<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-6136
CORUS BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0823592
(State of incorporation of organization) (I.R.S. Employer Identification No.)
3959 N. Lincoln Ave., Chicago, Illinois 60613-2431
(Address of principal executive offices) (Zip Code)
(773) 388-3088
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of exchange on which registered
- --------------------------------------- ------------------------------------
<S> <C>
Common stock, par value $0.05 per share NASDAQ
</TABLE>
Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Documents Incorporated By Reference
Parts I and II of this Form 10-K incorporate by reference certain information
from the Registrant's 1997 Annual Report to Shareholders. Part III of this Form
10-K incorporates by reference certain information from the Registrant's
definitive Proxy Statement dated March 17, 1998, for its Annual Meeting of
Shareholders to be held on May 20, 1998.
On February 28, 1998, the Registrant had 14,576,142 common shares outstanding.
Of these, 7,290,003 common shares having an aggregate market value (based on
the closing price for these shares as reported in a summary of national market
issues in The Wall Street Journal for stocks listed on NASDAQ on February 28,
1998) of approximately $320.8 million, were owned by shareholders other than
directors and executive officers of the Registrant and any other person known
by the Registrant as of the date hereof to beneficially own five percent or
more of Registrant's common shares.
<PAGE> 2
PART I.
ITEM 1. BUSINESS
CORUS BANKSHARES, Inc., incorporated in Minnesota in 1958, is a bank holding
company registered under the Bank Holding Company Act of 1956. CORUS 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.
CORUS owns an operations subsidiary, Bancorp Operations Company, that comprises
an insignificant portion of CORUS' total assets and net income. Bancorp
Operations Company provides item processing, bookkeeping and other ancillary
bank support services to CORUS' bank subsidiary.
COMPETITION
All of CORUS' principal business activities are highly competitive. CORUS
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 December 31, 1997, CORUS employed a total of 689 full-time equivalent
persons, consisting of 135 executives, management and supervisory personnel and
554 clerical and secretarial employees.
SUPERVISION AND REGULATION
General
CORUS 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, CORUS may engage in and own
shares of companies engaged in
1
<PAGE> 3
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 CORUS to acquire banks located anywhere in Illinois. Other amendments
of the Illinois Act authorize combinations between banks 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.
CORUS' 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. The subsidiary bank's FDIC deposit insurance cost for 1998 will be
approximately .01% of deposits.
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 that 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
2
<PAGE> 4
risk-weighted assets and total risk-based capital to risk-weighted assets to be
classified as well-capitalized are 6.0% and 10.0%, respectively. At December
31, 1997, CORUS' Tier 1 capital and total risk-based capital ratios were 15.3%
and 16.6%, 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 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 December 31, 1997, CORUS' leverage ratio was 10.5%.
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 were effective on June 1, 1997,
unless a state takes legislative action prior to that date. The long-term
effects on CORUS 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 4 through 10 contain supplemental statistical data. This data should be
read in conjunction with CORUS' Management's Discussion and Analysis of
Financial Statements and the Consolidated Financial Statements and notes
thereto of the 1997 Annual Report to Shareholders (1997 Annual Report),
incorporated herein by reference in response to Items 7 and 8 hereof.
3
<PAGE> 5
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, 1997
-------------------------------
(thousands) Volume Rate Total
-------- -------- ---------
<S> <C> <C> <C>
Interest Income:
Interest-earning deposits with banks $(206) $(26) $(232)
Federal funds sold 2,865 141 3,006
Taxable securities other than common stocks (1,602) (307) (1,909)
Common stocks 1,481 (73) 1,408
Tax-advantaged securities (193) 40 (153)
Trading account securities 380 380 760
Loans, net of discount (3,211) (6,880) (10,091)
-------- -------- ---------
Net Decrease (486) (6,725) (7,211)
-------- -------- ---------
Interest Expense:
-------- -------- ---------
NOW and money market deposits (187) 1,596 1,409
Savings deposits (567) - (567)
Time deposits 1,201 594 1,795
Short-term borrowings (494) 229 (265)
Federal Home Loan Bank advances 652 26 678
-------- -------- ---------
Net Increase 605 2,445 3,050
-------- -------- ---------
Decrease in Net Interest Income $(1,091) $(9,170) $(10,261)
======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------
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 other than common stocks (4,144) (1,518) (5,662)
Common stocks 648 (144) 504
Tax-advantaged securities (133) 39 (94)
Trading account securities (151) (151) (302)
Loans, net of discount 30,056 (3,623) 26,433
-------- -------- ---------
Net Increase (Decrease) 25,177 (5,642) 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>
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
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<PAGE> 6
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.
SECURITIES PORTFOLIO
Carrying Value of Securities by Category
The carrying value of securities held by CORUS were as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------
(thousands) 1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Available for sale
U.S. Government and agencies $191,236 $183,404 $220,808
Corporate debt securities 161,454 95,001 105,375
Common stocks 158,660 92,611 34,761
Other 20,513 8,013 3,460
-------- -------- --------
Total $531,863 $379,029 $364,404
======== ======== ========
Held to maturity
State and municipal $4,150 $5,201 $8,199
Other 5,129 6,053 6,368
-------- -------- --------
Total $9,279 $11,254 $14,567
======== ======== ========
</TABLE>
Maturities of Securities
The scheduled maturities by security type as of December 31, 1997 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 $190,918 $318 $ -- $ -- $ -- $191,236
Corporate debt
securities 51,998 109,194 262 -- -- 161,454
State and municipal 433 2,515 702 500 -- 4,150
Common stocks -- -- -- -- 158,660 158,660
Other -- 17 45 -- 25,580 25,642
-------- --------- ------ ---- -------- ---------
Total $243,349 $ 112,044 $1,009 $500 $184,240 $541,142
======== ========= ====== ==== ======== =========
</TABLE>
5
<PAGE> 7
The weighted-average yield for each range of maturities of securities at
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
From one From five Not due at
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 5.40% 9.02% -- % -- % -- % 5.40%
Corporate debt
securities 5.83 6.11 6.79 -- -- 5.97
State and municipal 8.68 9.91 7.59 10.41 -- 9.45
Common stocks -- -- -- -- N/M N/M
Other -- 5.50 -- -- 7.00 6.15
</TABLE>
N/M - Not meaningful.
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
CORUS' loans were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------
(thousands) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Commercial real estate $ 711,495 $ 655,793 $ 582,331 $ 354,893 $296,075
Student 412,926 402,859 379,129 354,073 290,635
Residential first mortgage 209,669 286,042 317,787 233,437 251,159
Home equity 131,868 188,755 170,793 57,093 37,578
Commercial 55,062 61,852 78,469 68,620 75,504
Consumer 24,955 27,844 30,273 32,393 27,880
---------- ---------- ---------- ---------- --------
Total $1,545,975 $1,623,145 $1,558,782 $1,100,509 $978,831
========== ========== ========== ========== ========
</TABLE>
Maturities of Loans and Sensitivity to Changes in Interest
The following table classifies the scheduled maturities for the following loan
portfolio categories at December 31, 1997:
<TABLE>
<CAPTION>
One year From one After
(thousands) or less to five years five years Total
-------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Commercial real estate $158,208 $345,890 $211,859 $715,957
Commercial 29,663 17,585 7,932 55,180
</TABLE>
6
<PAGE> 8
Of the loans maturing after one year, $333.0 million have fixed rates. To
manage the interest rate exposure of specific, fixed-rate commercial real
estate loans and other loans, CORUS has entered into interest rate swap
agreements. For additional information on such financial instruments, see Note
10 to the Consolidated Financial Statements on pages 39 through 40 of the 1997
Annual Report, incorporated herein by reference in response to Item 8 hereof.
RISK ELEMENTS IN THE LOAN PORTFOLIO
Nonaccrual and Past Due Loans
Nonaccrual loans were as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------
(thousands) 1997 1996 1995 1994 1993
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $8,641 $7,427 $8,536 $2,389 $3,098
Nonaccrual loans to total loans 0.56% 0.46% 0.55% 0.22% 0.32%
</TABLE>
Interest income that should have been recorded under the original terms of
these loans totaled $503,000 for the year ended December 31, 1997. Total
interest income recorded for these loans in 1997 was $62,000.
Loans past due 90 days or more, including nonaccrual loans, were as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
(thousands) 1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more $41,248 $50,368 $32,714 $20,620 $14,281
Less guaranteed student loans 14,077 15,163 13,913 13,252 8,231
------- ------- ------- ------- -------
Net loans past due 90 days or more $27,171 $35,205 $18,801 $7,368 $6,050
======= ======= ======= ======= =======
Net loans past due 90 days or more
as a percentage of total loans 1.76% 2.17% 1.21% 0.67% 0.62%
======= ======= ======= ======= =======
</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
December 31, 1997,
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<PAGE> 9
the principal amount of these loans was $4.9 million. This amount generally
includes loans that were classified for regulatory purposes.
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) 1997 1996 1995 1994 1993
--------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $32,668 $25,640 $20,157 $19,552 $17,490
Allowance of acquired subsidiaries -- -- -- -- 1,000
Provision for possible loan losses 16,000 16,000 5,779 -- 1,176
Less charge-offs:
Commercial real estate loans 350 206 284 65 804
Student loans 9,707 4,605 81 45 107
Residential first mortgage loans 431 1 4 20 96
Home equity loans 8,454 6,421 28 -- --
Commercial loans 22 92 269 35 515
Consumer loans 131 16 153 148 330
--------- -------- ------- ------- -------
Total charge-offs 19,095 11,341 819 313 1,852
--------- -------- ------- ------- -------
Add recoveries:
Commercial real estate loans 195 1,026 44 210 296
Student loans 24 80 105 100 596
Residential first mortgage loans 3 -- 5 5 7
Home equity loans 745 375 -- -- --
Commercial loans 19 770 69 303 537
Consumer loans 101 118 300 300 302
--------- -------- ------- ------- -------
Total recoveries 1,087 2,369 523 918 1,738
--------- -------- ------- ------- -------
Net (charge-offs) recoveries (18,008) (8,972) (296) 605 (114)
--------- -------- ------- ------- -------
Balance at end of year $30,660 $32,668 $25,640 $20,157 $19,552
Net (charge-offs)/recoveries to
average loans outstanding (1.15%) (0.56%) (0.02%) 0.06% (0.01%)
========= ======== ======= ======= =======
</TABLE>
8
<PAGE> 10
Allocation of the Allowance for Loan Losses
The allocation of the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------
(thousands) 1997 1996 1995 1994 1993
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial real estate $2,814 $2,575 $2,934 $5,801 $5,596
Student 2,658 3,608 11,489 1,202 1,424
Residential first mortgage 784 1,034 1,327 2,451 2,233
Home equity 16,180 21,460 1,000 827 483
Commercial 29 45 445 1,368 1,168
Consumer 306 643 476 291 378
Unallocated 7,889 3,303 7,969 8,217 8,270
------- ------- ------- ------- -------
Total $30,660 $32,668 $25,640 $20,157 $19,552
======= ======= ======= ======= =======
</TABLE>
Loan Portfolio Composition
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial real estate 46% 40% 38% 33% 30%
Student 27 25 24 32 30
Residential first mortgage 14 18 20 21 26
Home equity 8 11 11 5 3
Commercial 3 4 5 6 8
Consumer 2 2 2 3 3
---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
For further review of the loan loss provision and the allowance for loan losses,
reference is made to pages 27 through 28 of Management's Discussion and Analysis
of Financial Statements of the 1997 Annual Report, incorporated herein by
reference in response to Item 7 hereof.
9
<PAGE> 11
DEPOSITS
The scheduled maturities of time deposits in denominations of $100,000 and
greater was as follows at December 31, 1997:
<TABLE>
<S> <C>
(thousands)
Maturing within 3 months $52,985
After 3 but within 6 months 36,203
After 6 but within 12 months 91,299
After 12 months 144,064
--------
Total $324,551
========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table presents certain ratios relating to CORUS' equity and
assets:
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on average total assets 1.8% 2.0% 1.8%
Return on average common shareholders' equity 14.9 20.4 20.4
Dividend payout ratio 19.5 15.4 14.3
Average equity to average total assets 11.8 9.9 8.4
</TABLE>
ITEM 2. PROPERTIES
CORUS utilizes the building facilities of its Irving Park branch, which is
located at 3959 N. Lincoln Avenue, Chicago, Illinois, for its executive
offices. CORUS 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
CORUS 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, these proceedings will not have a material effect on the results of
operations, financial position, liquidity or capital resources of CORUS, except
for possibly the matter discussed below.
As disclosed previously, CORUS 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. CORUS terminated the employees involved and informed the
U.S. Department of Education immediately upon discovery of the problem and the
Department commenced an investigation.
CORUS believes that the Department's investigation has been expanded to include
a review of whether CORUS' student loan division has engaged in improper
practices from 1988 to April 1994, including
10
<PAGE> 12
whether information contained on guarantee claim forms may have been falsified.
If it is ultimately determined that CORUS acted illegally or violated
Department policy or regulations, CORUS 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 CORUS
previously received guarantee payments. In addition, CORUS or individual
employees could be subject to substantial penalties.
Shortly after reporting the problem, CORUS 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 CORUS is unable to state with certainty were not affected by
incorrect servicing history documentation. Management charged off against the
allowance for loan losses $1.5 million of student loans in the third quarter of
1997 and $4.0 million of student loans during each of the first two quarters of
1997 and the fourth quarter of 1996 that were subject to the interim agreement.
A total of $13.5 million of loans subject to the interim agreement have been
charged off against the allowance for loan losses. 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 CORUS will ultimately incur. As such,
management is unable to quantify either the student loans that may lose their
government guarantee or the amount of loans that CORUS may be required to
repurchase.
CORUS 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.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
CORUS' 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 46 of the 1997 Annual Report, incorporated herein by reference in response
to Item 7 hereof.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of February 28, 1998, there were 487 shareholders owning CORUS' 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.
11
<PAGE> 13
DIVIDENDS ON COMMON STOCK
Quarterly cash dividends per common share for the last two years are included
on page 46 of the 1997 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 CORUS' Board of
Directors and depends upon, among other factors, earnings, capital requirements
and the operating and financial condition of CORUS.
ITEM 6. SELECTED FINANCIAL DATA
Refer to page 46 of the 1997 Annual Report, incorporated herein by reference
for additional selected financial data.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------
(thousands, except per share data) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income $183,932 $190,950 $171,114 $114,541 $101,325
Interest expense 82,661 79,611 72,597 45,748 35,573
---------- ---------- ---------- ---------- ----------
Net interest income 101,271 111,339 98,517 68,793 65,752
Provision for loan losses 16,000 16,000 5,779 -- 1,176
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 85,271 95,339 92,738 68,793 64,576
Noninterest income, excluding
securities gains (losses) 21,547 19,436 15,443 12,572 12,869
Securities gains (losses), net 4,881 3,316 (1,332) 663 (330)
Noninterest expense 51,192 50,181 51,650 45,222 38,626
Income tax expense 21,136 24,005 19,429 12,790 13,167
---------- ---------- ---------- ---------- ----------
Net income available to common
shareholders 39,371 43,905 35,770 24,016 25,322
Change in unrealized securities
gains 29,508 9,384 12,337 (6,945) 992
---------- ---------- ---------- ---------- ----------
Comprehensive income $68,879 $53,289 $48,107 $17,071 $26,314
========== ========== ========== ========== ==========
Net income per share:
Basic $2.66 $2.96 $2.36 $1.58 $1.67
Diluted 2.63 2.93 2.35 1.57 1.66
========== ========== ========== ========== ==========
Cash dividends declared per
common share $0.53 $0.48 $0.36 $0.30 $0.27
========== ========== ========== ========== ==========
Assets $2,251,927 $2,218,528 $2,125,092 $1,889,445 $1,441,762
========== ========== ========== ========== ==========
</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 18 through 29 of the 1997 Annual
Report is incorporated herein by reference.
12
<PAGE> 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the caption "Risk Management" on pages 28
through 29 of the 1997 Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of CORUS, including the notes thereto,
and other information on pages 30 through 46 of the 1997 Annual Report are
incorporated herein by reference.
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 CORUS
recommended that the shareholders ratify Arthur Andersen LLP at the annual
meeting as independent accountants of CORUS for fiscal 1997. This
recommendation caused the dismissal of KPMG Peat Marwick LLP (KPMG) as the
independent accountants of CORUS upon the completion of the audit of CORUS'
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 CORUS on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or any reportable events.
CORUS requested that KPMG furnish a letter addressed to the United States
Securities and Exchange Commission stating whether KPMG agrees with the
preceding statements. KMPG's letter dated March 25, 1997 is incorporated by
reference to CORUS' Annual Report on Form 10-K for the year ended December 31,
1996.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of CORUS is incorporated
herein by reference to the descriptions under "Elections of Directors and
Ownership of Shares" on pages 2 through 3 of the 1998 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 1998 Proxy Statement.
13
<PAGE> 15
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 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated herein by reference to the material under the heading
"Transactions with Management and Others" on page 14 of the 1998 Proxy
Statement.
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 1997 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, 1997.
Index
<TABLE>
<CAPTION>
Pages
<S> <C>
Consolidated Balance Sheets 30
Consolidated Statements of Income and Comprehensive Income 31
Consolidated Statements of Changes of Shareholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34-46
Report of Independent Public Accountants 47-48
</TABLE>
(16) Letter regarding change in certifying accountant incorporated by
reference to the Registrant's Annual Report on Form10-K for the year ended
December 31, 1996.
(b) Reports on Form 8-K:
None.
14
<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>
<S> <C> <C> <C>
Michael J. McClure /s/ First Vice March 17, 1998
President & Chief
Accounting Officer
</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>
<S> <C> <C> <C>
Joseph C. Glickman /s/ Chairman of the Board of Directors March 17, 1998
Robert J. Glickman /s/ President, Chief Executive Officer & Director March 17, 1998
Timothy H. Taylor /s/ Senior Vice President & Chief Financial March 17, 1998
Officer
Michael J. McClure /s/ First Vice President & Chief Accounting March 17, 1998
Officer
Steven D. Fifield /s/ Director March 17, 1998
Karl H. Horn /s/ Director March 17, 1998
Michael Levitt /s/ Director March 17, 1998
Rodney D. Lubeznik /s/ Director March 17, 1998
Michael Tang /s/ Director March 17, 1998
William H. Wendt, III /s/ Director March 17, 1998
</TABLE>
15
<PAGE> 1
management's discussion
and analysis of financial statements
Earnings Summary
- --------------------------------------------------------------------------------
Net income in 1997 totaled $39.4 million, compared with $43.9 and $35.8 million
in 1996 and 1995, respectively. Return on average common equity was 14.9% for
1997 and 20.4% for 1996 and 1995. The return on average assets was 1.8% in 1997,
compared with 2.0% and 1.8% in 1996 and 1995, respectively.
Comprehensive income, which includes net income and changes in unrealized gains
and losses on CORUS' securities portfolio, totaled $68.9 million in 1997,
compared with $53.3 and $48.1 million in 1996 and 1995, respectively. Return on
average common equity using comprehensive income was 26.1%, 24.8% and 27.4% for
1997, 1996 and 1995, respectively. The return on average assets using
comprehensive income was 3.1% for 1997 and 2.5% for 1996 and 1995.
NET INTEREST INCOME
The major source of earnings for CORUS is net interest income. Net interest
income provided 79.3%, 83.0% and 87.5% of net revenues during 1997, 1996 and
1995, respectively. The related net interest margin represents the net interest
income as a percentage of average earning assets during the period. The table on
the following page sets forth certain information relating to CORUS'
consolidated average balance sheets 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 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.
The following represents the impact certain significant and/or nonrecurring
items had on net interest income (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Year ended December 31 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
Taxable equivalent net
interest income $102,141 $112,402 $99,881
Significant and/or
nonrecurring items:
Discount accretion in
interest income from
purchased student loan
pools 4,502 13,188 13,493
Loan fees from
prepayments of
commercial real estate
loans 1,145 538 --
- --------------------------------------------------------
Taxable equivalent net
interest income
excluding significant
and/or nonrecurring
items $ 96,494 $ 98,676 $86,388
- --------------------------------------------------------
Net interest margin
excluding significant
and/or nonrecurring
items 4.54% 4.78% 4.68%
- ------------------------------------------------------------
</TABLE>
The decline in the net interest margin in 1997 was primarily due to lower
student loan discount accretion income. The discount accretion income is
expected to continue to decline in 1998. The net interest margin in 1997 was
also adversely affected by the increase in the average balance of CORUS' bank
stock portfolio. If the average balance and dividend income associated with the
bank stock portfolio were also excluded from the preceding table, the net
interest margin excluding significant and/or nonrecurring items would have been
4.66% for 1997, compared with 4.84% and 4.71% for 1996 and 1995, respectively.
The remaining decline in net interest margin for 1997 compared with 1996 was
primarily due to lower rates earned on loans and investments. The increase in
the 1996 net interest margin from 1995 was primarily due to a $217.4 million, or
11.8%, increase in average earning assets.
<PAGE> 2
average balance sheets
and net interest margin
(Dollars in Thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Interest-bearing
deposits with banks $ 8,123 $ 491 6.04% $ 11,528 $ 723 6.27% $ 25,000 $ 1,560 6.24%
Federal funds sold 99,952 5,514 5.52% 47,907 2,508 5.24% 52,507 3,015 5.74%
Taxable securities
other than common
stocks 317,923 17,741 5.58% 346,599 19,650 5.67% 414,421 25,312 6.11%
Common stocks 112,077 2,633 2.35% 49,202 1,225 2.49% 25,901 721 2.78%
Tax-advantaged
securities(1) 4,591 357 7.78% 7,103 510 7.18% 9,116 604 6.63%
Trading account
securities 13,953 760 5.45% -- -- -- 4,135 302 7.30%
Loans, net of unearned
discount(1)(2)(3) 1,570,521 157,306 10.02% 1,601,269 167,397 10.45% 1,315,105 140,964 10.72%
----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 2,127,140 184,802 8.69% 2,063,608 192,013 9.30% 1,846,185 172,478 9.34%
Noninterest-earning
assets
Cash and due from
banks--
noninterest-bearing 59,600 69,461 68,964
Allowance for loan
losses (31,180) (32,301) (21,157)
Premises and equipment,
net 29,607 24,496 22,012
Other assets, including
goodwill 52,252 48,824 41,975
----------------------------------------------------------------------------------------------------------------------------------
Total assets $2,237,419 $2,174,088 $1,957,979
----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits--interest-bearing
NOW and money market
deposits $1,028,746 $ 47,662 4.63% $1,033,053 $ 46,253 4.48% $1,007,196 $ 48,354 4.80%
Savings deposits 187,573 4,913 2.62% 209,468 5,480 2.62% 232,590 6,142 2.64%
Time deposits 480,743 27,139 5.65% 458,850 25,344 5.52% 323,571 17,436 5.39%
----------------------------------------------------------------------------------------------------------------------------------
Total
interest-bearing
deposits 1,697,062 79,714 4.70% 1,701,371 77,077 4.53% 1,563,357 71,932 4.60%
Short-term borrowings 8,562 630 7.36% 15,987 895 5.60% 7,266 665 9.15%
Federal Home Loan Bank
advances 40,000 2,317 5.79% 28,778 1,639 5.70% -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Total
interest-bearing
liabilities 1,745,624 82,661 4.74% 1,746,136 79,611 4.56% 1,570,623 72,597 4.62%
Noninterest-bearing
liabilities and
shareholders' equity
Noninterest-bearing
deposits 191,904 189,317 198,918
Other liabilities 36,279 23,477 23,013
Shareholders' equity 263,612 215,158 165,425
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders'
equity $2,237,419 $2,174,088 $1,957,979
----------------------------------------------------------------------------------------------------------------------------------
Interest income/average
earning assets $2,127,140 $184,802 8.69% $2,063,608 $192,013 9.30% $1,846,185 $172,478 9.34%
Interest expense/average
interest-bearing
liabilities 1,745,624 82,661 4.74% 1,746,136 79,611 4.56% 1,570,623 72,597 4.62%
----------------------------------------------------------------------------------------------------------------------------------
Net interest spread $102,141 3.95% $112,402 4.74% $ 99,881 4.72%
----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.80% 5.45% 5.41%
----------------------------------------------------------------------------------------------------------------------------------
</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.
18 Corus Bankshares, Inc.
----
19
<PAGE> 3
The following table represents a reconciliation of fully tax-equivalent net
interest income from 1996 to 1997 and 1995 to 1996 (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------
Year ended December 31 1997 1996
- -----------------------------------------------------
<S> <C> <C> <C>
Fully tax-equivalent net
interest income for
prior year $112,402 $ 99,881
Change due to average
earning assets
fluctuations 3,462 11,763
Change due to interest
rate fluctuations other
than student loan
discount accretion (4,727) 1,043
Change due to student
loan discount accretion (8,686) (305)
Change due to
rate/volume
fluctuations (310) 20
- -----------------------------------------------------
Fully tax-equivalent net
interest income $102,141 $112,402
- -----------------------------------------------------
</TABLE>
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. CORUS actively monitors and manages its overall
interest rate exposure. CORUS utilizes off-balance-sheet financial instruments
as a tool for managing this exposure. Refer to notes 1 and 10 to the
consolidated financial statements for further information.
EARNING ASSET COMPOSITION At December 31, 1997, earning assets as a percentage
of total assets was 94.8%, compared with 95.2% and 92.5% at December 31, 1996
and 1995, respectively. CORUS' 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
December 31 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Loans:
Commercial real estate 33.3% 31.1% 29.6%
Student 19.3 19.1 19.3
Residential first
mortgage 9.8 13.5 16.2
Home equity 6.2 8.9 8.7
Commercial 2.6 2.9 4.0
Consumer 1.2 1.3 1.5
- ----------------------------------------------------------
Total loans 72.4 76.8 79.3
Securities other than
common stocks 17.9 14.1 17.5
Common stocks 7.4 4.4 1.8
Federal funds sold 1.0 4.7 0.1
Interest-bearing
deposits with banks 1.3 -- 1.3
- ----------------------------------------------------------
Total earning assets 100.0% 100.0% 100.0%
- ----------------------------------------------------------
</TABLE>
<PAGE> 4
- --------------------------------------------------------------------------------
NONINTEREST INCOME
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997/1996 1996/1995
1997 1996 1995 Change Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $ 8,616 $ 9,590 $ 9,686 (10.2)% (1.0)%
Gain on dispositions of loans 11,115 8,134 2,292 36.6 254.9
Trust services 588 492 477 19.5 3.1
Other 1,228 1,220 2,691 0.7 (54.7)
- --------------------------------------------------------------------------------------------------------------------
Noninterest income, excluding securities gains
(losses), net 21,547 19,436 15,146 10.9 28.3
Trading account gains (losses), net (221) -- 297 NM NM
Securities gains (losses), net 5,102 3,316 (1,332) 53.9 NM
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income $26,428 $22,752 $14,111 16.2% 61.2%
- --------------------------------------------------------------------------------------------------------------------
NM - Not Meaningful
</TABLE>
NONINTEREST INCOME
In 1997, noninterest income, excluding security gains and losses, increased $2.1
million, or 10.9%. Service charges on deposit accounts declined $974,000
primarily due to lower return and overdraft fee income. The gain on dispositions
of loans increased $3.0 million to $11.1 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.
In 1996, noninterest income, excluding securities gains and losses, increased
$4.3 million, or 28.3%. This increase was primarily due to a $5.8 million
increase in the gain on dispositions of loans. Other income decreased $1.5
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.
CORUS 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. In 1997, trading activities resulted in a
net loss of $221,000. There were no trading activities in 1996 and net trading
account gains in 1995 were $297,000.
The net gain from the sales of certain stocks in CORUS' bank stock portfolio was
$4.2, $2.3 and $1.3 million in 1997, 1996 and 1995, respectively. In addition,
there was a gain of $565,000 related to the termination of an option collar
agreement in 1997. The net gain in 1996 also included 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 these swap agreements were $931,000.
In February 1998, CORUS entered into a contract to purchase the assets of an
investment management company. The transaction is expected to close in the first
quarter of 1998. As a result of the agreement, CORUS' assets under management
are anticipated to more than triple, resulting in a significant increase in
trust services income.
20 Corus Bankshares, Inc.
----
21
<PAGE> 5
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997/1996 1996/1995
Year ended December 31 1997 1996 1995 Change Change
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 27,833 $ 25,483 $ 25,116 9.2% 1.5%
Net occupancy expense 4,123 3,975 3,917 3.7 1.5
Data processing 1,977 2,417 2,175 (18.2) 11.1
Furniture and equipment depreciation 2,502 1,883 1,342 32.9 40.3
Other 11,739 13,527 16,843 (13.2) (19.7)
- ----------------------------------------------------------------------------------------------------------------------
Noninterest expense, excluding goodwill
amortization 48,174 47,285 49,393 1.9 (4.3)
Goodwill amortization 3,018 2,896 2,257 4.2 28.3
- ----------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 51,192 $ 50,181 $ 51,650 2.0% (2.8)%
- ----------------------------------------------------------------------------------------------------------------------
Net overhead(1) $ 26,627 $ 27,849 $ 34,247
Average total assets 2,237,419 2,174,088 1,957,979
Net overhead ratio(2) 1.2% 1.3% 1.7%
- ------------------------------------------------------------------------------------
</TABLE>
(1) Net overhead represents "Noninterest expense, excluding goodwill
amortization" 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 1997, noninterest expense, excluding goodwill amortization, increased
$889,000, or 1.9%. The increase was attributable to increases in salaries and
employee benefits, net occupancy, and furniture and equipment depreciation.
These increases were partially offset by declines in data processing and other
expenses.
In 1996, noninterest expense, excluding goodwill amortization, decreased $2.1
million, or 4.3%. The decrease was attributable to a decrease in other expenses.
These decreases were partially offset by increases in salaries and employee
benefits, net occupancy, data processing and furniture and equipment
depreciation expenses.
SALARIES AND EMPLOYEE BENEFITS In 1997, salaries and employee benefits increased
$2.4 million, or 9.2%. This increase was primarily attributable to an increase
in the performance-based compensation of commercial real estate lending officers
and a market adjustment increase in the compensation of retail banking hourly
employees at the end of 1996. The compensation of commercial and residential
real estate lending officers is subject to performance-based compensation plans.
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 primarily due to an increase in home equity loan
charge-offs.
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 CORUS' 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 CORUS' goals and
objectives.
NET OCCUPANCY EXPENSE In 1997, net occupancy expense increased $148,000, or
3.7%. CORUS is in the process of remodeling a portion of its headquarters
building and constructing a new building on an adjacent site. The remodeled
areas and new building will house CORUS' executive staff, commercial real estate
lending department, finance department and retail banking executives. In
addition, the new building will have a significant amount of space available for
future expansion purpose. The cost of the remodeling is estimated to total
approximately $7.0 million and is expected to be completed mid-1998. The new
building is estimated to cost approximately $6.0 million and is expected to be
completed in 1999. When these projects are completed, net occupancy expense is
expected to increase due to higher depreciation expense.
DATA PROCESSING In 1997, data processing expense declined $440,000, or 18.2%, to
$2.0 million. This decline was primarily due to the merger of CORUS' subsidiary
banks. In 1996, CORUS merged its seven subsidiary banks into one bank, which
resulted in certain onetime data processing expenses. In addition, ongoing data
processing expense declined in 1997 due to reduced data processing activity as a
result of the mergers.
<PAGE> 6
CORUS outsources all of its significant data processing applications. Management
is communicating with the vendors and conducting due diligence inquiries
concerning Year 2000 readiness. Management is also implementing appropriate
testing or verification processes to ensure that all systems and data will
function properly together. Contingency plans are being formulated for all
vendors that service critical applications and trigger dates are being
established for implementing alternative solutions should a vendor not complete
its conversion efforts on time. Management does not currently anticipate that
Year 2000 compliance will have a material effect on results of operations,
financial condition or cash flows.
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%.
FURNITURE AND EQUIPMENT DEPRECIATION In 1997, furniture and equipment
depreciation expense increased $619,000, or 32.9%, to $2.5 million. Depreciation
on furniture and equipment is computed using accelerated methods. The increase
was partially attributable to higher depreciation expense from the 1996
acquisition of a new phone system and 1997 acquisitions of personal computers
for new teller and retail banking systems and an optical storage system for
computer reports. The remainder of the increase was attributable to higher
depreciation expense related to 1996 acquisitions and other 1997 acquisitions.
In 1996, furniture and equipment depreciation expense increased $541,000, or
40.3%, to $1.9 million. This increase was partially attributable to the
acquisition of a new phone system. The remainder of the increase was
attributable to higher depreciation expense related to 1995 acquisitions and
other 1996 acquisitions.
OTHER EXPENSES In 1997, other expenses declined $1.8 million, or 13.2%, to $11.7
million. This decline was primarily due to lower loan and advertising expenses.
Loan expenses declined due to the strengthening of residential lending
underwriting guidelines in 1996, which resulted in a significant reduction in
residential loan originations. Advertising expenses declined primarily due to
lower expenditures for the promotion of the Ultimate Money Market Account. In
addition, there were onetime expenses included in the 1996 results, which
included $442,000 for merger and name change costs and $210,000 for the
write-down and demolition costs of a building at CORUS' headquarters location.
The 1997 declines were partially offset by a significant increase in expenses
related to other real estate owned properties.
In 1996, other expenses declined $3.3 million, or 19.7%, to $13.5 million. This
decline was primarily due to lower FDIC insurance, loan, minority interest and
advertising expenses. FDIC insurance declined $1.8 million to $10,000 due to the
elimination of all premiums effective January 1, 1996. Loan expenses declined
due to a reduction in residential real estate lending. The decline in minority
interest expense was due to CORUS' purchase of the remaining minority interest
in CORUS' subsidiary banks during the first half of 1996. Advertising expenses
declined primarily due to lower expenditures for the promotion of the Ultimate
Money Market Account. These reductions were partially offset by the onetime
charges described in the preceding paragraph.
COST MANAGEMENT Cost management is a fundamental element of CORUS' culture.
Management constantly reviews operating expenses to ensure that they are
minimized while maintaining a high level of quality customer service. CORUS
remains committed to identifying additional reductions in net overhead costs
while maintaining superior customer service and stringent internal controls.
NET OVERHEAD AND EFFICIENCY RATIOS CORUS has successfully maintained a favorable
net overhead ratio at or below 1.8% throughout the 1990's. By comparison, CORUS'
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 CORUS 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. CORUS' efficiency ratio
was 38.9%, 35.9% and 42.9% in 1997, 1996 and 1995, respectively. By comparison,
the peer group average was 60% or higher each of the last three years.
22 Corus Bankshares, Inc.
----
23
<PAGE> 7
GOODWILL AMORTIZATION In 1997, goodwill amortization increased $122,000, or
4.2%, to $3.0 million. The increase in goodwill was due to additional goodwill
recorded in 1996 as explained in the following paragraph. In 1998, goodwill
amortization expense is expected to decline by approximately $1.5 million.
In 1996, goodwill amortization increased $639,000, or 28.3%. During the first
half of 1996, $1.9 million of goodwill was recorded for the purchase of the
minority interests in CORUS' subsidiary banks. Also, additional goodwill for the
1993 acquisition of Belmont National Bank totaling $754,000 was recorded in
1996. 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.
INCOME TAXES Income tax expense was $21.1 million in 1997, compared with $24.0
and $19.4 million in 1996 and 1995, respectively. The effective tax rate for
1997 was 34.9%, compared with 35.3% and 35.2% in 1996 and 1995, respectively.
The decline in the 1997 rate was primarily attributable to an increase in the
dividends received deduction due to higher dividends from CORUS' bank stock
portfolio.
CORUS' net deferred tax liability was $14.7 million at December 31, 1997,
compared with a net deferred tax asset of $1.5 million at December 31, 1996. The
net deferred tax liability was primarily due to the increase in unrealized gains
from CORUS' bank stock portfolio.
Management believes that the gross deferred tax asset of $12.5 million at
December 31, 1997 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 CORUS' 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.
FORWARD-LOOKING STATEMENTS
Statements made about CORUS' 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 CORUS' 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 loan
losses;
- - Changes in the level and direction of loan delinquencies and write-offs;
- - Interest rate movements and their impact on customer behavior and CORUS' net
interest margin;
- - Changes in the overall mix of CORUS' loan and deposit products;
- - The impact of repricing and competitors' pricing initiatives on loan and
deposit products;
- - The impact of the changes in student loan pricing planned to take effect on
July 1, 1998;
- - CORUS' ability to adapt successfully to technological changes to meet
customers' needs and developments in the marketplace;
- - The impact of the Year 2000 on CORUS' data processing vendors, customers and
other vendors;
- - CORUS' ability to access cost-effective funding; and
- - Economic conditions.
<PAGE> 8
Financial Condition
- --------------------------------------------------------------------------------
ASSETS
Total assets and earning assets were $2.25 and $2.14 billion, respectively, at
December 31, 1997, compared with $2.22 and $2.11 billion, respectively, at
December 31, 1996. The percentage of earning assets to total assets was 94.8%
and 95.2% at December 31, 1997 and 1996, respectively. Refer to page 20 for the
composition of the earning asset portfolio.
LOANS In 1997, total loans declined $77.2 million, or 4.8%, to $1.55 billion.
The composition of the loan portfolio was as follows:
- ---------------------------------------------------------
LOAN PORTFOLIO
(Dollars in Thousands)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1997 1996
- ------------------------------------------------------
<S> <C> <C> <C>
Commercial real
estate $ 711,495 $ 655,793
Student 412,926 402,859
Residential first
mortgage 209,669 286,042
Home equity 131,868 188,755
Commercial 55,062 61,852
Consumer 24,955 27,844
- ------------------------------------------------------
Total $1,545,975 $1,623,145
- ------------------------------------------------------
</TABLE>
In 1997, commercial real estate loans increased $55.7 million, or 8.5%. The
commercial real estate portfolio was comprised of the following:
- ---------------------------------------------------------
COMMERCIAL REAL ESTATE LOANS
(Dollars in Thousands)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1997 1996
- -----------------------------------------------------
<S> <C> <C> <C>
Mortgage loans $554,545 $614,506
Construction loans 156,950 41,287
- -----------------------------------------------------
Total $711,495 $655,793
- -----------------------------------------------------
</TABLE>
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 1997 1996
- -----------------------------------------------------
<S> <C> <C> <C>
Rental apartments $195,343 $251,252
Nursing homes 116,721 92,241
Hotel/Motel 100,470 28,439
Retail 89,878 89,901
Industrial 69,779 56,847
Office 46,298 74,552
Condo/Loft conversion
and other residential
for sale 40,459 36,090
Other 52,547 26,471
- -----------------------------------------------------
Total $711,495 $655,793
- -----------------------------------------------------
</TABLE>
At December 31, 1997, approximately 71% of CORUS' 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> <C>
Illinois 75.6%
Indiana 6.2
Florida 3.6
Texas 3.0
California 2.8
- ---------------------------------------------------
</TABLE>
In 1997, the student loan portfolio increased $10.1 million, or 2.5%. This
growth was due to a record $72.8 million of loan originations and $1.0 million
of purchases. CORUS' 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 34% of all student loan originations
during the 1996-1997 school year.
For all new student loan originations after July 1, 1998, the index that the
loans are tied to is scheduled to change from the 3-month U.S. Treasury bill to
the 10-year U.S. Treasury bond. This change could make student lending
unprofitable, substantially increase the interest rate risk associated with
student loans and lead to a reduced level of loan originations. It is uncertain
whether there will be legislative relief from the new provision prior to July 1,
1998.
In the past few years, nonperforming student loans were purchased at a
substantial discount to the face value of the loans. CORUS 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, 1997, the total discount to be accreted into income in future
years totaled $13.3 million.
In 1997, residential first mortgage and home equity loans decreased $76.4 and
$56.9 million, or 26.7% and 30.1%, respectively. During 1996, management
strengthened the underwriting guidelines for both residential first mortgage and
home equity loans, which led to a significant reduction in loan originations.
In 1997, commercial and consumer loans decreased $9.7 million, or 10.8%, as
CORUS continues to focus, with the exception of currency exchange and medical
finance lending, on other lending areas.
24 Corus Bankshares, Inc.
----
25
<PAGE> 9
SECURITIES OTHER THAN COMMON STOCKS CORUS' 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.
CORUS' objectives in managing the securities portfolio are driven by the
dynamics of the balance sheet and the interest rate environment. At December 31,
1997, securities other than common stocks increased $84.8 million, or 28.5%,
from the comparable 1996 amounts. This increase was primarily attributable to
the decline in loans.
At December 31, 1997, 68.9% of the carrying value of the available for sale
portfolio with stated maturities was scheduled to mature within one year and
99.9% within five years. The short maturity schedule of the securities portfolio
is consistent with CORUS' overall asset/ liability philosophy and provides
significant liquidity.
COMMON STOCKS At December 31, 1997, the investment in common stocks of other
bank holding companies was $158.7 million, an increase of $66.0 million, or
71.3%, compared with $92.6 million at December 31, 1996. This increase was
primarily due to the increase in the unrealized gains for these stocks. Changes
in the market value of the stocks are included in other comprehensive income in
shareholders' equity on an after-tax basis, but are not included in net income
until the stocks are sold. During 1997, the pretax unrealized gains on this
portfolio increased by $45.6 million.
At December 31, 1997, CORUS held investments in 46 equity securities of
publicly-traded bank holding companies with total unrealized gains of $69.7
million, which were included in the available for sale securities
classification.
Refer to notes 1 and 3 to the consolidated financial statements for further
information concerning the securities portfolio. In addition, CORUS utilizes
option collar agreements to hedge the market risk associated with the bank stock
portfolio. Refer to the Market Risk section following and notes 1 and 10 to the
consolidated financial statements for further information.
LIABILITIES
DEPOSITS In 1997, total deposits declined $37.6 million, or 2.0%, to $1.86
billion. The composition of CORUS' deposit base was as follows:
- ---------------------------------------------------------
COMPOSITION OF DEPOSITS
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Demand 10% 10% 11%
Savings 10 10 12
NOW 5 5 5
Money Market 48 49 48
Certificates of Deposit 27 26 24
- ---------------------------------------------------------
Total 100% 100% 100%
- ---------------------------------------------------------
</TABLE>
In 1997, savings and money market deposits declined $19.9 and $27.7 million,
respectively. These declines were partially offset by an increase of $18.3
million in certificates of deposit, which was due to an increase in retail
certificates of deposit obtained from brokers. At December 31, 1997 and 1996,
retail certificates of deposit totaled $260.4 and $227.3 million, respectively.
FEDERAL HOME LOAN BANK ADVANCES In 1996, CORUS borrowed $40.0 million of Federal
Home Loan Bank advances. The advances have a term of 5 years and reprice
quarterly at the 3-month LIBOR rate. Management will utilize, as necessary,
outside funding sources to support loan growth.
SHAREHOLDERS' EQUITY
At December 31, 1997, CORUS' common shareholders' equity increased $56.0
million, or 23.8%, to $291.6 million, compared with $235.6 million at December
31, 1996. At December 31, 1997 and 1996, the unrealized holding gain net of
income taxes on available for sale securities was $45.3 and $15.8 million,
respectively.
Various measures of capital were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
December 31 1997 1996
(Dollars in Thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common equity(1) $291,633 13.0% $235,590 10.6%
Tangible common
equity(2) 282,596 12.6 223,399 10.1
Tier 1 risk-based
capital(3) 237,320 15.3 207,632 13.5
Total risk-based
capital(4) 256,701 16.6 227,182 14.8
Leverage(5) 237,320 10.5 207,632 9.7
- ------------------------------------------------------------------
</TABLE>
(1) Common equity is computed in accordance with generally accepted accounting
principles, which includes unrealized gains 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 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.
CORUS' risk-based capital ratios far exceed the minimum required leverage, tier
1 and the 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
<PAGE> 10
adverse effect on CORUS' 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 11 to the consolidated financial
statements.
During 1997 and 1996, CORUS repurchased and retired 138,800 and 207,000 shares
at an average price of $36.08 and $26.05 per share, respectively. The 1997
repurchases were made under a 750,000 common share repurchase program approved
by the Board of Directors in February 1997. This program provides a means to
return some of CORUS' excess capital to all shareholders.
CREDIT RISK AND ASSET QUALITY
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)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1997 1996
- --------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans:
Residential first mortgage $17,451 $22,687
Commercial real estate 4,678 1,139
Commercial 80 12
Home equity 3,706 2,844
Student 453 7,114
Consumer 803 1,409
- --------------------------------------------------------
Total nonperforming loans 27,171 35,205
Other real estate owned 5,673 2,691
- --------------------------------------------------------
Total nonperforming assets $32,844 $37,896
- --------------------------------------------------------
Nonaccrual loans included in
nonperforming loans above $ 8,641 $ 7,427
Nonperforming loans/Total
loans 1.76% 2.17%
Nonperforming assets/Total
assets 1.46% 1.71%
Allowance for loan
losses/Nonperforming loans 112.84% 92.79%
- --------------------------------------------------------
</TABLE>
In 1997, nonperforming assets declined $5.1 million. This decline was primarily
due to student and residential first mortgage loans. The student loan decline
was due to charge-offs during 1997. Refer to the Allowance for Loan Losses
section for additional information. The decline in residential first mortgage
loans was primarily due to the transfer of loans to other real estate owned via
foreclosure proceedings and loan payoffs. The collateral securing the
residential first mortgage loans is primarily owner-occupied, residential
property. These declines were partially offset by a $3.5 million increase in
commercial real estate nonperforming loans.
At December 31, 1997, other real estate owned was comprised of three commercial
real estate properties with a carrying value of $180,000 and thirty-two
single-family, residential properties with a carrying value of $5.5 million.
During 1997, seven commercial real estate properties with a carrying value of
$1.1 million were sold for a net gain of $238,000 and thirty-five single-family,
residential properties with a carrying value of $5.0 million were sold for a net
gain of $57,000. These gains were partially offset by writedowns on properties
not sold during 1997. The writedowns of commercial and residential real estate
properties totaled $65,000 and $155,000, respectively.
Excluded from the preceding table are student loans that CORUS 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 $14.1 and $15.2
million at December 31, 1997 and 1996, respectively.
ALLOWANCE FOR LOAN LOSSES The allowance for 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.
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 $ 32,668 $ 25,640 $20,157 $19,552 $17,490
Allowance of acquired subsidiaries -- -- -- -- 1,000
Provision for loan losses 16,000 16,000 5,779 -- 1,176
Charge-offs (19,095) (11,341) (819) (313) (1,852)
Recoveries 1,087 2,369 523 918 1,738
- ------------------------------------------------------------------------------------------------------------------
Net (charge-offs) recoveries (18,008) (8,972) (296) 605 (114)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 30,660 $ 32,668 $25,640 $20,157 $19,552
- ------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage
of total loans 1.98% 2.01% 1.64% 1.83% 2.00%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
26 Corus Bankshares, Inc.
----
27
<PAGE> 11
In 1997, net charge-offs of student and home equity loans were $9.7 and $7.7
million, respectively. The student loan charge-offs included $9.5 million for
loans that CORUS has temporarily 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 11 to the consolidated financial
statements for further information.
Home equity loans that were originated at up to 100% of a property's value,
Ultimate Home Equity loans, are charged off when they become delinquent 120 days
past due. These loans represented $7.5 million of the home equity net
charge-offs in 1997. Management anticipates that there will continue to be
significant charge-offs of Ultimate Home Equity loans in 1998. At December 31,
1997, Ultimate Home Equity loans totaled $85.4 million. Of this total, $1.4
million were classified as nonperforming loans at December 31, 1997. The
following represents an aging schedule of Ultimate Home Equity loans.
- ---------------------------------------------------------
ULTIMATE HOME EQUITY LOANS AGING SCHEDULE
(Dollars in Thousands)
- ---------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1997
- --------------------------------------------------
<S> <C> <C>
Current $80,800
31 to 60 days past due 2,150
61 to 90 days past due 1,113
91 to 120 days past due 1,343
- --------------------------------------------------
Total $85,406
- --------------------------------------------------
</TABLE>
The underwriting guidelines for home equity loans were strengthened in 1996,
which resulted in a significant decrease in loan originations.
At December 31, 1997, the allowance for loan losses as a percentage of total
loans declined slightly to 1.98% of total loans from 2.01% of total loans at
December 31, 1996. However, the allowance as a percentage of nonperforming loans
increased to 112.84% compared with 92.79% at December 31, 1996. Management
believes that the level of the allowance for loan losses was adequate at
December 31, 1997.
INDEPENDENT LOAN REVIEW Management contracts for an independent loan review
function of its commercial and commercial real estate loan portfolio. This
function reviews CORUS' 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 CORUS' commercial and commercial real estate loans. In
1997, there were no significant loan grading differences or losses recommended
by the independent firm.
LIQUIDITY
PARENT COMPANY The parent company had $169.9 million of cash and marketable
equity securities available for possible liquidity needs at December 31, 1997.
At December 31, 1997, the subsidiary bank had $14.8 million available to pay in
dividends to the parent company without prior regulatory approval while
maintaining well-capitalized status.
SUBSIDIARY BANK CORUS' 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, 1997, cash and marketable securities that were available for
liquidity needs totaled $435.5 million, or 20.8%, of the subsidiary bank's total
assets.
RISK MANAGEMENT
CORUS' market risk is primarily due to interest rate risk. The following table
provides information about CORUS' financial instruments that are subject to
interest rate risk and includes the interest rate swap agreements that are used
to minimize this risk. For loans, securities and liabilities with contractual
maturities, the table presents principal cash flows and weighted-average rates
by contractual maturities adjusted for the estimated prepayment of student,
residential first mortgage and home equity loans. For core deposits that have no
contractual maturity, the table presents principal cash flows and
weighted-average rates based on historical patterns of balance attrition. For
interest rate swaps, the table presents the notional and weighted-average rates
by contractual maturities. All variable and floating rate notes have been
adjusted for the implied forward rates from the December 31, 1997 yield curve.
<PAGE> 12
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS SUBJECT TO INTEREST RATE RISK -- PRINCIPAL/NOTIONAL
MATURITIES
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Year ending December 31 1998 1999 2000 2001
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate
loans $ 53,731 $ 32,326 $ 41,560 $ 84,519
Average interest rate 7.72% 10.10% 9.44% 9.35%
Variable interest rate
loans $291,191 $198,334 $136,698 $ 84,113
Average interest rate 9.45% 9.51% 9.58% 9.60%
Fixed interest rate
securities $225,933 $ 87,516 $ 27,487 $ 2,885
Average interest rate 5.48% 6.18% 6.27% 7.86%
Variable interest rate
securities $ 20,013 $ 16 $ 16 $ 516
Average interest rate 6.08% 6.40% 6.53% 6.60%
- ---------------------------------------------------------------------------
RATE SENSITIVE
LIABILITIES:
Noninterest-bearing
deposits $ 38,148 $ 30,518 $ 24,415 $ 19,532
Average interest rate -- -- -- --
Savings, NOW and money
markets $148,952 $127,617 $109,703 $ 94,609
Average interest rate 4.09% 4.36% 4.53% 4.66%
Time deposits $317,700 $159,216 $ 21,819 $ 2,406
Average interest rate 5.57% 6.06% 6.18% 5.67%
Variable rate short
term borrowings $ 9,264 -- -- --
Average interest rate 5.86% -- -- --
Variable rate FHLB
advances -- -- -- $ 40,000
Average interest rate -- -- -- 6.15%
- ---------------------------------------------------------------------------
RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS:
Pay fixed, receive
floating interest
rate swaps $ 24,934 $ 20,576 $ 26,559 $ 68,370
Average pay rate 7.32% 7.34% 6.38% 6.27%
Average receive
rate 5.82% 5.95% 6.07% 6.15%
Pay floating, receive
fixed interest rate
swaps $ 10,000 $ 10,000 $ 10,000 --
Average pay rate 5.81% 5.95% 6.07% --
Average receive
rate 5.91% 6.00% 6.07% --
Pay floating, receive
variable basis swaps -- -- -- $100,000
Average pay rate -- -- -- 6.01%
Average receive
rate -- -- -- 6.08%
- ---------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------
December 31,
1997
Year ending December 31 2002 Thereafter Total Fair Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate
loans $ 57,396 $179,646 $ 449,178 $ 468,084
Average interest rate 8.81% 9.17% 9.07%
Variable interest rate
loans $ 76,485 $309,976 $1,096,797 $1,096,797
Average interest rate 9.74% 9.54% 9.53%
Fixed interest rate
securities $ 2,881 $ 6,806 $ 353,508 $ 353,747
Average interest rate 7.74% 6.91% 5.78%
Variable interest rate
securities $ 16 $ 8,404 $ 28,981 $ 28,981
Average interest rate 6.68% 6.78% 6.29%
- -----------------------------------------------------------------------------------
RATE SENSITIVE
LIABILITIES:
Noninterest-bearing
deposits $ 15,625 $ 62,501 $ 190,739 $ 190,739
Average interest rate -- -- --
Savings, NOW and money
markets $ 81,851 $604,749 $1,167,481 $1,167,481
Average interest rate 4.80% 5.38% 4.93%
Time deposits $ 3,664 $ 41 $ 504,846 $ 505,765
Average interest rate 5.88% 6.50% 5.76%
Variable rate short
term borrowings -- -- $ 9,264 $ 9,264
Average interest rate -- -- 5.86%
Variable rate FHLB
advances -- -- $ 40,000 $ 40,000
Average interest rate -- -- 6.15%
- -----------------------------------------------------------------------------------
RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS:
Pay fixed, receive
floating interest
rate swaps $ 44,057 $ 73,802 $ 258,298 $ (5,696)
Average pay rate 6.37% 7.04% 6.70%
Average receive
rate 6.23% 6.47% 6.20%
Pay floating, receive
fixed interest rate
swaps -- -- $ 30,000 $ 3
Average pay rate -- -- 5.94%
Average receive
rate -- -- 5.99%
Pay floating, receive
variable basis swaps -- -- $ 100,000 $ 100
Average pay rate -- -- 6.01%
Average receive
rate -- -- 6.08%
- -----------------------------------------------------------------------------------
</TABLE>
In addition to interest rate risk, CORUS is also exposed to price risk with the
bank stock portfolio. This risk has been reduced through the use of S&P 500
option collar agreements. The terms of the option collar agreements are outlined
in Note 10 to the consolidated financial statements. The following is a summary
of historical stock price movements during the past three years. There were no
price movements in excess of twenty percent in any of the quarters. The amounts
for CORUS portfolio were based on the historical prices for the portfolio
holdings at December 31, 1997.
<TABLE>
<CAPTION>
PERCENT OF QUARTERS PERCENT OF QUARTERS
FOR CORUS PORTFOLIO FOR S&P 500 IN PAST
PRICE MOVEMENT IN QUARTER IN PAST THREE YEARS THREE YEARS
- ------------------------- ------------------- -------------------
<S> <C> <C>
At least five percent 83% 58%
At least ten percent 58 8
At least fifteen percent 8 --
</TABLE>
28 Corus Bankshares, Inc.
----
29
<PAGE> 13
consolidated
balance sheets
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks -- noninterest-bearing $ 62,217 $ 57,508
Federal funds sold 21,500 98,500
Interest-bearing deposits with banks 26,999 --
Securities:
Available for sale, at fair value 531,863 379,029
Held to maturity, at amortized cost (fair value $9,525 and
$11,554) 9,279 11,254
- -----------------------------------------------------------------------------------------------
Total Securities 541,142 390,283
Loans, net of unearned discount 1,545,975 1,623,145
Less: Allowance for loan losses 30,660 32,668
- -----------------------------------------------------------------------------------------------
Net Loans 1,515,315 1,590,477
Premises and equipment, net 30,950 28,650
Accrued interest receivable and other assets 44,767 40,919
Goodwill, net of accumulated amortization of $24,874 and
$21,856 9,037 12,191
- -----------------------------------------------------------------------------------------------
Total Assets $2,251,927 $2,218,528
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 190,739 $ 195,324
Interest-bearing 1,672,327 1,705,355
- -----------------------------------------------------------------------------------------------
Total Deposits 1,863,066 1,900,679
Short-term borrowings 9,264 6,317
Federal Home Loan Bank advances 40,000 40,000
Accrued interest payable and other liabilities 47,964 35,942
- -----------------------------------------------------------------------------------------------
Total Liabilities 1,960,294 1,982,938
Commitments and contingent liabilities -- --
Shareholders' equity:
Preference and preferred stock -- --
Common stock, $0.05 par value, 50,000,000 shares
authorized;
14,681,442 and 14,820,242 shares issued 734 741
Surplus 4,101 4,140
Retained earnings 241,522 214,941
Accumulated other comprehensive income 45,276 15,768
- -----------------------------------------------------------------------------------------------
Total Shareholders' Equity 291,633 235,590
- -----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $2,251,927 $2,218,528
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 14
consolidated
statements of income and comprehensive income
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Years Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $155,178 $164,871 $137,706
Tax-advantaged 1,383 1,642 2,120
Deposits with banks 491 723 1,560
Federal funds sold 5,514 2,508 3,015
Interest and dividends on securities:
Taxable interest 17,741 19,650 25,312
Tax-advantaged interest 232 331 378
Dividends 2,633 1,225 721
Trading account interest 760 -- 302
- -------------------------------------------------------------------------------------------------------
Total Interest Income 183,932 190,950 171,114
- -------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 79,714 77,077 71,932
Short-term borrowings 630 895 665
Federal Home Loan Bank advances 2,317 1,639 --
- -------------------------------------------------------------------------------------------------------
Total Interest Expense 82,661 79,611 72,597
- -------------------------------------------------------------------------------------------------------
Net Interest Income 101,271 111,339 98,517
Provision for loan losses 16,000 16,000 5,779
- -------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
Losses 85,271 95,339 92,738
- -------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 8,616 9,590 9,686
Gain on dispositions of loans 11,115 8,134 2,292
Trust services 588 492 477
Other income 1,228 1,220 2,691
Trading account gains (losses), net (221) -- 297
Securities and other financial instruments gains
(losses), net 5,102 3,316 (1,332)
- -------------------------------------------------------------------------------------------------------
Total Noninterest Income 26,428 22,752 14,111
- -------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and employee benefits 27,833 25,483 25,116
Net occupancy 4,123 3,975 3,917
Data processing 1,977 2,417 2,175
Furniture and equipment depreciation 2,502 1,883 1,342
Goodwill amortization 3,018 2,896 2,257
Other expenses 11,739 13,527 16,843
- -------------------------------------------------------------------------------------------------------
Total Noninterest Expenses 51,192 50,181 51,650
- -------------------------------------------------------------------------------------------------------
Income before income taxes 60,507 67,910 55,199
Income tax expense 21,136 24,005 19,429
- -------------------------------------------------------------------------------------------------------
Net Income $ 39,371 $ 43,905 $ 35,770
Other comprehensive income, net of income taxes:
Unrealized securities gains 29,508 9,384 12,337
- -------------------------------------------------------------------------------------------------------
Comprehensive Income $ 68,879 $ 53,289 $ 48,107
- -------------------------------------------------------------------------------------------------------
Net Income per Share:
Basic $ 2.66 $ 2.96 $ 2.36
Diluted 2.63 2.93 2.35
Comprehensive Income per Share:(1)
Basic 4.66 3.59 3.17
Diluted 4.60 3.55 3.16
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) For informational purposes only.
See accompanying notes.
30 Corus Bankshares, Inc.
----
31
<PAGE> 15
consolidated
statements of changes of shareholders' equity
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Net income -- -- 39,371 -- 39,371
Retirement of 138,800 common shares (7) (39) (4,961) -- (5,007)
Cash dividends declared on common
stock, $0.53 per common share -- -- (7,829) -- (7,829)
Net change in unrealized gains on
available for sale securities -- -- -- 29,508 29,508
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $734 $4,101 $241,522 $45,276 $291,633
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 16
consolidated
statements of cash flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Years Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 39,371 $ 43,905 $ 35,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 16,000 16,000 5,779
Depreciation and amortization 3,198 3,247 2,540
Accretion of investment and loan discounts (13,980) (19,276) (13,493)
Goodwill amortization 3,018 2,896 2,257
Deferred income tax expense (benefit) 343 (1,740) (4,010)
Net securities (gains) losses (4,239) (1,985) 401
Decrease in trading account securities -- -- 74,432
Gain on dispositions of loans (11,115) (8,134) (2,292)
(Increase) decrease in accrued interest
receivable and other assets (3,848) (12) 3,076
Increase (decrease) in accrued interest payable
and other liabilities (2,522) 4,965 (5,009)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 26,226 39,866 99,451
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held to maturity
securities 1,975 3,313 5,222
Proceeds from maturities of available for sale
securities 526,270 328,855 25,535
Proceeds from sales of available for sale
securities 42,285 3,377,908 2,191,004
Purchases of available for sale securities (662,275) (3,700,208) (2,156,151)
Purchases of federal funds sold with greater than
90 day maturities (20,000) -- --
(Purchases) maturities of interest-bearing deposits
with banks (26,999) 25,000 --
Purchases of loans (1,000) (22,550) (4,486)
Net decrease (increase) in loans 75,779 (29,463) (438,971)
Purchases of premises and equipment, net (5,498) (5,103) (2,066)
Purchases of minority interest and additional
consideration for bank subsidiaries (1,690) (4,139) (54)
- -------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (71,153) (26,387) (379,967)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts (37,613) 2,139 200,042
Increase (decrease) in short-term borrowings 2,947 4,489 (8,337)
Proceeds from Federal Home Loan Bank advances -- 40,000 --
Issuance of common shares under stock option plan -- 9 --
Retirement of common shares (5,007) (5,392) (4,751)
Cash dividends paid on common shares (7,691) (6,691) (5,128)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (47,364) 34,554 181,826
- ---------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (92,291) 48,033 (98,690)
Cash and Cash Equivalents at January 1 156,008 107,975 206,665
- ---------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at December 31 $ 63,717 $ 156,008 $ 107,975
- ---------------------------------------------------------------------------------------------------
Supplemental disclosures:
Interest paid $ 82,156 $ 77,523 $ 71,191
Income taxes paid 19,799 27,914 22,642
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
32 Corus Bankshares, Inc.
----
33
<PAGE> 17
notes to
consolidated financial statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of CORUS BANKSHARES,
Inc. and its wholly-owned subsidiaries, CORUS BANK, N.A. and Bancorp Operations
Company. CORUS, 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 CORUS 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 with 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, is reflected as a component of
shareholders' equity.
Securities held to maturity represent securities that CORUS 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 ultimate collectibility of interest or principal.
Loans past due over 90 days continue to accrue interest income only if there are
adequate sources of repayment. These sources include sufficient collateral to
cover repayment of the loan or if other designated sources of repayment exist.
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 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 the
principal balance of 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 is recognized in gain on dispositions of loans.
<PAGE> 18
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is available to absorb
losses inherent in the portfolio. Loans are charged against the allowance for
loan losses when they are deemed to be uncollectible. Ultimate Home Equity
loans, which are originated to 100% of the underlying residential real estate's
collateral value, are charged off when they become 120 days past due. Recoveries
of previously charged-off amounts are credited to the allowance for loan losses.
The allowance for loan losses is based upon quarterly comprehensive 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 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 CORUS utilizes various off-balance-sheet
financial instruments to manage the interest rate and market risk exposure
associated with its financial assets and liabilities. The counterparties to
these instruments are major financial institutions with credit ratings of 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 net interest
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.
CORUS utilizes option collar agreements to minimize the market risk associated
with the bank stock portfolio. The net cost of the agreements is amortized on a
straight-line basis and included in securities and other financial instruments
gains and losses. The intrinsic value of purchased put options is carried at
market value with any unrealized gains included, net of tax, in other
comprehensive income. Any realized gains from the exercise or settlement of the
put options relating to changes in intrinsic value are deferred as a basis
adjustment to the related securities. Any realized gains or losses from the
exercise or settlement of the put options relating to changes in time value are
included in securities and other financial instruments gains and losses.
The intrinsic value of written put options is carried at market value with any
unrealized losses offsetting a portion of the unrealized gains from the
purchased put options in other comprehensive income. Any realized losses from
the exercise or settlement of the options relating to changes in intrinsic value
are used to offset realized gains from purchased put options in other
comprehensive income. Any realized gains or losses from the exercise or
settlement of the put options relating to changes in time value are included in
securities and other financial instruments gains and losses.
Written call options are carried at market value with any unrealized losses
included in securities and other financial instruments gains and losses.
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform
with the 1997 presentation.
2. ACCOUNTING CHANGES
In December 1997, CORUS adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share." SFAS No. 128 requires the presentation of
both basic earnings per share and diluted earnings per share. Basic earnings per
share is computed by dividing net income by the weighted-average number of
common shares outstanding. Diluted earnings per share is computed by dividing
net income by the weighted-average number of common shares and dilutive stock
options outstanding.
34 Corus Bankshares, Inc.
----
35
<PAGE> 19
In December 1997, CORUS also adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires that all items that are components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The statement of
comprehensive income is included with the statement of income. The adoption of
SFAS No. 130 had no impact on any amounts previously reported as net income.
Effective January 1, 1996, CORUS adopted 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." CORUS 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 12. The adoption of SFAS No. 123 had no impact on CORUS'
results of operations, financial position or cash flows.
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, 1997 Cost Gains Losses Value
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and
agencies $191,283 $ 11 $ (58) $191,236
Corporate debt
securities 161,333 158 (37) 161,454
Common stocks 88,927 69,774 (41) 158,660
Other 20,664 -- (151) 20,513
- ------------------------------------------------------------------
Total $462,207 $69,943 $ (287) $531,863
- ------------------------------------------------------------------
Held to maturity:
State and municipal $ 4,150 $ 153 $ -- $ 4,303
Other 5,129 95 (2) 5,222
- ------------------------------------------------------------------
Total $ 9,279 $ 248 $ (2) $ 9,525
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Gross
Unrealized
Amortized ---------------- Fair
December 31, 1996 Cost Gains Losses Value
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and
agencies $183,350 $ 59 $ (5) $183,404
Corporate debt
securities 94,977 27 (3) 95,001
Common stocks 68,430 24,209 (28) 92,611
Other 8,013 -- -- 8,013
- ------------------------------------------------------------------
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
- ------------------------------------------------------------------
</TABLE>
The scheduled maturities for securities were as follows at December 31, 1997 (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> <C>
One year or less $242,977 $242,916 $ 433 $ 437
After one year
through five years 109,382 109,513 2,531 2,602
After five years
through ten years 258 262 747 767
After ten years -- -- 500 557
- --------------------------------------------------------------------
352,617 352,691 4,211 4,363
Securities not due at
a single maturity 109,590 179,172 5,068 5,162
- --------------------------------------------------------------------
Total $462,207 $531,863 $9,279 $9,525
- --------------------------------------------------------------------
</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 $5.9,
$2.6 and $1.6 million during 1997, 1996 and 1995, respectively. Gross losses
realized on sales of available for sale securities totaled $1.7 million,
$658,000 and $2.0 million, respectively.
At December 31, 1997, Federal Home Loan Bank stock with a book value of $8.0
million was pledged as collateral to secure Federal Home Loan Bank advances.
Securities having an aggregate carrying value of $49.7 and $37.6 million at
December 31, 1997 and 1996, respectively, were pledged as collateral to secure
public deposits and for other purposes required or permitted by law. In
addition, common stocks with a carrying value of $26.1 million were pledged as
collateral at December 31, 1997 for the option collar agreements discussed in
Note 10.
<PAGE> 20
4. LOANS
Total loans, net of unearned discount of $13.3 and $20.3 million at December 31,
1997 and 1996, respectively, were as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------
December 31 1997 1996
- ------------------------------------------------------
<S> <C> <C> <C>
Commercial real
estate $ 711,495 $ 655,793
Student 412,926 402,859
Residential first
mortgage 209,669 286,042
Home equity 131,868 188,755
Commercial 55,062 61,852
Consumer 24,955 27,844
- ------------------------------------------------------
Total $1,545,975 $1,623,145
- ------------------------------------------------------
</TABLE>
Changes in the allowance for loan losses were as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1 $ 32,668 $ 25,640 $20,157
Provision for loan
losses 16,000 16,000 5,779
Charge-offs (19,095) (11,341) (819)
Recoveries 1,087 2,369 523
- --------------------------------------------------------
Balance at December
31 $ 30,660 $ 32,668 $25,640
- --------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, loans that were considered to be impaired totaled
$3.4 million and $720,000, 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 CORUS'
policy. The majority of the loans deemed impaired were evaluated using the fair
value of the collateral as the measurement method. At December 31, 1997 and
1996, the related allowance allocated to impaired loans was $310,000 and
$60,000, respectively. The contractual interest due on impaired loans for the
years ended December 31, 1997 and 1996, was $297,000 and $61,000, respectively.
No interest income was recognized on impaired loans for the years ended December
31, 1997 and 1996.
At December 31, 1997 and 1996, nonaccrual loans totaled $8.6 and $7.4 million,
respectively. The interest income foregone on these loans during 1997 and 1996
was $503,000 and $588,000, respectively.
All of CORUS' 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 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Land $ 7,422 $ 7,265
Buildings and improvements 26,467 24,994
Furniture and equipment 12,544 15,294
- -------------------------------------------------------
46,433 47,553
Less accumulated depreciation 15,483 18,903
- -------------------------------------------------------
Total premises and equipment,
net $30,950 $28,650
- -------------------------------------------------------
</TABLE>
Two banking locations occupy offices under long-term operating lease agreements.
Rent expense under these lease agreements totaled $322,000, $311,000 and
$306,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Minimum fixed lease obligations, excluding taxes, insurance and other expenses
payable directly by CORUS, for leases in effect at December 31, 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------
Year Ending December 31
- ----------------------------------------------------
<S> <C> <C>
1998 $ 318
1999 325
2000 331
2001 337
2002 344
2003 and thereafter 818
- ----------------------------------------------------
Minimum payments $2,473
- ----------------------------------------------------
</TABLE>
6. TIME DEPOSITS
Interest-bearing deposits included certificates of deposit in amounts of
$100,000 or more totaling $324.6 and $289.9 million at December 31, 1997 and
1996, respectively. Interest expense on these deposits was $17.0 and $14.1
million in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit were
as follows (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------
Year Ending December 31
- --------------------------------------------------
<S> <C> <C>
1998 $317,700
1999 159,216
2000 21,819
2001 2,406
2002 and thereafter 3,705
- --------------------------------------------------
Total $504,846
- --------------------------------------------------
</TABLE>
36 Corus Bankshares, Inc.
----
37
<PAGE> 21
7. FEDERAL HOME LOAN BANK ADVANCES
During 1996, CORUS 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.
CORUS maintains as qualifying collateral its Federal Home Loan Bank stock and
all performing residential first mortgages.
8. INCOME TAXES
The components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Year Ended December 31 1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal income tax $ 20,746 $ 25,649 $ 23,433
State income tax 47 96 6
- -----------------------------------------------------------
Total current expense 20,793 25,745 23,439
Deferred federal
expense (benefit) 343 (1,740) (4,010)
- -----------------------------------------------------------
Income tax provision $ 21,136 $ 24,005 $ 19,429
- -----------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective rate
is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal income
tax rate 35.0% 35.0% 35.0%
Goodwill amortization 1.7 1.5 1.4
Dividends received
deduction (1.1) (0.4) (0.3)
Tax-exempt income (0.9) (0.9) (1.5)
Minority interest -- 0.1 0.5
Other, net 0.2 -- 0.1
- --------------------------------------------------------
Effective rate 34.9% 35.3% 35.2%
- --------------------------------------------------------
</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 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 9,540 $ 10,243
Deferred loan fees and
discounts 2,384 2,144
Other deferred tax assets 535 592
- -------------------------------------------------------
Gross deferred tax assets 12,459 12,979
- -------------------------------------------------------
Deferred tax liabilities:
Unrealized securities
gains (24,380) (8,491)
Purchase accounting
adjustments (2,045) (2,390)
Other deferred tax
liabilities (730) (562)
- -------------------------------------------------------
Gross deferred tax
liabilities (27,155) (11,443)
- -------------------------------------------------------
Net deferred tax asset
(liability) $ (14,696) $ 1,536
- -------------------------------------------------------
</TABLE>
9. EMPLOYEE BENEFIT PLANS
Expenses for retirement and savings-related benefit plans were as follows (in
thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------
<S> <C> <C> <C> <C>
Pension plan $ (97) $ 3 $ 44
Employees' savings plan and
trust 94 95 68
- -------------------------------------------------------
Total $ (3) $ 98 $ 112
- -------------------------------------------------------
</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, 1997. Pension plan assets are primarily
invested in common stocks and bank deposits.
Pension expense was comprised of the following (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost $ 423 $ 362 $ 260
Interest cost 874 825 737
Actual return on plan
assets (5,255) (3,175) (2,614)
Amortization of transition
asset (202) (202) (202)
Net amortization and
deferral 4,063 2,193 1,863
- --------------------------------------------------------------
Pension expense $ (97) $ 3 $ 44
- --------------------------------------------------------------
</TABLE>
The plan's funded status was as follows (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------
December 31 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of
vested benefit
obligations $ (11,614) $ (10,154)
Actuarial present value of
nonvested benefit
obligations (129) (132)
- -------------------------------------------------------
Accumulated benefit
obligation (11,743) (10,286)
Estimated future benefits (1,778) (1,627)
- -------------------------------------------------------
Projected benefit
obligation (13,521) (11,913)
Plan assets at fair value 19,829 15,175
- -------------------------------------------------------
Plan assets in excess of
projected benefit
obligation 6,308 3,262
Unrecognized net transition
asset (808) (1,010)
Unrecognized net gain (4,719) (1,568)
- -------------------------------------------------------
Prepaid pension asset $ 781 $ 684
- -------------------------------------------------------
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0% at December 31, 1997 and 7.5%
at December 31, 1996 and 1995. 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 1997, 1996 and 1995.
<PAGE> 22
SAVINGS PLAN Most employees are eligible to become participants of CORUS'
Employees' Savings Plan and Trust. CORUS' matching contributions to the Plan are
discretionary. For the years ended December 31, 1997, 1996 and 1995, CORUS
matched 20% of participants' contributions, up to a maximum of $750.
10. FINANCIAL INSTRUMENTS
In the normal course of business, CORUS 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 presented below are not necessarily indicative of the amounts CORUS
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 CORUS' assets and liabilities are not considered financial instruments,
the disclosures below do not reflect the fair value of CORUS as a whole.
FINANCIAL ASSETS CORUS had the following financial assets (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
December 31 1997 1996
- ---------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents $ 63,717 $ 63,717 $ 156,008 $ 156,008
Federal funds sold
with original
maturities greater
than 90 days 20,000 19,994 -- --
Interest-bearing
deposits with banks 26,999 26,976 -- --
Securities 541,142 541,388 390,283 390,583
Loans 1,515,315 1,534,221 1,590,477 1,613,618
Accrued interest
receivable 25,562 25,562 22,495 22,495
- ---------------------------------------------------------------------------
</TABLE>
Cash and cash equivalents and accrued interest receivable are short-term in
nature and as such, their carrying value approximates book value.
Fair values of interest-bearing deposits with banks, federal funds sold with
original maturities greater than 90 days 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 securities for
similar loans after adjustment for differences in characteristics. The fair
values 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 CORUS had the following financial liabilities (in
thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
December 31 1997 1996
- ----------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deposits without a
stated maturity $1,358,220 $1,358,220 $1,414,134 $1,414,134
Certificates of
deposit 504,846 505,765 486,545 486,779
Short-term borrowings 9,264 9,264 6,317 6,317
Federal Home Loan
Bank advances 40,000 40,000 40,000 40,000
Accrued interest
payable 8,685 8,685 7,471 7,471
- ----------------------------------------------------------------------------
</TABLE>
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 CORUS 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 (thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------
December 31 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Standby letters of credit $ 4,307 $ 3,358
Loan commitments 220,553 220,389
Unfunded open-ended lines
of credit 22,979 44,562
- -------------------------------------------------------
</TABLE>
38 Corus Bankshares, Inc.
----
39
<PAGE> 23
The following financial instruments were used by CORUS to hedge its interest
rate risk (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Notional Fair Carrying
December 31, 1997 Amount Value Value
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swap
agreements:
Amortizing pay fixed
rate, receive floating
rate $240,068 $(4,604) $(158)
Non-amortizing pay fixed
rate, receive floating
rate 18,230 (1,092) (102)
Non-amortizing pay
floating rate, receive
fixed rate 30,000 3 1
Basis swap agreements:
Non-amortizing variable
pay/variable receive 100,000 100 (1)
- -------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------
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
- -------------------------------------------------------------
</TABLE>
The fair values of interest rate and basis swaps and floor agreements are based
on either quoted market or dealer prices. The carrying value for interest rate
and basis 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, 1997, the fair value of all interest rate swaps
agreements included in the table above represent the gross amounts of unrealized
gains or losses.
CORUS 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, CORUS paid a weighted-average rate of
6.51% and received a weighted-average rate of 5.73% in 1997. For the
non-amortizing pay fixed rate, receive floating rate swaps, CORUS paid a
weighted-average rate of 9.09% and received a weighted-average rate of 5.84% in
1997. For non-amortizing pay floating rate, receive fixed rate swaps, CORUS paid
a weighted-average rate of 5.77% and received a weighted-average rate of 5.99%
in 1997. At December 31, 1997, interest rate swaps with notional amounts of
$34.9, $179.6 and $73.8 million had maturity dates within one year, from one to
five years and greater than five years, respectively.
CORUS enters into basis swaps to change the floating rate index on pay fixed
rate, receive floating rate interest rate swaps. For the basis swaps, CORUS paid
a weighted-average rate of 5.80% and received a weighted-average rate of 5.86%
in December 31, 1997. At December 31, 1997, basis swaps with notional amounts of
$100 million had maturity dates from one to five years.
CORUS 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 CORUS under the agreements during 1997 or 1996. These
agreements expired in 1997.
The following financial instruments were used by CORUS to hedge the market risk
associated with the bank stock portfolio (in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------
Notional Fair Carrying
December 31, 1997 Amount Value Value
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Over the counter S&P
500 options:
Purchased put
options $302,500 $10,199 $10,851
Written put options 302,500 (5,009) (4,962)
Written call
options 302,500 (6,987) (5,889)
- --------------------------------------------------------
</TABLE>
The options were the result of two option collar agreements on the S&P 500 that
CORUS entered into during 1997. The details of each agreement were as follows:
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------
Notional Value $142.5 million $160.0 million
Expiration Date May 1, 1998 June 8, 1998
Type of options European European
Purchased put strike
price 888.52 953.15
Written put strike
price 760.28 888.30
Written call strike
price 1,009.43 1,110.37
- ------------------------------------------------------------
</TABLE>
The fair values of the option contracts are based on dealer prices. The carrying
value represents the unamortized option premium remaining at December 31, 1997.
CORUS entered into the collars to hedge its systematic market risk with respect
to the bank stock portfolio. CORUS is subject to credit risk as a purchaser of
an option contract and is subject to market risk to the extent of the purchase
price of the option. CORUS is subject to market risk on its written option
contracts, but not credit risk since the counterparty already performed by
paying an up front cash premium.
<PAGE> 24
11. LEGAL AND REGULATORY PROCEEDINGS
CORUS 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,
these proceedings will not have a material effect on the results of operations,
financial position, liquidity or capital resources of CORUS, except for possibly
the matter discussed below.
As disclosed previously, CORUS 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. CORUS terminated the employees involved and informed the
U.S. Department of Education immediately upon discovery of the problem and the
Department commenced an investigation.
CORUS believes that the Department's investigation expanded in 1996 to include a
review of whether CORUS' student loan division 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 CORUS
acted illegally or violated Department policy or regulations, CORUS 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 CORUS previously received guarantee payments. In addition, CORUS or
individual employees could be subject to substantial penalties.
Shortly after notifying the Department of the problem, CORUS 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 CORUS is unable to state with certainty were
not affected by incorrect servicing history documentation. Management charged
off against the allowance for loan losses $1.5 million of student loans in the
third quarter of 1997 and $4.0 million of student loans during each of the first
two quarters of 1997 and the fourth quarter of 1996 that were subject to the
interim agreement. A total of $13.5 million of loans subject to the interim
agreement have been charged off against the allowance for loan losses. 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 CORUS will ultimately incur. As such,
management is unable to quantify either the student loans that may lose their
government guarantee or the amount of loans that CORUS may be required to
repurchase.
CORUS does not condone or permit such improper practices and is cooperating
fully with the Depart-ment's investigation.
12. SHAREHOLDERS' EQUITY
PREFERENCE SHARES CORUS 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, 1997 and 1996, no preference or preferred stock was
issued.
DIVIDEND RESTRICTIONS The payment of dividends to CORUS 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. CORUS' subsidiary bank was considered
well-capitalized as of December 31, 1997. At December 31, 1997, the total amount
of the subsidiary bank's retained earnings available for dividends without prior
regulatory approval and maintaining well-capitalized status was $14.8 million.
STOCK OPTION PLAN Options to purchase CORUS' 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, 1997, there were 51,735 shares available for grant.
40 Corus Bankshares, Inc.
----
41
<PAGE> 25
- --------------------------------------------------------------------------------
Changes in stock options were as follows (number of shares in thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. 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 359 $16.53 347 $15.52 293 $14.56
Granted 44 31.96 29 30.00 74 19.38
Exercised -- -- (1) 20.30 -- --
Cancelled (5) 21.88 (16) 19.05 (20) 15.62
- --------------------------------------------------------------------------------------
Ending balance 398 $18.16 359 $16.53 347 $15.52
- --------------------------------------------------------------------------------------
Exercisable at December 31 289 $15.09 271 $14.57 254 $14.23
- --------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the range of exercise prices for outstanding options and
weighted-average term remaining was $10.50 to $34.65 and 4.7 years,
respectively. If CORUS expensed the fair value of options granted in 1997, 1996
and 1995, the pro forma net income and earnings per share would have been as
follows (in thousands, except per share data):
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------
Year Ended December
31 1997 1996 1995
- ----------------------------------------------------------
Reported net income $39,371 $43,905 $35,770
After-tax fair value
of options granted 97 66 33
- ----------------------------------------------------------
Pro forma net income $39,274 $43,839 $35,737
- ----------------------------------------------------------
Pro forma diluted
earnings per share $ 2.62 $ 2.92 $ 2.34
- ----------------------------------------------------------
</TABLE>
The fair value of options granted was computed using the Black-Scholes model
using the following assumptions: a risk-free rate between 5.8% and 6.6% in 1997,
6.6% in 1996, and between 6.0% and 6.1% in 1995; expected life of 5 years in
1997 and 1996, and between 5 and 8.6 years in 1995; expected volatility of 21%
in 1997, 1996 and 1995; and, expected dividend yield of 1.5% in 1997, 1.7% in
1996, and 1.8% in 1995. For the pro forma disclosure, the estimated fair value
of the options is amortized to expense over the options' vesting period.
<PAGE> 26
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Total Risk-Based
Leverage Tier I Capital Capital
----------------------------------------------------------
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, 1997:
CORUS $237,320 10.5% $237,320 15.3% $256,701 16.6%
Subsidiary bank 141,703 6.7% 141,703 9.8% 160,134 11.0%
December 31, 1996:
CORUS $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%
- -------------------------------------------------------------------------------
</TABLE>
REGULATORY CAPITAL CORUS 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, 1997 and 1996,
CORUS and its subsidiary bank were classified as well-capitalized. There have
been no events since December 31, 1997 that management believes would have
changed that classification.
OTHER COMPREHENSIVE INCOME Changes in other comprehensive income, net of income
taxes, were as follows (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Increase in unrealized
securities gains
during the year $32,263 $10,674 $12,076
Reclassification
adjustment for
securities sold
during the year 2,755 1,290 (261)
- ---------------------------------------------------------------------------
Unrealized securities
gains recognized in
other comprehensive
income $29,508 $ 9,384 $12,337
- ---------------------------------------------------------------------------
</TABLE>
13. NET INCOME PER SHARE
Net income per share was calculated as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Denominator for basic
earnings per share
-- average common
shares outstanding 14,788 14,833 15,161
Dilutive common stock
options 178 161 80
- ---------------------------------------------------------------------------
Denominator for
diluted earnings per
share 14,966 14,994 15,241
- ---------------------------------------------------------------------------
Numerator: Net income
attributable to
common shares $39,371 $43,905 $35,770
- ---------------------------------------------------------------------------
Net income per share:
Basic $ 2.66 $ 2.96 $ 2.36
Diluted 2.63 2.93 2.35
- ---------------------------------------------------------------------------
</TABLE>
42 Corus Bankshares, Inc.
----
43
<PAGE> 27
14. PARENT COMPANY FINANCIAL STATEMENTS
CORUS condensed parent company financial statements were as follows (in
thousands, except per share data):
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Cash $ 11,227 $ 4,356
Available for sale securities, at fair value 158,660 92,611
Investment in subsidiaries 152,031 154,945
Other assets 2,350 686
- ------------------------------------------------------------------------------------------
Total $324,268 $252,598
- ------------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Liabilities $ 32,635 $ 17,008
Shareholders' equity 291,633 235,590
- ------------------------------------------------------------------------------------------
Total $324,268 $252,598
- ------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income:
Dividends from bank subsidiary $37,000 $36,000 $20,524
Other income 8,483 5,516 1,474
- -----------------------------------------------------------------------------------------------------
Total Income 45,483 41,516 21,998
- -----------------------------------------------------------------------------------------------------
Expenses:
Interest expense 327 414 430
Other expenses 1,381 1,247 981
Goodwill and purchase accounting amortization -- 1,036 2,211
- -----------------------------------------------------------------------------------------------------
Total Expenses 1,708 2,697 3,622
- -----------------------------------------------------------------------------------------------------
Income before income taxes and equity in undistributed
(distributed) net income of subsidiaries 43,775 38,819 18,376
Income tax expense (benefit) 1,727 839 (665)
- -----------------------------------------------------------------------------------------------------
Income before equity in undistributed (distributed) net
income of subsidiaries 42,048 37,980 19,041
Equity in undistributed (distributed) net income of banking
subsidiaries (2,968) 5,612 16,609
Equity in undistributed net income of non-bank subsidiary 291 313 120
- -----------------------------------------------------------------------------------------------------
Net Income $39,371 $43,905 $35,770
- -----------------------------------------------------------------------------------------------------
Net Income per Share:
Basic $ 2.66 $ 2.96 $ 2.36
Diluted 2.63 2.93 2.35
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 39,371 $ 43,905 $ 35,770
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 51 54 44
Amortization of goodwill and purchase accounting
adjustments -- 1,036 2,211
Net securities and other financial instruments gains (4,220) (2,656) (1,289)
Decrease in dividends receivable, net -- -- 2,000
Decrease (increase) in other assets (1,688) (215) 126
Increase (decrease) in other liabilities 1,372 (1,747) 153
Equity in (undistributed) distributed net income of
subsidiaries 2,677 (5,925) (16,729)
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 37,563 34,452 22,286
- --------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of available for sale securities -- 1,000 2,013
Proceeds from sales of available for sale securities 42,023 6,075 3,236
Purchases of available for sale securities (58,300) (46,311) (9,919)
Purchases of premises and equipment (27) (68) (59)
Return of capital from banking subsidiary -- 8,000 --
Purchases of minority interest and additional
consideration for bank subsidiaries (1,690) (4,139) --
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (17,994) (35,443) (4,729)
- --------------------------------------------------------------------------------------------------------
Financing activities:
Issuance of common shares under stock option plan -- 9 --
Retirement of common shares (5,007) (5,392) (4,751)
Cash dividends paid on common stock (7,691) (6,691) (5,128)
- --------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (12,698) (12,074) (9,879)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 6,871 (13,065) 7,678
Cash and Cash Equivalents at January 1 4,356 17,421 9,743
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at December 31 $ 11,227 $ 4,356 $ 17,421
- --------------------------------------------------------------------------------------------------------
</TABLE>
44 Corus Bankshares, Inc.
----
45
<PAGE> 29
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly financial information for the years
ended December 31, 1997 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $45,709 $49,221 $47,018 $48,074 $45,829 $47,568 $45,376 $46,087 $183,932 $190,950
Interest expense 20,284 19,978 20,531 19,917 20,639 20,211 21,207 19,505 82,661 79,611
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 25,425 29,243 26,487 28,157 25,190 27,357 24,169 26,582 101,271 111,339
Provision for loan losses 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 16,000 16,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 21,425 25,243 22,487 24,157 21,190 23,357 20,169 22,582 85,271 95,339
Noninterest income, net of
securities gains 5,699 3,956 6,192 4,640 5,004 5,009 4,652 5,831 21,547 19,436
Securities gains, net 27 1,420 699 199 1,934 1,244 2,221 453 4,881 3,316
Noninterest expense 12,870 12,875 12,740 12,543 12,498 12,522 13,084 12,241 51,192 50,181
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 14,281 17,744 16,638 16,453 15,630 17,088 13,958 16,625 60,507 67,910
Income tax expense 4,978 6,259 5,848 5,811 5,466 6,086 4,844 5,849 21,136 24,005
- ---------------------------------------------------------------------------------------------------------------------------------
Net income available to
common shareholders $ 9,303 $11,485 $10,790 $10,642 $10,164 $11,002 $ 9,114 $10,776 $ 39,371 $ 43,905
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.63 $ 0.77 $ 0.73 $ 0.72 $ 0.69 $ 0.74 $ 0.62 $ 0.73 $ 2.66 $ 2.96
Diluted 0.62 0.77 0.72 0.71 0.68 0.73 0.61 0.72 2.63 2.93
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK MARKET INFORMATION AND DIVIDEND HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter Year
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock price range
High $34.50 $30.00 $33.25 $31.00 $37.25 $32.75 $41.00 $33.00 $41.00 $33.00
Low 31.50 24.75 23.50 28.75 28.00 28.25 32.75 30.75 23.50 24.75
Close 33.25 29.00 28.25 30.00 36.13 32.00 39.56 32.25 39.56 32.25
Cash dividends declared 0.125 0.10 0.135 0.125 0.135 0.125 0.135 0.125 0.53 0.475
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CORUS' common stock is a NASDAQ National Market Issue trading under the ticker
symbol CORS.
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of CORUS BANKSHARES, Inc.:
We have audited the accompanying consolidated balance sheet of CORUS
BANKSHARES, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of CORUS' management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
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, 1997, and the results of
their operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 9, 1998
47
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of CORUS BANKSHARES, Inc.:
We have audited the accompanying consolidated balance sheet of CORUS
BANKSHARES, Inc. and subsidiaries as of December 31, 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of CORUS'
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
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 the results of
their operations and cash flows for each of the two years in the period ended
December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 10, 1997
48
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 62,217
<INT-BEARING-DEPOSITS> 26,999
<FED-FUNDS-SOLD> 21,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 531,863
<INVESTMENTS-CARRYING> 9,279
<INVESTMENTS-MARKET> 9,525
<LOANS> 1,545,975
<ALLOWANCE> 30,660
<TOTAL-ASSETS> 2,251,927
<DEPOSITS> 1,863,066
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<LONG-TERM> 40,000
0
0
<COMMON> 734
<OTHER-SE> 290,899
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<INTEREST-LOAN> 156,561
<INTEREST-INVEST> 21,366
<INTEREST-OTHER> 6,005
<INTEREST-TOTAL> 183,932
<INTEREST-DEPOSIT> 79,714
<INTEREST-EXPENSE> 82,661
<INTEREST-INCOME-NET> 101,271
<LOAN-LOSSES> 16,000
<SECURITIES-GAINS> 4,881
<EXPENSE-OTHER> 51,192
<INCOME-PRETAX> 60,507
<INCOME-PRE-EXTRAORDINARY> 60,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,371
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.63
<YIELD-ACTUAL> 4.80
<LOANS-NON> 8,641
<LOANS-PAST> 18,530
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 32,668
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<ALLOWANCE-CLOSE> 30,660
<ALLOWANCE-DOMESTIC> 30,660
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
