1996 and 1995, respectively, were as follows (in thousands):
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Commercial real estate $ 655,793 $ 582,331
Student 402,859 379,129
Residential first
mortgage 286,042 317,787
Home equity 188,755 170,793
Commercial 61,852 78,469
Consumer 27,844 30,273
- ---------------------------------------------------------
Total $1,623,145 $1,558,782
- ---------------------------------------------------------
</TABLE>
Changes in the allowance for possible loan losses were as follows (in
thousands):
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of
year $25,640 $20,157 $19,552
Provisions charged to
expense 16,000 5,779 --
Charge-offs (11,341) (819) (313)
Recoveries 2,369 523 918
- ----------------------------------------------------------
Balance at end of year $32,668 $25,640 $20,157
- ----------------------------------------------------------
</TABLE>
At December 31, 1996 and 1995, loans that were considered to be impaired totaled
$720,000 and $1.3 million, respectively. Management does not individually
evaluate certain smaller-balance loans for impairment. These loans are evaluated
on an aggregate basis using a formula-based approach in accordance with
Bankshares' policy. The majority of the loans
- --------------------------------------------------------------------------------
26
<PAGE> 20
deemed impaired were evaluated using the fair value of the collateral as the
measurement method. At December 31, 1996 and 1995, the related allowance
allocated to impaired loans was $60,000 and $135,000, respectively. The
contractual interest due on impaired loans for the years ended December 31, 1996
and 1995, was $61,000 and $134,000, respectively. Bankshares recognized no
interest income on impaired loans for the year ended December 31, 1996 and
$5,000 for the year ended December 31, 1995.
At December 31, 1996 and 1995, nonaccrual loans totaled $7.4 and $8.5 million,
respectively. The interest income foregone on these loans during 1996 and 1995
was $588,000 and $732,000, respectively.
Changes in the balance of loans to directors and principal officers of
Bankshares and its subsidiaries, and their affiliated enterprises, were as
follows (in thousands):
- ---------------------------------------------------------
<TABLE>
<S> <C>
Balance at December 31, 1995 $12,885
New loans 2,209
Repayments (4,075)
- ----------------------------------------------------
Balance at December 31, 1996 $11,019
- ----------------------------------------------------
</TABLE>
These loans were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other customers. In the opinion of management, these loans do not involve more
than the normal risk of collection or possess other unfavorable features.
All of Bankshares' performing residential first mortgage loans are pledged as
collateral for its Federal Home Loan Bank advances.
5. Premises and Equipment, Net
Premises and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------
December 31 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Land $ 7,265 $ 6,602
Buildings and improvements 24,994 26,364
Furniture and equipment 15,294 18,873
- -------------------------------------------------------
47,553 51,839
Less accumulated depreciation 18,903 25,045
- -------------------------------------------------------
Total premises and equipment,
net $28,650 $26,794
- -------------------------------------------------------
</TABLE>
Two banking locations occupy offices under long-term operating lease agreements.
Rent expense under these lease agreements totaled $311,000, $306,000 and
$214,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Minimum fixed lease obligations, excluding taxes, insurance and other expenses
payable directly by Bankshares, for leases in effect at December 31, 1996 were
as follows (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------
Year Ending December 31
- -------------------------------------------------
<S> <C>
1997 $ 314
1998 318
1999 325
2000 331
2001 337
2002 and thereafter 1,162
- -------------------------------------------------
Minimum payments $2,787
- -------------------------------------------------
</TABLE>
6. Goodwill
In 1996 and 1995, additional goodwill of $754,000 and $3.0 million,
respectively, was recorded for the 1993 acquisition of Belmont National Bank.
The additional goodwill was the result of the settlement of contingencies
related to the purchase. The original purchase price was contingent upon the
performance of certain specified loans and assets during the post-acquisition
period. The additional goodwill is being amortized over the remaining term of
the original goodwill period of 15 years.
In addition, goodwill totaling $1.9 million was recorded during 1996 related to
the purchase of the minority interest ownership interests in two of the
subsidiary banks. After these purchases, there were no minority ownership
interests remaining in any of the subsidiary banks.
7. Time Deposits
Interest-bearing deposits included certificates of deposit in amounts of
$100,000 or more totaling $289.9 and $232.5 million at December 31, 1996 and
1995, respectively. Interest expense on these deposits was $14.1 and $5.5
million in 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 27
<PAGE> 21
At December 31, 1996, the scheduled maturities of certificates of deposit were
as follows (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------
Year Ending December 31
- ----------------------------------------------------
<S> <C>
1997 $393,853
1998 50,427
1999 23,164
2000 17,081
2001 and thereafter 2,020
- ----------------------------------------------------
Total $486,545
- ----------------------------------------------------
</TABLE>
8. Federal Home Loan Bank Advances
During 1996, Bankshares borrowed $40.0 million of Federal Home Loan Bank
advances. The interest rate on the advances is 3-month LIBOR and they reprice
quarterly. The advances will mature in April 2001.
Bankshares maintains as qualifying collateral its Federal Home Loan Bank stock
and all performing residential first mortgage loans.
9. Income Taxes
The components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal income tax $25,649 $23,433 $14,509
State income tax 96 6 33
- -------------------------------------------------------------
Total current expense 25,745 23,439 14,542
Deferred federal
benefit (1,740) (4,010) (1,752)
- -------------------------------------------------------------
Income tax provision $24,005 $19,429 $12,790
- -------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective rate
is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
Statutory federal
income
tax rate 35.0% 35.0% 35.0%
Tax-exempt income (0.9) (1.5) (2.6)
Goodwill amortization 1.5 1.4 1.9
Minority interest 0.1 0.5 0.5
Other, net (0.4) (0.2) (0.1)
- ----------------------------------------------------------
Effective rate 35.3% 35.2% 34.7%
- ----------------------------------------------------------
</TABLE>
Deferred taxes were recorded based upon differences between the financial
statement and tax bases of assets and liabilities. The following deferred taxes
were recorded (in thousands):
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan
losses $ 10,243 $ 7,919
Deferred loan fees and
discounts 2,144 2,342
Other deferred tax assets 592 1,258
- -------------------------------------------------------
Gross deferred tax assets 12,979 11,519
- -------------------------------------------------------
Deferred tax liabilities:
Unrealized securities gains (8,491) (3,438)
Purchase accounting
adjustments (2,390) (2,819)
Other deferred tax
liabilities (562) (415)
- -------------------------------------------------------
Gross deferred tax
liabilities (11,443) (6,672)
- -------------------------------------------------------
Net deferred tax asset $ 1,536 $ 4,847
- -------------------------------------------------------
</TABLE>
10. Employee Benefit Plans
Expenses for retirement and savings-related benefit plans were as follows (in
thousands):
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------
<S> <C> <C> <C>
Pension plan $ 3 $ 44 $(127)
Employees' savings plan and
trust 95 68 85
- -------------------------------------------------------
Total $98 $112 $ (42)
- -------------------------------------------------------
</TABLE>
PENSION PLAN Substantially all employees are eligible to participate in a
noncontributory defined benefit plan after meeting age and service requirements.
Pension benefits are based on length of service and compensation. Funding for
the plan is based on actuarial cost methods. No contributions were made during
the three years ended December 31, 1996. Pension plan assets are invested in
common stocks, bank deposits and bonds.
Pension expense was comprised of the following (in thousands):
- ---------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 362 $ 260 $ 201
Interest cost 825 737 722
Actual return on plan
assets (3,175) (2,614) (82)
Amortization of
transition asset (202) (202) (202)
Net amortization and
deferral 2,193 1,863 (766)
- -----------------------------------------------------------
Pension expense $ 3 $ 44 $(127)
- -----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE> 22
The plan's funded status was as follows (in thousands):
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Actuarial present value of
vested benefit obligations $(10,154) $ (9,202)
Actuarial present value of
nonvested benefit
obligations (132) (72)
- --------------------------------------------------------
Accumulated benefit
obligation (10,286) (9,274)
Estimated future benefits (1,627) (1,302)
- --------------------------------------------------------
Projected benefit obligation (11,913) (10,576)
Plan assets at fair value 15,175 12,400
- --------------------------------------------------------
Plan assets in excess of
projected benefit
obligation 3,262 1,824
Unrecognized net transition
asset (1,010) (1,211)
Unrecognized net (gain) loss (1,568) 74
- --------------------------------------------------------
Prepaid pension asset $ 684 $ 687
- --------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% at December 31, 1996 and
1995, and 8.5% at December 31, 1994. The weighted average rate of increase in
compensation and expected long-term rate of return on plan assets were 5.0% and
8.0%, respectively, in 1996, 1995 and 1994.
SAVINGS PLAN Most employees are eligible to become participants of Bankshares'
Employees' Savings Plan and Trust. Bankshares' matching contributions to the
Plan are discretionary. In the years ended December 31, 1996, 1995 and 1994,
Bankshares matched 20% of participants' contributions, up to a maximum of $750.
11. Financial Instruments
In the normal course of business, Bankshares invests in various financial
assets, incurs various financial liabilities and enters into agreements
involving off-balance-sheet financial instruments. The fair value estimates of
financial instruments are not necessarily indicative of the amounts Bankshares
might receive or pay in actual market transactions. Potential taxes and other
transaction costs have also not been considered in estimating fair value. As
some of Bankshares' assets and liabilities are not considered financial
instruments, the disclosures do not reflect the fair value of Bankshares as a
whole.
FINANCIAL ASSETS Bankshares had the following financial assets (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents $ 156,008 $ 156,008 $ 107,975 $ 107,975
Interest-bearing
deposits with banks -- -- 25,000 25,117
Securities 390,283 390,583 378,971 379,476
Loans 1,590,477 1,613,618 1,533,142 1,567,417
Accrued interest
receivable 22,495 22,495 26,030 26,030
- ----------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents and accrued interest receivable are short-term in
nature and, as such, their carrying value approximates fair value.
Fair values of interest-bearing deposits with banks and securities are based on
quoted market prices, when available. Non-quoted instruments are valued based on
discounted cash flows using current interest rates for similar securities.
Loans are valued based on type of loan. The fair value of variable-rate loans
that reprice frequently is assumed to approximate carrying value. Residential
mortgage loans are valued based on secondary market prices for similar loans
after adjustment for differences in characteristics. The fair value of all other
loans are based on the discounted amount of scheduled cash flows or the
estimated fair value of the underlying collateral. The discount rate used is the
rate for loans being offered to borrowers with similar terms and credit quality.
FINANCIAL LIABILITIES Bankshares had the following financial liabilities (in
thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
December 31 1996 1995
- ----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits without a
stated maturity $1,414,134 $1,414,134 $1,445,724 $1,445,724
Certificates of
deposit 486,545 486,779 452,816 456,406
Short-term borrowings 6,317 6,317 1,828 1,828
Federal Home Loan
Bank advances 40,000 40,000 -- --
Accrued interest
payable 7,471 7,471 4,683 4,683
- ----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 29
<PAGE> 23
The fair value of deposits without a stated maturity is assumed to approximate
carrying value. The fair value of certificates of deposit is based on discounted
contractual cash flows. Discount rates are selected using the rates that were
offered at year-end.
Short-term borrowings and accrued interest payable are short-term in nature and,
as such, their carrying value approximates fair value. The fair value of Federal
Home Loan Bank advances is assumed to approximate carrying value as these
reprice quarterly.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Bankshares is a party to
off-balance-sheet financial instruments used in the normal course of business to
meet the financing needs of its customers and manage its interest rate risk.
These financial instruments involve, in varying degrees, elements of credit,
interest rate, and liquidity risk.
The following lending-related financial instruments had contract amounts that
represented credit exposure (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------
December 31 1996 1995
- --------------------------------------------------------
<S> <C> <C>
Standby letters of credit $ 3,358 $ 3,633
Loan commitments 220,389 163,301
Unfunded open-ended lines
of credit 44,562 63,935
- --------------------------------------------------------
</TABLE>
The following financial instruments were used by Bankshares to hedge its
interest rate risk (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Notional Fair Carrying
December 31, 1996 Amount Value Value
- ------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap
agreements:
Amortizing pay fixed
rate, receive
floating rate $213,975 $(1,312) $ (194)
Non-amortizing pay
fixed rate, receive
floating rate 22,480 (1,379) (104)
Non-amortizing pay
floating rate,
receive fixed rate 30,000 (157) 15
Interest rate floor
agreements 200,000 -- 44
- ------------------------------------------------------------
December 31, 1995
- ------------------------------------------------------------
Interest rate swap
agreements:
Amortizing pay fixed
rate, receive
floating rate $135,437 $(6,343) $ (87)
Non-amortizing pay
fixed rate, receive
floating rate 22,480 (2,472) (94)
Non-amortizing pay
floating rate,
receive fixed rate 30,000 456 1
Interest rate floor
agreements 200,000 8 96
- ------------------------------------------------------------
</TABLE>
The fair value of interest rate swap and floor agreements are based on either
quoted market or dealer prices. The carrying value for interest rate swaps
represents the net accrued interest receivable or payable. The carrying value of
interest rate floors represents the amount of unamortized premium. At December
31, 1996, the fair value of all interest rate swaps and floor agreements
included in the table above represent the gross amounts of unrealized gains or
losses.
Bankshares enters into interest rate swap agreements to hedge its exposure to
interest rate risk on specific fixed-rate loans and deposits. The terms of the
swaps match the terms of the hedged loans and deposits. For the amortizing pay
fixed rate, receive floating rate swaps, Bankshares paid a weighted average rate
of 6.45% and received a weighted average rate of 5.39% in 1996. For the
non-amortizing pay fixed rate, receive floating rate swaps, Bankshares paid a
weighted average rate of 9.14% and received a weighted average rate of 5.63% in
1996. For non-amortizing pay floating rate, receive fixed rate swaps, Bankshares
paid a weighted average rate of 5.49% and received a weighted average rate of
5.99% in 1996. At December 31, 1996, interest rate swaps with notional amounts
of $5.0, $159.5 and $102.0 million had maturity dates within one year, from two
to five years and greater than five years, respectively.
Bankshares purchases interest rate floor agreements to offset the possibility of
falling interest rates as part of its asset/liability management. No amounts
were received by Bankshares under the agreements during 1996 and 1995. These
agreements will expire in 1997.
In addition to the financial instruments used by Bankshares to hedge its
interest rate risk, Bankshares also had pay fixed rate, receive floating rate
swaps with a notional amount of $45.0 million at December 31, 1995. The swap
agreements were terminated in the first quarter of 1996. The swaps were
purchased by Bankshares to manage its interest rate exposure and did not qualify
for hedge accounting treatment. For the year ended December 31, 1996, the net
gain on the swaps was $1.3 million. In 1995, the net loss on these swaps was
$931,000. The swaps' average fair value in 1996 and 1995 was a loss of $613,000
and $44,000, respectively. At December 31, 1995, the fair value of the swaps was
a loss of $1.8 million.
- --------------------------------------------------------------------------------
30
<PAGE> 24
12. Legal and Regulatory Proceedings
Bankshares is involved in various legal and regulatory proceedings, many
involving matters that arose in the ordinary course of business. The
consequences of these proceedings are not presently determinable but, in the
opinion of management, the ultimate liability in excess of reserves recorded
will not have a material effect on the results of operations, financial
position, liquidity or capital resources of Bankshares, except for possibly the
matter discussed below.
As disclosed previously, Bankshares discovered that certain former employees in
the student loan servicing area had falsified some records of telephone calls,
from late 1993 to April 1994, to students whose loans were delinquent. The
telephone calls are a required action to maintain the enforceability of a
student loan's government guarantee. Bankshares terminated the employees
involved and informed the U.S. Department of Education immediately upon
discovery of the problem and the Department commenced an investigation.
Bankshares believes that the Department's investigation has been expanded to
include a review of whether Bankshares' student loan division has engaged in
improper practices from 1988 to April 1994, including whether information
contained on guarantee claim forms may have been falsified. If it is ultimately
determined that Bankshares acted illegally or violated Department policy or
regulations, Bankshares could (i) lose its government guarantees with respect to
certain student loans and (ii) be required to repurchase a substantial amount of
delinquent student loans for which Bankshares previously received guarantee
payments. In addition, Bankshares or individual employees could be subject to
substantial penalties.
Shortly after reporting the problem, Bankshares entered into an interim
agreement with the Department pursuant to which it agreed, pending the
conclusion of the investigation, not to request payment from any guarantor or
the Department on any loans that Bankshares is unable to state with certainty
were not affected by incorrect servicing history documentation. As a result of
this agreement, at December 31, 1996, there were $6.7 million of nonaccrual
student loans for which Bankshares has agreed not to seek guarantee payments. In
addition, management charged off $4.0 million of student loans during 1996 that
were subject to the interim agreement. The ultimate collectibility of the loans
is uncertain.
Management is unable to predict what actions, if any, the Department will take
following the completion of its investigation, and therefore cannot estimate the
amount or range of any liability that Bankshares will ultimately incur.
Bankshares does not condone or permit such improper practices and is cooperating
fully with the Department's investigation.
13. Shareholders' Equity
STOCK SPLIT On August 16, 1995, the Board of Directors approved a two-for-one
stock split effective September 22, 1995. All references in these financial
statements to dividends paid, number of common shares, stock prices and net
income per common share give retroactive effect to the stock split.
PREFERENCE SHARES Bankshares has 1.0 million authorized shares of
$50-stated-value preference stock and 3.0 million of authorized shares of
$1-stated-value preferred stock available to be issued for acquisition and
capital maintenance programs. At December 31, 1996 and 1995, no preference stock
was issued.
DIVIDEND RESTRICTIONS The payment of dividends to Bankshares by its subsidiary
bank is subject to federal regulatory limitations. National banks are generally
allowed to pay dividends to the extent of net income for the current and prior
two years less dividends paid without regulatory approval. The payment of
dividends by any bank may also be affected by other factors, such as the
maintenance of adequate capital. Bankshares' subsidiary bank was considered
well-capitalized as of December 31, 1996. At December 31, 1996, the total amount
of subsidiary retained earnings available for dividends without prior regulatory
approval and maintaining well-capitalized status was $13.7 million.
STOCK OPTION PLAN Options to purchase Bankshares' common stock have been granted
to employees under the 1990 Stock Option Plan at prices equal to the fair market
value of the underlying stock on the dates the options were granted. The options
are generally exercisable in not more than five equal, annual cumulative
installments beginning one year after the date of grant, and expire in 10 years.
At December 31, 1996, there were 90,350 shares available for grant.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 31
<PAGE> 25
Changes in stock options were as follows (number of shares in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 347 $15.52 293 $14.56 433 $13.98
Granted 29 30.00 74 19.38 16 18.65
Exercised (1) 20.30 -- -- (150) 13.23
Canceled (16) 19.05 (20) 15.62 (6) 16.85
- --------------------------------------------------------------------------------------------------------------------------
Ending balance 359 $16.53 347 $15.52 293 $14.56
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, the range of exercise prices for outstanding options and
weighted-average term remaining was $10.50 to $30.00 and 5.2 years,
respectively. If Bankshares expensed the fair value of options granted in 1995
and 1996, the pro forma net income and earnings per share would have been as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
- -------------------------------------------------------
Year Ended December 31 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Reported net income $43,905 $35,770
After-tax fair value of
options granted 66 33
- -------------------------------------------------------
Pro forma net income $43,839 $35,737
- -------------------------------------------------------
Pro forma earnings per share $ 2.92 $ 2.34
- -------------------------------------------------------
</TABLE>
The fair value of options granted was computed using the Black-Scholes model.
For the pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period.
REGULATORY CAPITAL Bankshares and its subsidiary bank are required to maintain
certain capital ratios. Failure to maintain these ratios would severely limit
their ability to pay dividends, support growth and repurchase shares and would
increase the amount of FDIC insurance premiums. At December 31, 1996 and 1995,
Bankshares and its subsidiary bank were classified as well-capitalized. There
have been no events since December 31, 1996 that management believes would have
changed that classification. The minimum ratios to be well-capitalized and
Bankshares' and its subsidiary bank's regulatory capital and ratios were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Total Risk-Based
Leverage Tier I Capital Capital
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Minimum ratios for well-capitalized 5.0% 6.0% 10.0%
December 31, 1996:
Bankshares $207,632 9.7% $207,632 13.5% $227,182 14.8%
Subsidiary bank 141,859 6.8% 141,859 9.6% 160,535 10.9%
December 31, 1995:
Bankshares 177,966 9.2% 177,966 12.6% 195,579 13.9%
Subsidiary bank 138,477 6.8% 138,477 9.8% 156,300 11.1%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
32
<PAGE> 26
14. Net Income Per Common Share
Net income per common share was calculated as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average common shares outstanding 14,833 15,161 15,242
Dilutive common stock options based on treasury stock method
using average market price 161 80 50
- ------------------------------------------------------------------------------------------------------
Average primary shares outstanding 14,994 15,241 15,292
- ------------------------------------------------------------------------------------------------------
Net income attributable to common shares $43,905 $35,770 $24,016
- ------------------------------------------------------------------------------------------------------
Net income per common share $ 2.93 $ 2.35 $ 1.57
- ------------------------------------------------------------------------------------------------------
</TABLE>
15. Parent Company Financial Statements
Bankshares' condensed parent company financial statements were as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------------------
December 31 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 4,356 $ 17,421
Available for sale securities, at fair value 92,611 35,749
Investment in subsidiaries 154,945 153,552
Other assets 686 457
- -------------------------------------------------------------------------------------------
Total $252,598 $207,179
- -------------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Liabilities $ 17,008 $ 12,453
Shareholders' equity 235,590 194,726
- -------------------------------------------------------------------------------------------
Total $252,598 $207,179
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary $36,000 $20,524 $27,309
Other income 5,516 1,474 1,531
- ---------------------------------------------------------------------------------------------------
Total Income 41,516 21,998 28,840
- ---------------------------------------------------------------------------------------------------
Expenses:
Interest expense 414 430 410
Other expenses 1,247 981 2,152
Goodwill and purchase accounting amortization 1,036 2,211 1,751
- ---------------------------------------------------------------------------------------------------
Total Expenses 2,697 3,622 4,313
- ---------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed
(distributed) net income of subsidiaries 38,819 18,376 24,527
Income tax expense (benefit) 839 (665) (611)
- ---------------------------------------------------------------------------------------------------
Income before equity in undistributed (distributed) net
income of subsidiaries 37,980 19,041 25,138
Equity in undistributed (distributed) net income of bank
subsidiary 5,612 16,609 (1,085)
Equity in undistributed (distributed) net income of non-bank
subsidiary 313 120 (37)
- ---------------------------------------------------------------------------------------------------
Net Income $43,905 $35,770 $24,016
- ---------------------------------------------------------------------------------------------------
Net Income per Common Share $ 2.93 $ 2.35 $ 1.57
- ---------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 33
<PAGE> 27
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 43,905 $ 35,770 $ 24,016
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 54 44 26
Amortization of goodwill and purchase accounting
adjustments 1,036 2,211 1,751
Net securities and other financial instruments gains (2,656) (1,289) (775)
Decrease in dividends receivable, net -- 2,000 9,108
Decrease (increase) in other assets (215) 126 (10)
Increase (decrease) in other liabilities (1,747) 153 1,393
Equity in (undistributed) distributed net income of
subsidiaries (5,925) (16,729) 1,122
- ------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 34,452 22,286 36,631
- ------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of available for sale securities 1,000 2,013 --
Proceeds from sales of available for sale securities 6,075 3,236 2,923
Purchases of available for sale securities (46,311) (9,919) (21,797)
Purchases of premises and equipment, net (68) (59) (36)
Issuance of note to subsidiary -- -- (350)
Capital infusion from (to) subsidiaries 8,000 -- (8,352)
Purchases of minority interest and additional consideration
for bank subsidiaries (4,139) -- (2)
- ------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (35,443) (4,729) (27,614)
- ------------------------------------------------------------------------------------------------------
Financing activities:
Repayments of subordinated debentures -- -- (1,185)
Issuance of common shares under stock option plan 9 -- 1,983
Retirements of common shares (5,392) (4,751) (1,088)
Cash dividends paid on common stock (6,691) (5,128) (4,412)
- ------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (12,074) (9,879) (4,702)
- ------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (13,065) 7,678 4,315
Cash and Cash Equivalents at Beginning of Year 17,421 9,743 5,428
- ------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 4,356 $ 17,421 $ 9,743
- ------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE> 28
16. Quarterly Financial Data (Unaudited)
The following is a summary of quarterly financial information for the years
ended December 31, 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $49,221 $ 38,031 $48,074 $43,701 $47,568 $41,801 $46,087 $47,581 $190,950 $171,114
Interest expense 19,978 17,236 19,917 20,365 20,211 15,818 19,505 19,178 79,611 72,597
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 29,243 20,795 28,157 23,336 27,357 25,983 26,582 28,403 111,339 98,517
Provision for possible loan
losses 4,000 -- 4,000 1,479 4,000 1,500 4,000 2,800 16,000 5,779
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for possible
loan losses 25,243 20,795 24,157 21,857 23,357 24,483 22,582 25,603 95,339 92,738
Noninterest income, net of
trading account and
securities gains (losses) 3,956 4,188 4,640 4,158 5,009 3,287 5,831 3,513 19,436 15,146
Trading account and
securities gains (losses),
net 1,420 (1,039) 199 248 1,244 325 453 (569) 3,316 (1,035)
Noninterest expense 12,875 12,310 12,543 12,905 12,522 13,133 12,241 13,302 50,181 51,650
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 17,744 11,634 16,453 13,358 17,088 14,962 16,625 15,245 67,910 55,199
Income tax expense 6,259 4,069 5,811 4,760 6,086 5,386 5,849 5,214 24,005 19,429
- ---------------------------------------------------------------------------------------------------------------------------------
Net income available to
common shareholders $11,485 $ 7,565 $10,642 $ 8,598 $11,002 $ 9,576 $10,776 $10,031 $ 43,905 $ 35,770
- ---------------------------------------------------------------------------------------------------------------------------------
Net income per common share $ 0.77 $ 0.50 $ 0.71 $ 0.56 $ 0.73 $ 0.63 $ 0.72 $ 0.66 $ 2.93 $ 2.35
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMON STOCK MARKET INFORMATION AND DIVIDEND HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock price range
High $ 30.00 $ 17.25 $ 31.00 $ 20.25 $ 32.75 $ 24.25 $ 33.00 $ 25.50 $ 33.00 $ 25.50
Low 24.75 16.38 28.75 16.38 28.25 20.13 30.75 23.00 24.75 16.38
Close 29.00 16.50 30.00 20.25 32.00 23.25 32.25 25.50 32.25 25.50
Cash dividends declared 0.10 0.075 0.125 0.088 0.125 0.10 0.125 0.10 0.475 0.363
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Bankshares' common stock is a Nasdaq National Market Issue trading under the
ticker symbol CORS.
- --------------------------------------------------------------------------------
CORUS BANKSHARES INC. 35
<PAGE> 29
Independent Auditors' Report
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CORUS BANKSHARES, INC.:
We have audited the accompanying consolidated statements of condition of CORUS
BANKSHARES, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CORUS BANKSHARES,
Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 10, 1997
- --------------------------------------------------------------------------------
36
<PAGE> 1
EXHIBIT 16
March 25, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Ladies and Gentlemen:
We have read CORUS BANKSHARES, Inc.'s statements included under Item 9 of its
Form 10-K dated March 25, 1997 and we agree with such statements contained in
paragraphs 2 and 3 therein. We have no basis to agree or disagree with other
statements of the registrant contained within Item 9.
Very truly yours,
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
17
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 57,508
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 98,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 379,029
<INVESTMENTS-CARRYING> 11,254
<INVESTMENTS-MARKET> 11,554
<LOANS> 1,623,145
<ALLOWANCE> 32,668
<TOTAL-ASSETS> 2,218,528
<DEPOSITS> 1,900,679
<SHORT-TERM> 6,317
<LIABILITIES-OTHER> 35,942
<LONG-TERM> 40,000
0
0
<COMMON> 741
<OTHER-SE> 234,849
<TOTAL-LIABILITIES-AND-EQUITY> 2,218,528
<INTEREST-LOAN> 166,513
<INTEREST-INVEST> 21,206
<INTEREST-OTHER> 3,231
<INTEREST-TOTAL> 190,950
<INTEREST-DEPOSIT> 77,077
<INTEREST-EXPENSE> 79,611
<INTEREST-INCOME-NET> 111,339
<LOAN-LOSSES> 16,000
<SECURITIES-GAINS> 3,316
<EXPENSE-OTHER> 50,181
<INCOME-PRETAX> 67,910
<INCOME-PRE-EXTRAORDINARY> 67,910
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,905
<EPS-PRIMARY> 2.93
<EPS-DILUTED> 2.93
<YIELD-ACTUAL> 5.40
<LOANS-NON> 7,427
<LOANS-PAST> 27,778
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 25,640
<CHARGE-OFFS> 11,341
<RECOVERIES> 2,369
<ALLOWANCE-CLOSE> 32,668
<ALLOWANCE-DOMESTIC> 29,365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,303
</TABLE>
