<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-6136
CORUS BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0823592
(State of incorporation of organization) (I.R.S. Employer Identification No.)
3959 N. Lincoln Ave., Chicago, Illinois 60613
(Address of principal executive offices) (Zip Code)
(773) 388-3088
(Registrant's telephone number)
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 ___
As of June 30, 1998, the Registrant had 14,551,142 common shares, $0.05 par
value, outstanding.
<PAGE> 2
CORUS BANKSHARES, Inc.
Index to Quarterly Report on Form 10-Q
June 30, 1998
PART I - FINANCIAL INFORMATION. PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
June 30, 1998, December 31, 1997 and June 30, 1997. 1
Condensed Consolidated Statements of Income and
Comprehensive Income (unaudited) -
Three and Six Months Ended June 30, 1998 and 1997. 2
Condensed Consolidated Statements of Cash Flows
(unaudited) -Six Months Ended June 30, 1998 and 1997. 3
Notes to Condensed Consolidated Financial Statements
(unaudited). 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
PART II - OTHER INFORMATION.
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 6. Exhibits and Reports on Form 8-K. 16
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORUS BANKSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31 June 30
(thousands) 1998 1997 1997
------------ ------------- ------------
<S> <C> <C> <C>
Assets
Cash and due from banks - noninterest bearing $ 56,034 $ 62,217 $ 52,571
Federal funds sold overnight 144,900 1,500 90,400
Federal funds sold term 20,000 20,000 --
Interest-bearing deposits with banks 27,000 26,999 --
Securities:
Available for sale, at fair value 652,783 531,863 416,669
Held to maturity, at amortized cost 8,089 9,279 10,136
---------- ---------- ----------
Total Securities 660,872 541,142 426,805
Loans, net of unearns, net of unearn 1,483,709 1,545,975 1,566,165
Less: Allowance for possible loan losses 34,214 30,660 27,750
---------- ---------- ----------
Net Loans 1,449,495 1,515,315 1,538,415
Premises and equipment, net 32,972 30,950 29,392
Accrued interest receivable and other assets 68,801 44,767 37,293
Goodwill, net of accumulated amortization 10,990 9,037 10,523
---------- ---------- ----------
Total Assets $2,471,064 $2,251,927 $2,185,399
========== ========== ==========
Liabilities & Shareholders' Equity
Deposits:
Noninterest-bearing $ 191,787 $ 190,739 190,264
Interest-bearing 1,856,197 1,672,327 1,645,877
---------- ---------- ----------
Total Deposits 2,047,984 1,863,066 1,836,141
Short-term borrowings 9,710 9,264 9,113
Federal Home Loan Bank advances 40,000 40,000 40,000
Accrued interest payable and other liabilities 71,227 47,964 39,017
---------- ---------- ----------
Total Liabilities 2,168,921 1,960,294 1,924,271
Shareholders' Equity
Common stock, surplus and retained earnings 257,080 246,357 236,063
Accumulated other comprehensive income 45,063 45,276 25,065
---------- ---------- ----------
Total Shareholders' Equity 302,143 291,633 261,128
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $2,471,064 $2,251,927 $2,185,399
========== ========== ==========
</TABLE>
See accompanying notes.
1
<PAGE> 4
CORUS BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- -------------------------
(thousands, except per share data) 1998 1997 1998 1997
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest and Dividend Income $ 45,756 $ 47,018 $ 90,490 $ 92,727
Interest Expense 21,191 20,531 41,689 40,815
------------- -------------- ------------- --------------
Net Interest Income 24,565 26,487 48,801 51,912
Provision for Loan Losses 3,000 4,000 6,000 8,000
------------- -------------- ------------- --------------
Net Interest Income after Provision
for Loan Losses 21,565 22,487 42,801 43,912
Noninterest Income:
Service charges on deposit accounts 2,147 2,191 4,219 4,487
Trust and investment management services 399 184 536 351
Gain on dispositions of student loans 1,522 3,278 3,298 6,283
Other income 552 538 985 770
Trading account losses, net (134) (105) (186) (194)
Securities and other financial
instruments gains, net 2,050 804 3,907 920
------------- -------------- ------------- --------------
Total noninterest income 6,536 6,891 12,759 12,617
Noninterest Expense:
Salaries and employee benefits 7,337 6,861 14,498 13,642
Net occupancy 945 1,033 1,949 2,052
Data processing 540 523 1,159 1,038
Goodwill amortization 435 764 824 1,532
Other expenses 3,459 3,559 6,699 7,346
------------- -------------- ------------- --------------
Total noninterest expense 12,716 12,740 25,129 25,610
------------- -------------- ------------- --------------
Income before income taxes 15,385 16,638 30,431 30,919
Income tax expense 5,223 5,848 10,367 10,826
------------- -------------- ------------- --------------
Net Income 10,162 10,790 20,064 20,093
Other comprehensive income, net of income taxes
Unrealized securities gains (4,348) 5,973 (213) 9,297
------------- -------------- ------------- --------------
Comprehensive Income $ 5,814 $ 16,763 $ 19,851 $ 29,390
============= ============== ============= ==============
Net Income per Common Share
Basic $ 0.70 $ 0.73 $ 1.38 $ 1.36
Diluted 0.69 0.72 1.36 1.34
Cash Dividends Declared Per Common Share $ 0.140 $ 0.135 $ 0.275 $ 0.260
============= ============== ============= ==============
Weighted Average Common and Common
Equivalent Shares Outstanding 14,778 14,971 14,798 14,986
============= ============== ============= ==============
</TABLE>
See accompanying notes.
2
<PAGE> 5
CORUS BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------
(thousands) 1998 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 20,064 $ 20,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 6,000 8,000
Depreciation and amortization 1,502 1,454
Accretion of investment and loan discounts (3,856) (6,969)
Goodwill amortization 824 1,532
Gain on dispositions of student loans (3,298) (6,283)
Securities and other financial instruments gains, net (12,305) (612)
Increase in accrued interest receivable and other assets (18,902) (1,380)
Increase in accrued interest payable and other liabilities 21,566 3,064
----------- -----------
Net cash provided by operating activities 11,595 18,899
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities held to maturity 1,154 1,125
Proceeds from maturities of available for sale securities 145,070 246,270
Proceeds from sales of available for sale securities 111,815 35,376
Purchases of available for sale securities (363,933) (299,978)
Purchases of loans (489) (343)
Net decrease in loans 60,472 53,257
Purchases of premises and equipment, net (3,524) (2,196)
Purchases of businesses (1,019) -
----------- -----------
Net cash provided by (used in) investing activities (50,454) 33,511
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit accounts 184,918 (64,538)
Increase in short-term borrowings 446 2,796
Retirements of common shares (5,339) -
Cash dividends paid on common shares (3,949) (3,705)
------------ ------------
Net cash provided by (used in) financing activities 176,076 (65,447)
------------ ------------
Net increase in cash and cash equivalents 137,217 (13,037)
Cash and cash equivalents at January 1 63,717 156,008
------------ ------------
Cash and cash equivalents at June 30 $ 200,934 $ 142,971
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 6
CORUS BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Balance Sheets and Statements of Income,
Comprehensive Income and Cash Flows are unaudited. The interim financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in CORUS
BANKSHARES, Inc.'s consolidated financial statements for the three years
ended December 31, 1997 included in CORUS' Annual Report and Form 10-K for
the year ended December 31, 1997. The results of operations for the
interim period should not be considered indicative of results to be
expected for the full year.
Certain reclassifications have been made in the 1997 financial statements
to conform to current accounting classifications.
2. Student Loan Investigation
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 (the
"Department") immediately upon discovery of the problem and the Department
commenced an investigation. The Department's investigation was expanded 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.
Shortly after notifying the Department of the problems in the student loan
servicing area, 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. A total of $13.5 million of loans subject
to the interim agreement were charged off against the allowance for loan
losses in 1996 and 1997. The ultimate collectibility of the loans is
uncertain.
Although certain employees of CORUS may have acted illegally or violated
Department policy or regulations, management is unable to predict what
actions, if any, the Department will take following the completion of its
investigation, and cannot estimate the magnitude of the violations or the
amount or range of any liability that CORUS will ultimately incur. As
such, management is unable to quantify either the amount of student loans
that may lose their government guarantee or the amount of loans that it may
be required to repurchase and, therefore, the effect such amounts and any
related penalties will have on CORUS' financial condition or results of
operations. No legal proceedings have been commenced against CORUS as a
result of the investigation.
If it is ultimately determined that CORUS acted illegally or violated
Department policy or regulations with respect to certain loans in a
significant number of instances or if a settlement is reached, 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. If the Department were to bring an action, and be successful in
proving violations of law related to the student loan program, potential
sanctions could include significant fines, recovery of treble amounts of
guarantee payments incorrectly received by CORUS and the suspension of
CORUS' continued participation in the student loan program.
CORUS does not condone or permit such improper practices and is cooperating
fully with the Department's investigation.
4
<PAGE> 7
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OPERATING RESULTS
For the three months ended June 30, 1998, net income was $10.2 million, or $0.69
per share on a diluted basis, a decline of 5.8% from net income of $10.8
million, or $0.72 per share on a diluted basis, for the same period in 1997. For
the six months ended June 30, 1998, net income was $20.1 million, unchanged from
the 1997 period.
Comprehensive income for the three months ended June 30, 1998 was $5.8 million
as compared to $16.8 million for the same period in 1997. For the six months
ended June 30, 1998, comprehensive income was $19.9 million as compared to $29.4
million for the 1997 period. The declines in comprehensive income are primarily
the result of lower unrealized gains on CORUS' bank stock portfolio in the 1998
periods.
Net Interest Income
The major source of earnings for CORUS is net interest income. 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 six month
period ended June 30, 1998. The yields and costs are adjusted for the accretion
and amortization of deferred fees. Interest income on nonaccrual loans is
reflected in the period that it is collected. Such amounts are not material to
net interest income or the net change in net interest income. Nonaccrual loans
are included in the average balances and do not have a material effect on the
average yield.
The following table represents a reconciliation of fully taxable equivalent net
interest income:
(thousands)
<TABLE>
<S> <C>
Fully taxable equivalent net interest income for the six months ended June 30,1997 $ 52,366
Change in interest and dividend income due to common stocks 427
Change due to average earning assets fluctuations (excluding common stocks) (338)
Change due to interest rate fluctuations other than student loan discount
accretion - earning assets excluding common stocks (1,632)
Change due to student loan discount accretion (532)
Change due to interest rate fluctuations - funding sources (1,152)
Change due to rate/volume fluctuations (excluding common stocks) 22
------------
Fully taxable equivalent net interest income for the six months ended June 30, 1998 $ 49,161
============
</TABLE>
The decline in the net interest margin in 1998 was partially due to lower
student loan discount accretion and an increase in the average balance of common
stock investments. During the three and six months ended June 30, 1998, CORUS
recognized $0.9 million and $2.0 million of interest income from the accretion
of acquisition discount related to several groups of purchased, previously
nonperforming student loan pools, compared with $1.1 million and $2.6 million
for the same periods of 1997. In addition, the net interest margin was
adversely affected in the quarter and six months ended June 30, 1998 by the
increase in the average balance of CORUS' bank stock portfolio.
5
<PAGE> 8
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------
Average Average
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Assets
Earning Assets:
Interest-bearing deposits with banks $ 26,999 $ 803 5.95% $ - $ - N/A
Federal funds sold 84,113 2,338 5.56% 115,985 3,146 5.42%
Taxable securities other than common stocks 301,196 8,633 5.73% 280,086 7,647 5.46%
Common stocks 166,615 1,695 2.03% 93,456 1,268 2.71%
Tax-advantaged securities (1) 3,650 140 7.67% 4,911 188 7.66%
Trading account securities 37,002 950 5.13% 19,279 527 5.47%
Loans, net of unearned discount (1) (2) (3) 1,555,689 76,291 9.81% 1,601,775 80,405 10.04%
---------------------------------- --------------------------------
Total earning assets 2,175,264 90,850 8.35% 2,115,492 93,181 8.81%
Noninterest-earning assets:
Cash and due from banks--noninterest bearing 59,327 62,687
Allowance for loan losses (32,178) (32,492)
Premises and equipment, net 31,953 29,209
Other assets, including goodwill 58,875 49,775
---------- ----------
Total assets $2,293,241 $2,224,671
========== ==========
Average Liabilities and Shareholders' Equity
Deposits -- interest-bearing:
NOW and money market deposits $ 999,811 $ 23,089 4.62% $1,037,476 $ 23,891 4.61%
Savings deposits 177,145 2,325 2.62% 192,213 2,497 2.60%
Time deposits 528,453 14,925 5.65% 475,857 12,960 5.45%
--------------------------------- -------------------------------
Total interest-bearing deposits 1,705,409 40,339 4.73% 1,705,546 39,348 4.61%
Short-term borrowings 5,579 208 7.46% 10,085 326 6.47%
Federal Home Loan Bank advances 40,000 1,142 5.71% 40,000 1,141 5.71%
--------------------------------- -------------------------------
Total interest-bearing liabilities 1,750,988 41,689 4.76% 1,755,631 40,815 4.65%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing deposits 192,807 189,238
Other liabilities 55,166 31,443
Shareholders' equity 294,280 248,359
---------- ----------
Total liabilities and shareholders' equity $2,293,241 $2,224,671
========== ==========
Interest income/average earning assets $2,175,264 $ 90,850 8.35% $2,115,492 $ 93,181 8.81%
Interest expense/average interest-bearing
liabilities 1,750,988 41,689 4.76% 1,755,631 40,815 4.65%
------------------ -----------------
Net interest spread $ 49,161 3.59% $ 52,366 4.16%
================== =================
Net interest margin 4.52% 4.95%
======= =======
</TABLE>
(1) Interest income on tax-advantaged loans and securities reflects a tax
equivalent adjustment based on a 35% income tax rate.
(2) Unremitted interest on nonaccrual loans is not included in the amounts.
(3) Includes net interest income derived from interest rate swap contracts.
6
<PAGE> 9
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The following table represents the impact these items had on net interest margin
for the three and six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
-----------------------------------------
<S> <C> <C> <C> <C>
Net interest margin 4.49% 5.05% 4.52% 4.95%
Impact of student loan discount accretion (0.17) (0.20) (0.18) (0.24)
-----------------------------------------
Net interest margin without student loan discount accretion 4.32 4.85 4.34 4.71
Impact of bank stock portfolio 0.19 0.09 0.19 0.09
-----------------------------------------
Net interest margin without student loan discount
accretion and bank stock portfolio 4.51% 4.94% 4.53% 4.80%
=========================================
</TABLE>
Noninterest Income
Noninterest income for the second quarter of 1998 declined $355,000 to $6.5
million, compared with $6.9 million in 1997. Gains on dispositions of student
loans declined $1.8 million to $1.5 million. These gains are the result of
payments made by guarantee agencies for student loan borrowers that defaulted.
Securities and other financial instruments gains increased $1.2 million to $2
million. These gains included $3.9 million of net gains from the sales of
certain bank stocks in CORUS' portfolio, offset by $1.9 million of losses
associated with derivative instruments entered into by CORUS to hedge the market
risk associated with the bank stock portfolio.
Noninterest income for the six months ended June 30, 1998 was $12.8 million, as
compared to $12.6 million for the 1997 period. Gains on dispositions of student
loans declined $3 million while securities and other financial instrument gains
increased by an equal amount. Securities and other financial instrument gains
included $12.3 million of net gains related to the sales of bank stocks in
CORUS' portfolio, offset partially by $8.4 million of losses associated with the
derivative instruments mentioned above.
On March 31, 1998, CORUS purchased the assets of two investment management
companies. CORUS' assets under management more than tripled as a result of the
purchases. The increase in trust and management services income for the second
quarter and six months ended June 30, 1998 is attributable to fees earned from
the additional assets under management. The purchases resulted in additional
goodwill of $2.8 million being recorded, which will be amortized over 15 years.
Noninterest Expense
Noninterest expense for the second quarter of 1998 was $12.7 million, unchanged
from the 1997 period. An increase in salaries and benefits expense of $476,000
was partially offset by a decline in goodwill amortization of $329,000 and a
decline in other expenses of $100,000.
Noninterest expense for the six months ended June 30, 1998 was $25.1 million,
$481,000 less than the 1997 period. An increase in salaries and employee
benefits expense of $856,000 was partially offset by a decline in goodwill
amortization of $708,000. Other expenses declined $647,000 including a decline
in advertising expenses of $396,000 due to reduced advertising for the Ultimate
Money Market product.
7
<PAGE> 10
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The effective income tax rate for the second quarter of 1998 was 33.9% versus
35.1% in 1997. For the six months ended June 30, 1998 and 1997, the effective
income tax rates were 34.1% and 35%, respectively. The decline in the effective
income tax rates was primarily due to lower goodwill amortization in the 1998
periods.
FINANCIAL CONDITION
Earning Assets
The following table details the composition of CORUS' earning assets:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
--------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial real estate:
Mortgage $ 539,760 23% $ 554,545 26% $ 585,427 28%
Construction 166,285 7 156,950 7 87,486 4
Student 422,704 18 412,926 19 404,828 20
Residential first mortgage 171,651 7 209,669 10 251,744 12
Home equity 105,931 5 131,868 6 162,293 8
Commercial 51,138 2 55,062 3 48,557 2
Medical finance 23,543 1 21,440 1 20,694 1
Consumer 2,697 - 3,515 - 5,136 -
----------------- ------------------- ------------------
Total loans 1,483,709 63 1,545,975 72 1,566,165 75
Securities other than common stocks 489,353 21 382,482 18 318,070 15
Common stocks 171,519 8 158,660 8 108,735 5
Federal funds sold 164,900 7 21,500 1 90,400 5
Interest-bearing deposits with banks 27,000 1 26,999 1 - -
----------------- ------------------- ------------------
Total $2,336,481 100% $2,135,616 100% $2,083,370 100%
================= =================== ==================
</TABLE>
Loans
Total loans at June 30, 1998 were $1.48 billion, a decline of $62.3 million, or
4%, from December 31, 1997. Commercial real estate mortgage loans declined
$14.8 million, or 2.7%, from December 31, 1997. Commercial real estate
construction loans increased $9.3 million, or 5.9%, from December 31, 1997. At
June 30, 1998, unfunded construction loan commitments totaled $144.1 million. In
addition, $95.1 million of commitments for commercial mortgage and construction
loans were pending.
8
<PAGE> 11
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The composition of the commercial real estate loan portfolio by type of
collateral securing the loan was as follows at June 30, 1998 (in thousands):
Rental apartments $ 174,969
Nursing homes 134,644
Hotel/Motel 104,716
Retail 85,640
Industrial 66,595
Condo/Loft conversion and other residential for sale 48,698
Office 48,945
Other 41,838
----------
Total $ 706,045
==========
Student loans increased $9.8 million, or 2.4%, from December 31, 1997. Please
refer to the Legislative Developments section elsewhere in this document for
information relating to the changes in interest rates earned on student loans
originated after June 30, 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
these 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.
The total discount to be accreted into income in future periods totaled $10.2
million at June 30, 1998.
At June 30, 1998 residential first mortgage and home equity loans declined $38.0
and $25.9 million, or 18.1% and 19.7%, respectively, compared with December 31,
1997.
Securities Other Than Common Stocks
At June 30, 1998 total securities other than common stocks were $489.4 million,
an increase of $106.9 million, or 27.9%, compared with $382.5 million at
December 31, 1997.
Common Stocks
At June 30, 1998 investments in common stocks were $171.5 million, an increase
of $12.8 million, or 8.1%, compared with $158.7 million at December 31, 1997.
9
<PAGE> 12
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
At June 30, 1998, CORUS held investments in 43 equity securities of
publicly-traded bank holding companies with total unrealized gains of $69.3
million, which were included in the available for sale securities
classification. At June 30, 1998, the holdings by market capitalization were
as follows:
<TABLE>
<CAPTION>
Percentage of
Market Capitalization (dollars in thousands): Amount of Holdings Portfolio
--------------------------------------------
<S> <C> <C>
Over $10 billion $87,554 51%
Between $5 and $10 billion 26,829 16
Between $1 and $5 billion 29,575 17
Between $500 million and $1 billion 13,813 8
Under $500 million 13,748 8
------------------ -----------------
Total $171,519 100%
================== =================
</TABLE>
Nonperforming Assets
The following table presents a summary of nonperforming assets' book value.
Nonperforming loans are nonaccrual loans, restructured loans and 90 days or
more past due loans still accruing interest.
<TABLE>
<CAPTION>
(thousands) June 30 December 31 June 30
1998 1997 1997
-------- ----------- -------
<S> <C> <C> <C>
Nonperforming loans:
Residential first mortgage $ 16,842 $ 17,451 $ 22,460
Commercial real estate 4,991 4,678 5,444
Commercial 31 80 10
Home equity 2,249 3,706 3,611
Student 329 453 975
Medical finance 956 684 663
Consumer 149 119 217
-------- --------- --------
Total nonperforming loans 25,547 27,171 33,380
Other real estate owned 5,663 5,673 3,881
-------- --------- --------
Total nonperforming assets $ 31,210 $ 32,844 $ 37,261
======== ========= ========
Nonaccrual loans included in
non-performing loans above $ 7,854 $ 8,641 $ 9,686
======== ========= ========
Nonperforming loans/Total loans 1.72% 1.76% 2.13%
Nonperforming assets/Total assets 1.26% 1.46% 1.70%
Allowance for loan losses/
nonperforming loans 133.93% 112.84% 83.13%
</TABLE>
10
<PAGE> 13
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Nonperforming residential first mortgage loans are secured by first mortgages on
primarily owner-occupied, residential property. At June 30, 1998, other real
estate owned was comprised of three commercial real estate properties with
aggregate book values of $399,000 and forty-five residential properties with
aggregate book values of $5.3 million. During the second quarter of 1998
nineteen residential properties with a carrying value of $2.9 million were sold
for a net gain of $275,000. These gains were partially offset by writedowns of
properties not sold. For the second quarter of 1998, writedowns of residential
real estate properties not yet sold totaled $98,000.
Excluded from the preceding table are student loans that CORUS has no reason to
believe have lost their guarantee. Guaranteed student loans more than 90 days
past due and not included in the table totaled $15.4, $14.1 and $12.4 million at
June 30, 1998, December 31, 1997 and June 30, 1997, respectively.
Allowance for Loan Losses
The allowance for loan losses is based on management's analysis of individual
loans, prior loss experience, overall growth in the portfolio, delinquency
levels, current economic conditions and other factors. A reconciliation of the
activity in CORUS' allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------
(thousands) 1998 1997 1998 1997
-----------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 32,056 $ 30,329 $ 30,660 $ 32,668
Provision for loan losses 3,000 4,000 6,000 8,000
Less charge-offs:
Commercial real estate loans -- 207 -- 349
Student loans 10 4,017 117 8,056
Residential first mortgage loans 60 106 163 240
Home equity loans 1,354 2,393 3,218 4,601
Commercial loans 1 1 1 16
Consumer loans -- 73 -- 73
------------------------------------------------
Total charge-offs 1,425 6,797 3,499 13,335
------------------------------------------------
Add recoveries:
Commercial real estate loans 10 31 106 57
Student loans 86 -- 99 --
Residential first mortgage loans -- -- -- --
Home equity loans 470 141 808 303
Commercial loans -- 9 -- 10
Consumer loans 17 37 40 47
------------------------------------------------
Total recoveries 583 218 1,053 417
------------------------------------------------
Net charge-offs (842) (6,579) (2,446) (12,918)
------------------------------------------------
Balance at June 30 $ 34,214 $ 27,750 $ 34,214 $ 27,750
================================================
Loans at June 30 $1,483,709 $1,566,165 $1,483,709 $1,566,165
================================================
Allowance as a percentage of loans 2.31% 1.77% 2.31% 1.77%
================================================
</TABLE>
11
<PAGE> 14
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Home equity loans that were originated at up to 100% of the underlying
property's value, Ultimate Home Equity loans, are charged off when they become
120 days past due. For the quarter and six months ended June 30, 1998, these
loans represented $900,000 and $2.4 million of the home equity net charge-offs.
Ultimate Home Equity loan net charge-offs for the three and six months ended
June 30, 1997 were $4.2 million and $2.2 million, respectively. Management
anticipates that there will continue to be significant net charge-offs of
Ultimate Home Equity loans during the remainder of 1998, although at lower
levels than experienced in 1997. At June 30, 1998, Ultimate Home Equity loans
totaled $68.5 million. Of this total, $917,000 was classified as nonperforming
loans. The following represents an aging schedule of Ultimate Home Equity loans
at June 30, 1998 (in thousands):
Current $ 64,372
30 to 59 days past due 2,093
60 to 89 days past due 1,086
90 to 119 days past due 917
---------
Total $ 68,468
=========
During 1996 the origination of residential first mortgage and home equity loans
was suspended to allow management to monitor the delinquency experience,
collection efforts and charge-off experience related to the loans in the
portfolio at that time. Since that time, the amount of residential first
mortgage and home equity loan originations has been minimal.
At June 30, 1998 the allowance for loan losses as a percentage of total loans
increased to 2.31% of total loans from 1.98% of total loans at December 31,
1997. In addition, the allowance as a percentage of nonperforming loans
increased to 133.93%, compared with 112.84% at December 31, 1997. Management
believes that the level of the allowance for loan losses was adequate at June
30, 1998.
Student Loan Investigation
Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements on
page 4 for further information.
Liabilities
The following table details the composition of deposit products by type:
June 30 December 31 June 30
1998 1997 1997
---------- -------------- ----------
Demand 9% 10% 10%
Savings 9 10 10
NOW 4 5 5
Money Market 44 48 51
Certificates of Deposit 34 27 24
---------- -------------- ----------
Total 100% 100% 100%
========== ============= ==========
At June 30, 1998, December 31, 1997 and June 30, 1997, CORUS had retail
certificates of deposit obtained from brokers of $379.9, $260.4 and $180.1
million, respectively.
12
<PAGE> 15
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Capital
CORUS' consolidated leverage ratio (Tier 1 capital/total average quarterly
assets) was 10.9% at June 30, 1998, well in excess of the minimum regulatory
level of 5%. The consolidated Tier 1 and total risk-based capital ratios were
15.6% and 16.9%, respectively, exceeding the minimum well-capitalized Tier 1 and
total risk-based capital ratios of 6.00% and 10.00%, respectively.
During the first three months of 1998, CORUS repurchased and retired 130,300
shares at an average price of $40.98 per share. No shares were repurchased
during the second quarter of 1998. A total of 269,100 shares have been
repurchased under the 750,000 common share repurchase program approved by the
Board of Directors in 1997. This program provides a means to return some of
CORUS' excess capital to all shareholders.
Operating, Investing and Financing Activities
Net cash provided by operating activities totaled $11.6 million for the first
six months of 1998, compared with $18.9 million of net cash provided by
operating activities for the same period in 1997. The decline was primarily the
result of increased securities and other financial instruments gains, net as
well as lower gains on dispositions of student loans.
Net cash used in investing activities totaled $50.5 million for the first six
months of 1998, compared with $33.5 million of net cash provided by investing
activities in 1997. The increase was due primarily to purchases of available
for sale securities.
Net cash provided by financing activities totaled $176.1 million for the first
six months of 1998, compared with $65.4 million of net cash used in financing
activities in 1997. This change was primarily attributable to an increase in
the balances of retail certificate of deposit accounts obtained from brokers.
LEGISLATIVE DEVELOPMENTS
Provisions of the Higher Education Act (the "Act") adopted in 1993 included
increased costs and reduced interest payments to lenders participating in the
Federal Family Education Loan ("FFEL") program and the introduction of a
competitor program, the Federal Direct Student Loan program. Specifically,
those provisions would have changed the interest rate on most new FFEL program
disbursements made on or after July 1, 1998 to the 10-year Treasury Bill plus
1%, adjusting annually.
Significant concerns about the provisions were raised by both student lenders
and by the higher education community. In response to those concerns, President
Clinton and Congress agreed on temporary revised interest rate provisions for
student loans originated from July 1, 1998 through September 30, 1998. The
legislation provided for borrower-paid interest rates based on the 91-day
Treasury Bill, plus 1.7% during in-school periods and plus 2.3% during
repayment. The legislation also provided for lender returns based on the 91-day
Treasury bill, plus 2.2% during in-school periods and plus 2.8% during
repayment.
The revised provisions resulted in an interest rate reduction of 0.8% for
student loan borrowers with lenders bearing 0.3% of the reduction and the
Federal government providing a subsidy for the remaining 0.5%.
13
<PAGE> 16
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
In May 1998 the House overwhelmingly (414-4) approved legislation making the
temporary interest rate provisions permanent. In July 1998 the Senate also
overwhelmingly (96-1) approved nearly identical legislation. President Clinton
has not yet signed the legislation. By virtue of the margins of passage,
Congress would appear, however, to have the ability to override a presidential
veto.
The interest rate reductions passed by Congress are regrettable and will result
in a lower yield on the Company's future student loan originations.
Nevertheless, management believes that the revised interest rate provisions
provide an acceptable rate of return and CORUS intends to continue to
aggressively solicit applications for student loans, barring any adverse changes
in the approved legislation.
ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. CORUS
may also implement the Statement as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter).
Statement 133 cannot be applied retroactively. Statement 133 must be applied to
(a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantively modified after
December 31, 1997 (and, at CORUS' election, those issued or acquired before
January 1, 1998).
CORUS has not yet quantified the impacts of adopting Statement 133 on its
financial statements and has not determined the timing of or method of its
adoption of Statement 133. However, the Statement could increase volatility in
earnings and other comprehensive income.
YEAR 2000 MATTERS
CORUS is highly dependent upon computer-based systems for processing related to
all of its lines of business, including loan, deposit and trust and investment
management accounts. CORUS outsources all of its significant data processing
applications. Many computer systems currently process transactions based on two
rather than four digits representing the year of the transaction. As such, "00"
is currently recognized as the Year 1900 rather than the Year 2000.
Management has communicated with its data processing vendors, other third party
vendors and suppliers and major borrowing customers to ascertain their efforts
with respect to Year 2000 readiness. With respect to CORUS major data
processing vendors, those that process its loan and deposit accounts, initial
Year 2000 code changes and related testing and verification processes will occur
in either the latter part of the third quarter or the fourth quarter of 1998.
It is currently anticipated that these systems will be fully Year 2000 compliant
by the end of 1998 or in early 1999.
Management does not currently anticipate that Year 2000 compliance will have a
material impact on CORUS' results of operations, financial condition or cash
flows.
14
<PAGE> 17
ITEM 2. - CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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 charge-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 that took 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.
15
<PAGE> 18
CORUS BANKSHARES, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Shareholders was held on May 20, 1998.
(c) At the Annual Meeting of Shareholders the following matters were
submitted to a vote of the shareholders:
(1) The election of seven directors to the Board of Directors to serve
until the next annual meeting of shareholders or until their
successors are elected and take office:
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
--------------------- ---------- --------------
<S> <C> <C>
Joseph C. Glickman 13,195,984 18,979
Robert J. Glickman 13,198,084 16,879
Steven D. Fifield 13,174,231 40,732
Karl H. Horn 13,176,581 38,382
Michael Levitt 13,195,134 19,829
Rodney D. Lubeznik 13,177,631 37,332
Michael Tang 12,254,193 960,770
William H. Wendt, III 13,196,134 18,829
</TABLE>
(2) The ratification of the appointment of Arthur Andersen LLP as
CORUS' independent accountants for the 1998 fiscal year:
Votes For Votes Against Abstentions
---------- ------------- -----------
13,206,113 6,950 1,900
(3) The ratification of the CORUS Bank, N.A. bonus program for
commercial loan officers:
Votes For Votes Against Abstentions
---------- ------------- -----------
13,071,482 82,087 61,394
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 11 - Computation of Net Income per Common Share is on page
18.
(b) Reports on Form 8-K.
None.
16
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORUS BANKSHARES, INC.
(Registrant)
August 10, 1998 By: /s/ Timothy H. Taylor
-------------------------
Timothy H. Taylor
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer and duly authorized
Officer of Registrant)
17
<PAGE> 1
EXHIBIT 11 - CORUS BANKSHARES, INC.
COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Six Months Ended
June 30
(thousands, except per share amounts) 1998 1997
----------- ----------
<S> <C> <C>
Denominator for basic earnings per share - average
common shares outstanding 14,573 14,820
Dilutive common stock options 225 166
----------- ----------
Denominator for diluted earnings per share 14,798 14,986
=========== ==========
Numerator: Net income attributable to common shares $20,064 $20,093
=========== ==========
Net income per share:
Basic $1.38 $1.36
Diluted 1.36 1.34
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 56,034
<INT-BEARING-DEPOSITS> 27,000
<FED-FUNDS-SOLD> 164,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 652,783
<INVESTMENTS-CARRYING> 8,089
<INVESTMENTS-MARKET> 0
<LOANS> 1,483,709
<ALLOWANCE> 34,214
<TOTAL-ASSETS> 2,471,064
<DEPOSITS> 2,047,984
<SHORT-TERM> 9,710
<LIABILITIES-OTHER> 71,227
<LONG-TERM> 40,000
0
0
<COMMON> 728
<OTHER-SE> 301,415
<TOTAL-LIABILITIES-AND-EQUITY> 2,471,064
<INTEREST-LOAN> 75,980
<INTEREST-INVEST> 11,369
<INTEREST-OTHER> 3,141
<INTEREST-TOTAL> 90,490
<INTEREST-DEPOSIT> 40,339
<INTEREST-EXPENSE> 41,689
<INTEREST-INCOME-NET> 48,801
<LOAN-LOSSES> 6,000
<SECURITIES-GAINS> 3,907
<EXPENSE-OTHER> 25,129
<INCOME-PRETAX> 30,431
<INCOME-PRE-EXTRAORDINARY> 30,431
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,064
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 4.52
<LOANS-NON> 7,854
<LOANS-PAST> 17,648
<LOANS-TROUBLED> 45
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 30,660
<CHARGE-OFFS> 3,499
<RECOVERIES> 1,053
<ALLOWANCE-CLOSE> 34,214
<ALLOWANCE-DOMESTIC> 34,214
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
