<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
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, 1998
COMMISSION FILE NUMBER 0-6136
CORUS BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA
(State of incorporation of organization)
3959 N. LINCOLN AVE., CHICAGO, ILLINOIS
(Address of principal executive offices)
41-0823592
(I.R.S. Employer Identification No.)
60613-2431
(Zip Code)
(773) 832-3088
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS
Common stock, par value $0.05 per share
NAME OF EXCHANGE ON WHICH REGISTERED
NASDAQ
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 1998 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, 1999, for its Annual
Meeting of Shareholders to be held on April 28, 1999.
On February 28, 1999, the Registrant had 14,519,890 common shares
outstanding. Of these, 7,284,555 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, 1999) of approximately $239.5 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.
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<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 eleven 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 and investment management services; safe deposit boxes and a variety of
additional services. The bank also provides clearing, depository and credit
services to more than 550 currency exchanges in the Chicago area and an
additional 20 in Milwaukee, Wisconsin.
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, 1998, Corus employed a total of 674 full-time equivalent
persons, consisting of 138 executives, management and supervisory personnel and
536 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.
1
<PAGE> 3
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 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 1999 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
2
<PAGE> 4
(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 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, 1998, Corus'
Tier 1 capital and total risk-based capital ratios were 15.0% and 18.1%,
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, 1998, Corus' leverage ratio was 10.3%.
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 1998 Annual Report to Shareholders (1998 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, 1998
----------------------------------
VOLUME RATE TOTAL
------ ---- -----
(THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Interest-earning deposits with banks......... $ 972 $ (2) $ 970
Federal funds sold........................... (839) (49) (888)
Taxable securities other than common
stocks.................................... 9,311 (325) 8,986
Common stocks................................ 1,614 (311) 1,303
Tax-advantaged securities.................... (105) (12) (117)
Trading account securities................... 334 (42) 292
Loans, net of discount....................... (4,410) (2,449) (6,859)
------- ------- --------
Net Increase (Decrease)................... 6,877 (3,190) 3,687
------- ------- --------
Interest Expense:
NOW and money market deposits................ (1,133) (1,761) (2,894)
Savings deposits............................. (365) 38 (327)
Time deposits................................ 9,807 341 10,148
Short-term borrowings........................ (190) (49) (239)
Federal Home Loan Bank advances.............. -- (44) (44)
------- ------- --------
Net Increase (Decrease)................... 8,119 (1,475) 6,644
------- ------- --------
Decrease in Net Interest Income................. $(1,242) $(1,714) $ (2,957)
======= ======= ========
YEAR ENDED DECEMBER 31, 1997
----------------------------------
VOLUME RATE TOTAL
------- ------- --------
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>
4
<PAGE> 6
The tax-equivalent adjustment for interest income on tax-advantaged loans
and securities is reflected through the rate column based on a marginal
corporate income tax rate of 35%. Volume variances are computed using the change
in volume multiplied by the previous year's rate. Rate variances are computed
using the changes in rate multiplied by the previous year's volume. The change
in interest due to both rate and volume has been allocated between the factors
in proportion to the relationship of the absolute dollar amounts of the change
in each.
SECURITIES PORTFOLIO
Carrying Value of Securities by Category
The carrying value of securities held by Corus were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1998 1997 1996
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Available for sale
U.S. Government and agencies............. $529,374 $191,236 $183,404
Corporate debt securities................ 30,173 161,454 95,001
Common stocks............................ 185,698 158,660 92,611
Other.................................... 152,423 20,513 8,013
-------- -------- --------
Total................................. 897,668 $531,863 $379,029
======== ======== ========
Held to maturity
State and municipal...................... $ 2,168 $ 4,150 $ 5,201
Other.................................... 4,442 5,129 6,053
-------- -------- --------
Total................................. $ 6,610 $ 9,279 $ 11,254
======== ======== ========
</TABLE>
Maturities of Securities
The scheduled maturities by security type as of December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
FROM FROM
ONE FIVE NOT DUE AT
ONE YEAR THROUGH THROUGH AFTER A SINGLE
OR LESS FIVE YEARS TEN YEARS TEN YEARS MATURITY TOTAL
-------- ---------- --------- --------- ---------- -----
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agencies.............. $529,374 $ -- $ -- $ -- $ -- $529,374
Corporate debt
securities............ 15,302 14,871 -- -- -- 30,173
State and municipal...... 350 646 672 500 -- 2,168
Common stocks............ -- -- -- -- 185,698 185,698
Other.................... -- 15 12,740 124,047 20,063 156,865
-------- ------- ------- -------- -------- --------
Total........... $545,026 $15,532 $13,412 $124,547 $205,761 $904,278
======== ======= ======= ======== ======== ========
</TABLE>
5
<PAGE> 7
The weighted-average yield for each range of maturities of securities at
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
FROM FROM
ONE FIVE NOT DUE AT
ONE YEAR THROUGH THROUGH AFTER A SINGLE
OR LESS FIVE YEARS TEN YEARS TEN YEARS MATURITY TOTAL
-------- ---------- --------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and agencies... 5.03% --% --% --% --% 5.03%
Corporate debt securities...... 6.14 6.09 -- -- -- 6.12
State and municipal............ 10.55 9.29 7.46 9.37 -- 8.94
Common stocks.................. -- -- -- -- 2.97 2.97
Other.......................... -- 5.50 6.00 5.63 6.81 5.81
</TABLE>
Actual maturities may differ from those scheduled due to prepayments from
issuers. Common stock yields are not considered meaningful for purposes of this
analysis. Yields on tax-advantaged securities reflect a tax equivalent
adjustment based on a marginal corporate tax rate of 35%.
LOAN PORTFOLIO
Classification of Loans
Corus' loans were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial real
estate............... $ 761,564 $ 711,495 $ 655,793 $ 582,331 $ 354,893
Student................. 431,304 412,926 402,859 379,129 354,073
Residential first
mortgage............. 137,683 209,669 286,042 317,787 233,437
Commercial.............. 108,759 55,062 61,852 78,469 68,620
Home equity............. 85,408 131,868 188,755 170,793 57,093
Consumer................ 26,869 24,955 27,844 30,273 32,393
---------- ---------- ---------- ---------- ----------
Total.......... $1,551,587 $1,545,975 $1,623,145 $1,558,782 $1,100,509
========== ========== ========== ========== ==========
</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, 1998:
<TABLE>
<CAPTION>
FROM
ONE YEAR ONE TO AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
(THOUSANDS)
<S> <C> <C> <C> <C>
Commercial real estate................. $241,721 $385,171 $134,672 $761,564
Commercial............................. 70,646 35,622 2,491 108,759
</TABLE>
Of the loans maturing after one year, $269.8 million have fixed rates. To
manage the interest rate exposure of specific, fixed-rate commercial real estate
loans and other loans,
6
<PAGE> 8
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 41 through 43 of the 1998 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
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans...................... $5,307 $8,641 $7,427 $8,536 $2,389
Nonaccrual loans to total loans....... 0.34% 0.56% 0.46% 0.55% 0.22%
</TABLE>
Interest income that should have been recorded under the original terms of
these loans totaled $405,000 for the year ended December 31, 1998. Total
interest income recorded for these loans in 1998 was $229,000.
Loans past due 90 days or more, including nonaccrual loans, were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more... $34,877 $41,248 $50,368 $32,714 $20,620
Less guaranteed student loans.... 17,543 14,077 15,163 13,913 13,252
------- ------- ------- ------- -------
Net loans past due 90 days or
more.......................... $17,334 $27,171 $35,205 $18,801 $ 7,368
======= ======= ======= ======= =======
Net loans past due 90 days or
more as a percentage of
total loans................ 1.12% 1.76% 2.17% 1.21% 0.67%
</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, 1998, the principal amount of these loans was $8.5 million. This
amount generally includes loans that were classified for regulatory purposes.
7
<PAGE> 9
Analysis of the Allowance for Loan Losses
The activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year...... $30,660 $32,668 $25,640 $20,157 $19,552
Provision for loan losses......... 10,000 16,000 16,000 5,779 --
Less charge-offs:
Commercial real estate loans... 18 350 206 284 65
Student loans.................. 1,240 9,707 4,605 81 45
Residential first mortgage
loans....................... 414 431 1 4 20
Home equity loans.............. 5,171 8,454 6,421 28 --
Commercial loans............... 2 22 92 269 35
Consumer loans................. 7 131 16 153 148
------- ------- ------- ------- -------
Total charge-offs........... 6,852 19,095 11,341 819 313
------- ------- ------- ------- -------
Add recoveries:
Commercial real estate loans... 166 195 1,026 44 210
Student loans.................. 143 24 80 105 100
Residential first mortgage
loans....................... -- 3 -- 5 5
Home equity loans.............. 1,553 745 375 -- --
Commercial loans............... 9 19 770 69 303
Consumer loans................. 94 101 118 300 300
------- ------- ------- ------- -------
Total recoveries............ 1,965 1,087 2,369 523 918
------- ------- ------- ------- -------
Net (charge-offs) recoveries...... (4,887) (18,008) (8,972) (296) 605
------- ------- ------- ------- -------
Balance at end of year............ $35,773 $30,660 $32,668 $25,640 $20,157
Net (charge-offs)/recoveries to
average loans Outstanding...... (0.32%) (1.15%) (0.56%) (0.02%) 0.06%
</TABLE>
Allocation of the Allowance for Loan Losses
The allocation of the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial real estate........ $12,971 $ 2,814 $ 2,575 $ 2,934 $ 5,801
Student....................... 2,782 2,658 3,608 11,489 1,202
Residential first mortgage.... 459 784 1,034 1,327 2,451
Home equity................... 10,070 16,180 21,460 1,000 827
Commercial.................... 269 29 45 445 1,368
Consumer...................... 169 306 643 476 291
Unallocated................... 9,053 7,889 3,303 7,969 8,217
------- ------- ------- ------- -------
Total......................... $35,773 $30,660 $32,668 $25,640 $20,157
======= ======= ======= ======= =======
</TABLE>
8
<PAGE> 10
The increase in the allocation of the allowance for loan losses from 1997
to 1998 for commercial real estate loans reflects various factors, among them:
(i) commercial real estate construction loans increased to $228 million at
December 31, 1998 from $157 million at December 31, 1997 (refer to page 24 of
the 1998 Annual Report); (ii) unused commitments under existing commercial real
estate lines of credit increased to $243 million at December 31, 1998 from $154
million at December 31, 1997 (refer to page 42 of the 1998 Annual Report); and
(iii) commitment letters outstanding on commercial real estate loans increased
to $373 million at December 31, 1998 from $228 million at December 31, 1997
(refer to page 42 of the 1998 Annual Report).
Loan Portfolio Composition
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial real estate........................ 49% 46% 40% 38% 33%
Student....................................... 28 27 25 24 32
Residential first mortgage.................... 9 14 18 20 21
Home equity................................... 7 8 11 11 5
Commercial.................................... 5 3 4 5 6
Consumer...................................... 2 2 2 2 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 26 through 27 of Management's Discussion and
Analysis of Financial Statements of the 1998 Annual Report, incorporated herein
by reference in response to Item 7 hereof.
DEPOSITS
The scheduled maturities of time deposits in denominations of $100,000 and
greater was as follows at December 31, 1998:
<TABLE>
<CAPTION>
(THOUSANDS)
<S> <C>
Maturing within 3 months.............................. $ 69,508
After 3 but within 6 months........................... 82,572
After 6 but within 12 months.......................... 142,296
After 12 months....................................... 215,918
--------
Total.............................................. $510,294
========
</TABLE>
9
<PAGE> 11
RETURN ON EQUITY AND ASSETS
The following table presents certain ratios relating to Corus' equity and
assets:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return on average total assets........................ 1.7% 1.8% 2.0%
Return on average common shareholders' equity......... 13.7 14.9 20.4
Dividend payout ratio................................. 19.8 19.5 15.4
Average equity to average total assets................ 12.2 11.8 9.9
</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 nine of the eleven 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 possibly for 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. The Department's
investigation expanded in 1995 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 $14.5 million of loans subject to the interim
agreement were charged-off against the allowance for loan losses since 1996. The
ultimate collectibility of these 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 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
10
<PAGE> 12
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.
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 50 of the 1998 Annual Report, incorporated herein by reference in response
to Item 5 hereof.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of February 28, 1999, there were 443 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.
DIVIDENDS ON COMMON STOCK
Quarterly cash dividends per common share for the last two years are
included on page 50 of the 1998 Annual Report, incorporated herein by reference
in response to Item 5 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.
11
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
Refer to page 50 of the 1998 Annual Report, incorporated herein by
reference for additional selected financial data.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income............ $ 187,525 $ 183,932 $ 190,950 $ 171,114 $ 114,541
Interest expense........... 89,305 82,661 79,611 72,597 45,748
---------- ---------- ---------- ---------- ----------
Net interest income........ 98,220 101,271 111,339 98,517 68,793
Provision for loan
losses.................. 10,000 16,000 16,000 5,779 --
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan
losses.................. 88,220 85,271 95,339 92,738 68,793
Noninterest income,
excluding securities
gains (losses).......... 20,747 22,032 19,436 15,443 12,572
Securities gains (losses),
net..................... 4,919 4,881 3,316 (1,332) 663
Noninterest expense........ 51,889 51,677 50,181 51,650 45,222
Income tax expense......... 21,369 21,136 24,005 19,429 12,790
---------- ---------- ---------- ---------- ----------
Net income available to
common shareholders..... 40,628 39,371 43,905 35,770 24,016
========== ========== ========== ========== ==========
Net income per share:
Basic................... $ 2.79 $ 2.66 $ 2.96 $ 2.36 $ 1.58
Diluted................. 2.75 2.63 2.93 2.35 1.57
========== ========== ========== ========== ==========
Cash dividends declared per
common share............ $ 0.555 $ 0.530 $ 0.480 $ 0.360 $ 0.300
========== ========== ========== ========== ==========
Assets..................... $2,589,415 $2,251,927 $2,218,528 $2,125,092 $1,889,445
========== ========== ========== ========== ==========
</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 31 of the 1998 Annual
Report is incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the caption "Risk Management" on pages 27
through 29 of the 1998 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 32 through 50 of the 1998 Annual Report
are incorporated herein by reference.
12
<PAGE> 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 12, 1997, the Audit Committee and Board of Directors of 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 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 year 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 year 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. KPMG'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.
13
<PAGE> 15
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 4 of the 1999 Proxy
Statement. For both those executive officers listed in the Proxy as well as the
other executive officers of the Company (Senior Vice President title and
greater) not listed in the Proxy, the following is a table providing the
executive officer's name, age, position(s) held with the Company and
Subsidiaries and the date the officer assumed their present office(s).
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
POSITION(S) AND OFFICE(S) HELD WITH ASSUMED
NAME AGE THE COMPANY AND SUBSIDIARIES PRESENT OFFICE(S)
---- --- ----------------------------------- -----------------
<S> <C> <C> <C>
J.C. Glickman......... 83 Chairman of the Board of the
Company June 1, 1984
Robert J. Glickman.... 52 President and Chief Executive of
the Company and Corus Bank, N.A. June 1, 1984
David H. Johnson,
III................ 44 Executive Vice President of the
Company and Chief Operating Officer
of Corus Bank, N.A. June 10, 1996
Michael G. Stein...... 38 Executive Vice President of Corus
Bank, N.A. February 19, 1996
Timothy H. Taylor..... 34 Executive Vice President and Chief
Financial Officer of the Company
and Corus Bank, N.A. December 1, 1998
Randy P. Curtis....... 40 Senior Vice President of Corus Bank
N.A. April 30, 1997
Christopher Glancy.... 45 Senior Vice President of Corus
Bank, N.A. November 15, 1995
Terrence W. Keenan.... 53 Senior Vice President of Corus
Bank, N.A. September 16, 1996
Richard J. Koretz..... 35 Senior Vice President of Corus
Bank, N.A. November 15, 1995
Joel C. Solomon....... 44 Senior Vice President of Corus
Bank, N.A. August 29, 1997
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
to the material under the caption "Executive Compensation" on pages 10 through
18 of the 1999 Proxy Statement.
14
<PAGE> 16
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 4, respectively, of the
1999 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 20 of the 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits to Consolidated Financial Statements:
<TABLE>
<CAPTION>
INDEX PAGES
----- -----
<S> <C>
Consolidated Balance Sheets............................... 32
Consolidated Statements of Income......................... 33
Consolidated Statements of Changes of Shareholders'
Equity................................................. 34
Consolidated Statements of Cash Flows..................... 35
Notes to Consolidated Financial Statements................ 36-50
Report of Independent Public Accountants.................. 51
</TABLE>
(b) Reports on Form 8-K:
None.
(c) Exhibit: See exhibit filed herewith
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<S> <C>
(3a) Amended and Restated Articles of Incorporation is
incorporated herein by reference to Exhibit 4.1 to the Form
S-8 filing dated May 22, 1998;
(3b) By-Laws are incorporated herein by reference to Exhibit 4.2
to the Form S-8 filing dated May 22, 1998;
(10) Commercial Loan Officers Bonus Program is incorporated
herein by reference to Form S-8 filing dated May 22, 1998;
(13) The portions of Registrant's 1998 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,
1998; and
(16) Letter regarding change in certifying accountant
incorporated by reference to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996.
</TABLE>
16
<PAGE> 18
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.
/s/ TIMOTHY H. TAYLOR
--------------------------------------
Timothy H. Taylor
Executive Vice President &
Chief Financial Officer
April 30, 1999
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>
<C> <S> <C>
/s/ JOSEPH C. GLICKMAN Chairman of the Board of April 30, 1999
- ------------------------------------------------ Directors
Joseph C. Glickman
/s/ ROBERT J. GLICKMAN President, Chief Executive April 30, 1999
- ------------------------------------------------ Officer & Director
Robert J. Glickman
/s/ TIMOTHY H. TAYLOR Executive Vice President & April 30, 1999
- ------------------------------------------------ Chief Financial Officer
Timothy H. Taylor
/s/ STEVEN D. FIFIELD Director April 30, 1999
- ------------------------------------------------
Steven D. Fifield
/s/ KARL H. HORN Director April 30, 1999
- ------------------------------------------------
Karl H. Horn
/s/ MICHAEL LEVITT Director April 30, 1999
- ------------------------------------------------
Michael Levitt
/s/ RODNEY D. LUBEZNIK Director April 30, 1999
- ------------------------------------------------
Rodney D. Lubeznik
/s/ MICHAEL TANG Director April 30, 1999
- ------------------------------------------------
Michael Tang
/s/ WILLIAM H. WENDT, III Director April 30, 1999
- ------------------------------------------------
William H. Wendt, III
</TABLE>
17
<PAGE> 1
EXHIBIT 13
CORUS BANKSHARES, INC.
1998 FINANCIAL REVIEW
<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial
Statements............................................... 51
Consolidated Balance Sheets................................. 74
Consolidated Statements of Income........................... 75
Consolidated Statements of Changes in Shareholders'
Equity................................................... 77
Consolidated Statements of Cash Flows....................... 78
Notes to Consolidated Financial Statements.................. 80
Report of Independent Public Accountants.................... 108
Directors and Executive Officers............................
</TABLE>
50
<PAGE> 2
CORUS BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL STATEMENTS
EARNINGS SUMMARY
Net income in 1998 totaled $40.6 million, compared with $39.4 and $43.9
million in 1997 and 1996, respectively. Return on average common equity was
13.7% for 1998, 14.9% for 1997 and 20.4% for 1996. The return on average assets
was 1.7% in 1998, compared with 1.8% and 2.0% in 1997 and 1996, respectively.
Net Interest Income
The major source of earnings for Corus is net interest income. Net interest
income provided 79.3%, 79.0% and 82.8% of net revenues during 1998, 1997 and
1996, 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 income and reflects the average yield on
assets and cost of liabilities for the last three years. The yields and costs
are adjusted for the accretion or amortization of deferred fees. Interest income
on nonaccrual loans is reflected in the year that it is collected. Such amounts
are not material to net interest income or 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.
A source of interest income for Corus is the accretion of acquisition
discount related to several groups of nonperforming student loan pools. The
amount of acquisition discount recognized in interest income for the years ended
December 31, 1998, 1997 and 1996, totaled $3.9, $4.5 and $13.2 million,
respectively. The related net interest margin, excluding the acquisition
discount, would have been 4.17% in 1998, compared with 4.64% and 4.83%, for 1997
and 1996, respectively.
The net interest margin in 1998 was adversely affected by the increase in
the average balance of Corus' common stock portfolio. If the average balance and
dividend income associated with the common stock portfolio were excluded, the
net interest margin, excluding acquisition discount, would have been 4.26% for
1998, compared with 4.71% and 4.86% for 1997 and 1996, respectively.
51
<PAGE> 3
The following table represents the impact these items had on net interest
margin:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net interest margin................................... 4.33% 4.85% 5.47%
Impact of student loan discount accretion............. (0.16) (0.21) (0.64)
----- ----- -----
Net interest margin without student loan discount
accretion.......................................... 4.17% 4.64% 4.83%
Impact of common stock portfolio...................... 0.09 0.07 0.03
----- ----- -----
Net interest margin without student loan discount
accretion and common stock portfolio............... 4.26% 4.71% 4.86%
----- ----- -----
</TABLE>
An additional element that negatively affected the net interest margin was
the taking on of substantial brokered retail certificates of deposit in the
middle of 1998. These funds were partially used to offset maturing brokered
retail deposits, however the majority of these deposits represented additional
net funding and were temporarily invested, in large part, in Corus' taxable
investment portfolio other than common stocks. As the spread between the rate on
the brokered retail deposits and the investment portfolio was relatively narrow,
Corus' overall margin was negatively impacted. Excluding the brokered deposits
and the resulting investments, Corus' net interest margin would have been
approximately 0.15% higher for the year ended December 31, 1998. In taking on
these additional deposits, Corus has positioned itself for future loan growth.
The decline in net interest margin for 1997 compared with 1996 was
primarily due to lower rates earned on loans and investments.
52
<PAGE> 4
CORUS BANKSHARES, INC.
AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets
Interest-bearing deposits
with banks.............. $ 24,315 $ 1,461 6.01% $ 8,123 $ 491 6.04% $ 11,528 $ 723 6.27%
Federal funds sold........ 84,588 4,626 5.47% 99,952 5,514 5.52% 47,907 2,508 5.24%
Taxable securities other
than common stocks...... 488,093 26,727 5.48% 317,923 17,741 5.58% 346,599 19,650 5.67%
Common stocks(1).......... 165,659 4,928 2.97% 112,077 3,625 3.23% 49,202 1,687 3.43%
Tax-advantaged
securities(2)........... 3,190 240 7.52% 4,591 357 7.78% 7,103 510 7.18%
Trading account
securities.............. 20,368 1,052 5.16% 13,953 760 5.45% -- -- --
Loans, net of unearned
discount(2)(3)(4)....... 1,525,349 150,447 9.86% 1,570,521 157,306 10.02% 1,601,269 167,397 10.45%
---------- -------- ---- ---------- -------- ------ ---------- -------- ------
Total earning assets.... 2,311,562 189,481 8.20% 2,127,140 185,794 8.73% 2,063,608 192,475 9.33%
Noninterest-earning assets
Cash and due from banks --
noninterest-bearing..... 61,780 59,600 69,461
Allowance for loan
losses.................. (34,081) (31,180) (32,301)
Premises and equipment,
net..................... 32,839 29,607 24,496
Other assets, including
goodwill................ 57,254 52,252 48,824
---------- -------- ---- ---------- -------- ------ ---------- -------- ------
Total
noninterest-earning
assets................ 117,792 110,279 110,480
---------- -------- ---- ---------- -------- ------ ---------- -------- ------
Total assets....... $2,429,354 $2,237,419 $2,174,088
========== ======== ==== ========== ======== ====== ========== ======== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits -- interest-bearing
NOW and money market
deposits................ $1,004,448 $ 44,768 4.46% $1,028,746 $ 47,662 4.63% $1,033,053 $ 46,253 4.48%
Savings deposits.......... 173,799 4,586 2.64% 187,573 4,913 2.62% 209,468 5,480 2.62%
Time deposits(4).......... 652,086 37,287 5.72% 480,743 27,139 5.65% 458,850 25,344 5.52%
---------- -------- ---- ---------- -------- ------ ---------- -------- ------
Total interest-bearing
deposits.............. 1,830,333 86,641 4.73% 1,697,062 79,714 4.70% 1,701,371 77,077 4.53%
Short-term borrowings..... 5,799 391 6.74% 8,562 630 7.36% 15,987 895 5.60%
Federal Home Loan Bank
advances................ 40,000 2,273 5.68% 40,000 2,317 5.79% 28,778 1,639 5.70%
---------- -------- ---- ---------- -------- ------ ---------- -------- ------
Total interest-bearing
liabilities........... 1,876,132 89,305 4.76% 1,745,624 82,661 4.74% 1,746,136 79,611 4.56%
Noninterest-bearing
liabilities and
shareholders' equity
Noninterest-bearing
deposits................ 200,865 191,904 189,317
Other liabilities......... 56,503 36,279 23,477
Shareholders' equity...... 295,854 263,612 215,158
---------- -------- ---- ---------- -------- ------ ---------- -------- ------
Total
noninterest-bearing
liabilities and
shareholders'
equity................ 553,222 491,795 427,952
---------- -------- ---- ---------- -------- ------ ---------- -------- ------
Total liabilities and
shareholders'
equity................ $2,429,354 $2,237,419 $2,174,088
========== ======== ==== ========== ======== ====== ========== ======== ======
Interest income/average
earning assets............ $2,311,562 $189,481 8.20% $2,127,140 $185,794 8.73% $2,063,608 $192,475 9.33%
Interest expense/average
interest-bearing
liabilities............... 1,876,132 89,305 4.76% 1,745,624 82,661 4.74% 1,746,136 79,611 4.56%
---------- -------- ---- ---------- -------- ------ ---------- -------- ------
Net interest spread......... $100,176 3.44% $103,133 3.99% $112,864 4.77%
========== ======== ==== ========== ======== ====== ========== ======== ======
Net interest margin......... 4.33% 4.85% 5.47%
========== ======== ==== ========== ======== ====== ========== ======== ======
</TABLE>
53
<PAGE> 5
- -------------------------
(1) Dividends on the common stock portfolio reflect a tax equivalent adjustment
for the 70% dividend received deduction.
(2) Interest income on loans and tax-advantaged securities reflects a tax
equivalent adjustment based on a marginal income tax rate of 35%.
(3) Unremitted interest on nonaccrual loans is not included in the amounts.
(4) Includes net interest income derived from interest rate floor and swap
contracts.
The following table represents a reconciliation of fully tax-equivalent net
interest income from 1997 to 1998 and 1996 to 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Fully tax-equivalent net interest income for
prior year................................... $103,133 $112,864
Change in common stock dividend income.......... 1,303 1,938
Change due to student loan discount accretion... (625) (8,686)
Change due to average earning assets
fluctuations other than common stocks........ 6,461 36
Change due to interest rate fluctuations other
than student loan discount accretion and
common stock dividend income................. (9,444) (3,014)
Change due to rate/volume fluctuations.......... (652) (5)
-------- --------
Fully tax-equivalent net interest income........ $100,176 $103,133
======== ========
</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, 1998, earning assets as a
percentage of total assets was 95.4%, compared with 94.8% and 95.2% at December
31, 1997 and 1996, 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.
54
<PAGE> 6
COMPOSITION OF EARNING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Loans:
Commercial real estate:
First Mortgage................................... 21.6% 26.0% 29.1%
Construction..................................... 9.2 7.3 2.0
Student............................................. 17.5 19.3 19.1
Residential first mortgage.......................... 5.6 9.8 13.5
Commercial.......................................... 4.4 2.6 2.9
Home equity......................................... 3.4 6.2 8.9
Medical finance..................................... 1.0 1.0 1.0
Consumer............................................ 0.1 0.2 0.3
----- ----- -----
Total loans............................................ 62.8 72.4 76.8
Securities other than common stocks.................... 29.1 17.9 14.1
Common stocks.......................................... 7.5 7.4 4.4
Interest-bearing deposits with banks................... 0.5 1.3 -
Federal funds sold..................................... 0.1 1.0 4.7
----- ----- -----
Total earning assets................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Noninterest Income In 1998, noninterest income, excluding trading and
security gains and losses, decreased $1.3 million or 5.8%. The gain on
dispositions of loans decreased $3.1 million to $8.0 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. Partially offsetting the decline on gains of disposition
of loans was an increase of $1.0 million or 176% in trust and investment
management services income. This increase resulted principally from Corus'
acquisition of the assets of an investment management business on March 31,
1998. Service charges on deposit accounts increased $220,000 or 2.6%. Other
income increased $536,000 primarily due to greater OREO gains in 1998.
In 1997, noninterest income, excluding trading and security gains and
losses, increased $2.3 million, or 11.5%. 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.
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. Trading activities resulted in a net loss
of $208,000 and $221,000 in 1998 and 1997, respectively. There were no trading
activities in 1996.
The securities and other financial instrument gains include gains from
Corus' common stock portfolio and securities other than common stocks. The gross
gains relating to Corus' common stock portfolio were $13.0, $4.2 and $2.3
million in 1998, 1997 and 1996,
55
<PAGE> 7
respectively. Corus also had gains of $655,000 in 1998 from the sale of
securities other than common stocks. Partially offsetting 1998 gains were losses
of $8.2 million related to options used for hedging the common stock portfolio
and $328,000 of losses related to the termination of interest rate swaps on
loans that were prepaid.
The interest rate swap losses of $328,000 were offset by gains of a roughly
equal amount received in the form of prepayment charges. In 1997, there was a
gain of $565,000 related to the termination of an option collar agreement. The
net gain in 1996 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.
NONINTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------
1998/1997 1997/1996
1998 1997 1996 CHANGE CHANGE
------- ------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service charges on deposit
accounts....................... $ 8,836 $ 8,616 $ 9,590 2.6% (10.2)%
Gain on dispositions of loans..... 8,036 11,115 8,134 (27.7) 36.6
Trust and investment management
services....................... 1,626 588 492 176.5 19.5
Other............................. 2,249 1,713 1,535 31.3 11.6
------- ------- ------- ------ ------
Noninterest income, excluding
trading, securities and other
financial instruments gains
(losses), net.................. 20,747 22,032 19,751 (5.8) 11.5
Trading account losses, net....... (208) (221) - 5.9 NM
Securities and other financial
instruments gains, net......... 5,127 5,102 3,316 0.5 53.9
------- ------- ------- ------ ------
Total noninterest income.... $25,666 $26,913 $23,067 (4.6)% 16.7%
======= ======= ======= ====== ======
</TABLE>
- -------------------------
NM -- Not meaningful
Noninterest Expense In 1998, noninterest expense, excluding goodwill
amortization, increased $1.5 million, or 3.1%. The increase was attributable to
increases in salaries and employee benefits, data processing, and furniture and
equipment depreciation. These increases were partially offset by declines in net
occupancy and other expenses.
In 1997, noninterest expense, excluding goodwill amortization increased
$1.1 million or 2.2%. The increase was attributable to increases in salaries and
employee benefits and net occupancy. These increases were partially offset by
declines in data processing and other expenses.
56
<PAGE> 8
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1998/1997 1997/1996
1998 1997 1996 CHANGE CHANGE
---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee
benefits.......... $ 29,314 $ 27,833 $ 25,483 5.3% 9.2%
Net occupancy
expense........... 4,073 4,123 3,975 (1.2) 3.7
Data processing...... 2,306 1,977 2,417 16.6 (18.2)
Furniture and
equipment
depreciation...... 2,679 2,502 1,883 7.1 32.9
Other................ 11,810 12,224 13,842 (3.4) (11.7)
---------- ---------- ---------- ------ ------
Noninterest expense,
excluding goodwill
amortization...... 50,182 48,659 47,600 3.1 2.2
Goodwill
amortization...... 1,707 3,018 2,896 (43.4) 4.2
---------- ---------- ---------- ------ ------
Total
noninterest
expense..... $ 51,889 $ 51,677 $ 50,496 0.4% 2.3%
---------- ---------- ---------- ------ ------
Net overhead(1)...... $ 29,435 $ 26,627 $ 27,849
Average total
assets............ 2,429,354 2,237,419 2,174,088
Net overhead
ratio(2).......... 1.2% 1.2% 1.3%
</TABLE>
- -------------------------
(1) Net overhead represents "Noninterest expense, excluding goodwill
amortization" less "Noninterest income, excluding trading, securities and
other financial instrument gains (losses), net".
(2) Net overhead ratio is net overhead as a percentage of average total assets.
Salaries and Employee Benefits In 1998, salaries and employee benefits
increased $1.5 million, or 5.3%. Total compensation, excluding employee
benefits, increased $1.2 million, of which $423,000 was attributable to Corus'
acquisition of an investment management business on March 31, 1998. Excluding
investment management business related compensation, Corus' salary expense
increased $795,000 or 3.2% in 1998.
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.
Management continues to effectively control compensation expense by paying
a limited number of talented people a premium over market salaries rather than
staffing at
57
<PAGE> 9
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 1998, net occupancy expense declined $50,000, or
1.2%. The decline was primarily due to a decrease of $213,000 in building
repairs and maintenance. Offsetting this decline was an increase of $190,000 in
depreciation and other expenses related to the remodeling of Corus'
headquarters. The remodeled areas house Corus' executive staff, commercial real
estate lending department, currency exchange division, finance department and
retail banking executives. Through December 31, 1998, the cost to remodel
totaled $6.4 million. It is anticipated that an additional $2.1 million in costs
will be incurred when the remodeling is completed in 1999. These costs are
recognized as expense over the anticipated useful life of the building. As a
result, net occupancy expense is expected to increase from higher depreciation
expense.
In 1997, net occupancy expense increased $148,000, or 3.7%.
Data Processing In 1998, data processing expense increased $329,000, or
16.6%, to $2.3 million. This increase was primarily due to conversion expenses
as Corus changed its data processor for the deposit, loan and accounting
systems.
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 all its subsidiary banks into one bank, resulting
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.
Furniture and Equipment Depreciation In 1998, furniture and equipment
depreciation expense increased $177,000, or 7.1%, to $ 2.7 million. Depreciation
on furniture and equipment is computed using accelerated methods. The increase
was primarily attributable to higher depreciation expense related to new
workstations for the newly remodeled headquarters' building. The remainder of
the increase was attributable to higher depreciation expense related to other
1998 acquisitions.
In 1997, furniture and equipment depreciation expense increased $619,000,
or 32.9%, to $2.5 million. The increase was partially attributable to higher
depreciation expense related to the 1996 acquisition of a new phone system, 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.
Other Expenses In 1998, other expenses declined $414,000, or 3.4%, to
$11.8 million. This decline was primarily due to lower advertising expenditures
as Corus continues to evaluate the efficiencies of certain advertising mediums.
In addition there were onetime expenses included in the 1997 results, which
included write-down and other costs totaling $161,000 related to the remodeling
of Corus' headquarters. The 1998 declines were partially offset by an increase
in expenses associated with other real estate owned properties.
58
<PAGE> 10
In 1997, other expenses declined $1.6 million, or 11.7%, to $12.2 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.
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 of 1.3% or below for each of the last three years.
By comparison, Corus' bank holding company peer-group based on assets size has
averaged a net overhead ratio of 2.1%. 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 41.5%, 38.9% and 35.9% in 1998, 1997 and 1996, respectively. By
comparison, the peer group average was 59% or higher each of the last three
years.
Goodwill Amortization In 1998, goodwill amortization decreased $1.3
million, or 43%, to $1.7 million. The 1997 results included $1.5 million of
goodwill related to a previous bank acquisition, which was completely amortized
by December 1997. Offsetting this decline was an increase of $148,000 in
goodwill amortization related to the March 1998 acquisition of an investment
management business.
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.
Income Taxes Income tax expense was $21.4 million in 1998, compared with
$21.1 and $24.0 million in 1997 and 1996, respectively. The effective tax rate
for 1998 was 34.5%, compared with 34.9% and 35.3% in 1997 and 1996,
respectively. The decline in the 1998 rate was primarily attributable to an
increase in the partially tax sheltered dividends from Corus' common stock
portfolio and the decrease in goodwill amortization expense.
Corus' net deferred tax liability was $13.9 million at December 31, 1998,
compared with a net deferred tax liability of $14.7 million at December 31,
1997. The net deferred tax
59
<PAGE> 11
liability for 1998 and 1997 was primarily due to the unrealized gains from
Corus' common stock portfolio.
Management believes that the gross deferred tax asset of $12.8 million at
December 31, 1998 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.
FINANCIAL CONDITION
Assets
Total assets and earning assets were $2.59 and $2.47 billion, respectively,
at December 31, 1998, compared with $2.25 and $2.14 billion, respectively, at
December 31, 1997. The percentage of earning assets to total assets was 95.4%
and 94.8% at December 31, 1998 and 1997, respectively. Refer to page 20 for the
composition of the earning asset portfolio.
Loans
In 1998, total loans increased $5.6 million, or 0.4%, to $1.55 billion.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial real estate:
First mortgage.............................. $ 533,253 $ 554,545
Construction................................ 228,311 156,950
Student..................................... 431,304 412,926
Residential first mortgage loans............ 137,683 209,669
Commercial.................................. 108,759 55,062
Home equity................................. 85,408 131,868
Medical finance............................. 24,821 21,440
Consumer.................................... 2,048 3,515
---------- ----------
Total loans................................. $1,551,587 $1,545,975
========== ==========
</TABLE>
In 1998, commercial real estate loans increased $50.1 million or 7.0% to
$761.6 million.
60
<PAGE> 12
COMMERCIAL REAL ESTATE PORTFOLIO BY
COLLATERAL SECURING THE LOAN
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Rental apartments.............................. $160,324 $195,343
Hotel.......................................... 141,851 100,470
Nursing homes.................................. 137,870 116,721
Warehouse/Light industrial..................... 74,284 69,779
Retail......................................... 69,930 89,878
Condo/Loft conversion and other residential for
sale........................................ 66,436 40,459
Office......................................... 56,461 46,298
Other.......................................... 54,408 52,547
-------- --------
Total.......................................... $761,564 $711,495
======== ========
</TABLE>
At December 31, 1998, approximately 65% of Corus' commercial real estate
portfolio was secured by property located in the five county Chicago
metropolitan area. The concentrations in the five largest states were as
follows:
<TABLE>
<CAPTION>
STATE PERCENT
----- -------
<S> <C>
Illinois.................................................... 66.60%
Texas....................................................... 5.97
Arizona..................................................... 5.72
Indiana..................................................... 5.62
California.................................................. 3.09
</TABLE>
In 1998, the student loan portfolio increased $18.4 million, or 4.5%. This
growth was due to $70.8 million of loan originations and $1.3 million of
purchases. Although Corus' student loan originations continue to increase, the
growth rate has declined 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
1997-1998 school year.
The formula for calculating the interest rate on newly originated student
loans was changed effective July 1, 1998. New loans originated after that date
earn the 3 month U.S. Treasury bill plus 2.20% while the borrower is in school
or in an authorized deferment status, and the 3 month U.S. Treasury bill plus
2.80% while the borrower is in repayment. This represents a 30 basis point
reduction from what loans originated between July 1, 1995 and June 30, 1998 were
earning.
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, 1998, the total discount to be accreted into income in future
years totaled $8.3 million. In addition, Corus will recognize approximately $3
million in future income due to its collection efforts on a specific group of
non-
61
<PAGE> 13
guaranteed student loans. The guarantees on some non-performing loans Corus
purchased, can be reinstated in an accelerated manner, resulting in this
additional income.
In 1998, residential first mortgage and home equity loans decreased $72.0
and $46.5 million, or 34.3% and 35.2%, respectively. In past years, management
strengthened the underwriting guidelines for both residential first mortgage and
home equity loans, which led to a significant reduction in loan originations. In
the first quarter of 1999, Corus purchased a portfolio of $80.9 million of
second mortgage high-loan-to-value home loans.
During 1998, commercial loans increased $53.7 million, or 97.5%. This
increase was due primarily to currency exchange loans, which increased $35.2
million, or 87.9%, to $75.2 million at December 31, 1998. Of this increase,
$16.1 million is related to overnight funding requirements of the currency
exchanges. During the fourth quarter of 1998, Corus acquired LaSalle National
Bank's currency exchange related business. Currency exchange loans outstanding
at December 31, 1998, related to this acquisition, totaled $11.3 million.
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,
1998, securities other than common stocks increased $336.1 million, or 87.9%,
from the comparable 1997 amounts. This increase was primarily attributable to an
increase in deposits the proceeds of which were invested in securities.
At December 31, 1998, 78.2% of the carrying value of the available for sale
portfolio with stated maturities was scheduled to mature within one year and
80.4% 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, 1998, the investment in common stocks was
$185.7 million, an increase of $27.0 million, or 17.0%, compared with $158.7
million at December 31, 1997. This increase was due to additional investment.
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 1998, the pretax unrealized gains
on this portfolio declined by $559,000.
At December 31, 1998, Corus held investments in equity securities of 45
financial industry companies with total unrealized gains of $69.2 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
options to hedge the market risk associated with the common stock portfolio.
Refer to the Risk Management section following and notes 1 and 10 to the
consolidated financial statements for further information.
62
<PAGE> 14
Liabilities
Deposits In 1998, total deposits increased $291.6 million, or 15.7%, to
$2.15 billion.
COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Demand........................................ 10% 10% 10%
Savings....................................... 8 10 10
NOW........................................... 5 5 5
Money Market.................................. 42 48 49
Certificates of Deposit....................... 35 27 26
---- ---- ----
Total......................................... 100% 100% 100%
==== ==== ====
</TABLE>
In 1998, demand and money market deposits increased $21.9 and $14.3
million, respectively. Certificates of deposit also increased by $257.6 million,
partially due to a $142.4 million increase in retail certificates of deposit
obtained from brokers. At December 31, 1998 and 1997, retail certificates of
deposit from brokers totaled $402.8 and $260.4 million, respectively. All other
retail certificates of deposits totaled $359.6 and $244.4 million at December
31, 1998 and 1997, respectively. Savings deposits declined $9.4 million during
1998.
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 with an
interest rate equal to 3-month LIBOR, and reprice quarterly. Management will
utilize, as necessary, outside funding sources to support loan growth.
Shareholders' Equity At December 31, 1998, Corus' common shareholders'
equity increased $26.5 million, or 9.1%, to $318.1 million, compared with $291.6
million at December 31, 1997. At December 31, 1998 and 1997, the unrealized
holding gain net of income taxes on available for sale securities was $44.6 and
$45.3 million, respectively.
During 1998 and 1997, Corus repurchased and retired 130,300 and 138,800
shares at an average price of $40.98 and $36.08 per share, respectively. The
repurchases were made under a 750,000 common share repurchase program approved
by the Board of Directors in February 1997.
63
<PAGE> 15
Various measures of capital were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------
1998 1997
----------------- -----------------
AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Common equity(1)........................ $318,130 12.3% $291,633 13.0%
Tangible common equity(2)............... 307,766 11.9 282,596 12.6
Tier 1 risk-based capital(3)............ 262,999 15.0 237,320 15.1
Total risk-based capital(4)............. 316,549 18.1 256,701 16.4
Leverage(5)............................. 262,999 10.3 237,320 10.5
======== ==== ======== ====
</TABLE>
- -------------------------
(1) Common equity is computed in accordance with generally accepted accounting
principles, which includes unrealized gains (losses) on securities available
for sale. The ratio is common equity to total year-end assets.
(2) Common equity less goodwill; computed as a ratio to total year-end assets
less goodwill.
(3) Shareholders' equity less goodwill, disallowed portion of deferred income
taxes 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 and SFAS #115 gain;
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 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.
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.
64
<PAGE> 16
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Nonperforming loans:
Residential first mortgage................... $11,769 $17,451
Commercial real estate....................... 2,436 4,678
Commercial................................... 9 80
Home equity.................................. 1,415 3,706
Student...................................... 476 453
Medical finance.............................. 1,102 684
Consumer..................................... 127 119
------- -------
Total nonperforming loans....................... 17,334 27,171
Other real estate owned......................... 4,971 5,673
------- -------
Total nonperforming assets...................... $22,305 $32,844
======= =======
Nonaccrual loans included in nonperforming loans
above........................................ $5,307 $8,641
Nonperforming loans/Total loans................. 1.12% 1.76%
Nonperforming assets/Total assets............... 0.86% 1.46%
Allowance for loan losses/Nonperforming loans... 206.37% 112.84%
</TABLE>
In 1998, nonperforming assets declined $10.5 million. This decline was due
to lower nonperforming residential first mortgage, home equity and commercial
real estate loans. The decline in residential first mortgage loans was 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. The decline in home equity loans
was primarily due to charge-offs during 1998 and loan payoffs. The decline in
commercial real estate loans was primarily due to loan payoffs. These declines
were partially offset by a $418,000 increase in medical finance nonperforming
loans.
At December 31, 1998, other real estate owned was comprised of two
commercial real estate properties with a carrying value of $106,000 and
forty-four single-family, residential properties with a carrying value of $4.9
million. During 1998, two commercial real estate properties with a carrying
value of $363,000 were sold for a net gain of $32,000 and fifty-eight
single-family, residential properties with a carrying value of $8.0 million were
sold for a net gain of $863,000. These gains were partially offset by writedowns
on properties not sold during 1998. The writedowns of residential real estate
properties totaled $342,000. There were no writedowns on commercial real estate
properties in 1998.
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 $17.5
and $14.1 million at December 31, 1998 and 1997, respectively.
65
<PAGE> 17
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.
In 1998, net charge-offs of home equity and student loans were $3.6 and
$1.1 million, respectively. The student loan charge-offs included $1.0 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 $3.5 million and $7.5 million of the home
equity net charge-offs in 1998 and 1997, respectively. The second mortgage
high-loan-to-value loans, purchased in 1999, will also be charged-off when they
become 120 days past due.
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1............ $30,660 $ 32,668 $ 25,640 $20,157 $19,552
Provision for loan losses....... 10,000 16,000 16,000 5,779 --
Charge-offs..................... (6,852) (19,095) (11,341) (819) (313)
Recoveries...................... 1,965 1,087 2,369 523 918
------- -------- -------- ------- -------
Net (charge-offs) recoveries.... (4,887) (18,008) (8,972) (296) 605
------- -------- -------- ------- -------
Balance at December 31.......... $35,773 $ 30,660 $ 32,668 $25,640 $20,157
======= ======== ======== ======= =======
Allowance for loan losses as a
percentage of total loans.... 2.31% 1.98% 2.01% 1.64% 1.83%
</TABLE>
At December 31, 1998, Ultimate Home Equity loans totaled $54.3 million. Of
this total, $681,000 were classified as nonperforming loans at December 31,
1998. The following represents an aging schedule of Ultimate Home Equity loans.
ULTIMATE HOME EQUITY LOANS AGING SCHEDULE
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Current.................................. $50,565
31 to 60 days past due................... 2,396
61 to 90 days past due................... 676
91 to 120 days past due.................. 681
-------
Total.................................... $54,318
=======
</TABLE>
The allowance as a percentage of nonperforming loans was 206.37% as
compared to 112.84% at December 31, 1997. Management believes the level of
allowance for loan losses was adequate at December 31, 1998.
66
<PAGE> 18
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 Arthur Andersen LLP 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
1998, there were no significant loan grading differences or losses recommended
by the independent firm.
LIQUIDITY
Parent Company The parent company had $194.9 million of cash and
marketable equity securities available for possible liquidity needs at December
31, 1998. At December 31, 1998, the subsidiary bank had $4.3 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, 1998, cash and marketable securities that were available for
liquidity needs totaled $784.0 million, or 32.6%, 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 and liabilities with contractual
maturities, the table presents principal cash flows and weighted-average rates
by contractual maturities. For securities, the table reflects principal cash
flows and weighted-average rates by contractual maturities adjusted for the
estimated prepayment of mortgage-backed securities. 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 implied forward rates from the December 31, 1998 yield curve.
67
<PAGE> 19
FINANCIAL INSTRUMENTS PRINCIPAL SUBJECT TO INTEREST RATE RISK --
PRINCIPAL/NOTIONAL MATURITIES
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-------------------------------------------------------------------------------------------
FOR THE YEAR ENDING DECEMBER 31, 1998, BASED ON CARRYING VALUE DECEMBER 31,
---------------------------------------------------------------------------- 1998
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- ------- ------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate
loans.................. $109,689 $ 70,138 $ 54,399 $62,999 $60,413 $103,119 $ 460,757 $ 474,064
Average interest
rate................ 6.97% 9.31% 9.51% 8.89% 9.08% 9.34% 8.69%
Variable interest rate
loans.................. $731,549 $ 70,716 $ 80,672 $40,852 $30,100 $136,941 $1,090,830 $1,090,830
Average interest
rate................ 9.08% 8.45% 8.74% 8.58% 8.52% 9.04% 8.98%
Fixed interest rate
securities............. $548,808 $ 18,078 $ 3,328 $ 3,245 $ 2,734 $ 8,514 $ 584,707 $ 584,895
Average interest
rate................ 5.07% 6.22% 6.71% 6.66% 6.36% 6.77% 5.16%
Variable interest rate
securities............. $ 24,761 $ 24,231 $ 15,771 $14,011 $10,915 $ 34,617 $ 124,306 $ 124,310
Average interest
rate................ 5.56% 5.60% 5.58% 5.61% 5.63% 5.65% 5.61%
-------- -------- -------- ------- ------- -------- ---------- ----------
RATE SENSITIVE
LIABILITIES:
Noninterest-bearing
deposits............... $ 42,523 $ 34,019 $ 27,215 $21,772 $17,417 $ 69,670 $ 212,616 $ 212,616
Average interest
rate................ -- -- -- -- -- -- --
Savings, NOW and money
markets................ $149,407 $128,178 $110,330 $95,272 $82,525 $613,941 $1,179,653 $1,179,653
Average interest
rate................ 3.55% 3.81% 3.67% 3.80% 3.85% 4.19% 3.97%
Time deposits............ $498,757 $140,435 $ 79,295 $14,550 $24,646 $ 4,724 $ 762,407 $ 766,836
Average interest
rate................ 5.53% 5.75% 5.97% 5.95% 6.06% 5.11% 5.64%
Variable rate short term
borrowings............. $ 24,933 -- -- -- -- -- $ 24,933 $ 24,933
Average interest
rate................ 5.32% -- -- -- -- -- 5.32%
Variable rate FHLB
advances............... -- -- $ 40,000 -- -- -- $ 40,000 $ 40,000
Average interest
rate................ -- -- 5.28% -- -- -- 5.28%
-------- -------- -------- ------- ------- -------- ---------- ----------
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Pay fixed, receive
floating interest rate
swaps.................. $ 20,588 $ 24,110 $ 68,586 $45,183 $28,944 $ 89,079 $ 276,490 $ (11,260)
Average pay rate....... 6.28% 6.23% 6.24% 6.19% 6.00% 5.94% 6.11%
Average receive rate... 5.11% 4.97% 5.12% 5.28% 5.34% 5.21% 5.18%
Pay floating, receive
fixed interest rate
swaps.................. $ 10,000 $ 10,000 -- -- -- -- $ 20,000 $ 253
Average pay rate....... 5.06% 5.05% -- -- -- -- 5.06%
Average receive rate... 6.00% 6.07% -- -- -- -- 6.04%
Pay floating, receive
variable basis swaps... -- -- $100,000 -- -- -- $ 100,000 $ (804)
Average pay rate....... -- -- 5.15% -- -- -- 5.15%
Average receive rate... -- -- 5.16% -- -- -- 5.16%
======== ======== ======== ======= ======= ======== ========== ==========
</TABLE>
68
<PAGE> 20
In addition to interest rate risk, Corus is also exposed to price risk with
its common stock portfolio. This risk has been reduced through the use of option
contracts. The terms of the option contracts are outlined in Note 10 to the
consolidated financial statements. The following is a summary of historical
price movements of Corus' common stock portfolio during the past three years.
There were no price movements in excess of twenty five percent in any of the
quarters. The amounts for Corus' portfolio were based on the historical prices
for the holdings at December 31, 1998.
<TABLE>
<CAPTION>
PERCENT OF
QUARTERS FOR PERCENT OF
CORUS PORTFOLIO QUARTERS FOR
IN PAST THREE S&P 500 IN PAST
YEARS THREE YEARS
----------------- -----------------
1998 1997 1998 1997
PRICE MOVEMENT IN QUARTER ---- ---- ---- ----
<S> <C> <C> <C> <C>
At least five percent......................... 50% 83% 75% 58%
At least ten percent.......................... 33 58 50 8
At least fifteen percent...................... 17 8 25 --
At least twenty percent....................... 8 -- 17 --
</TABLE>
69
<PAGE> 21
FINANCIAL INSTRUMENTS PRINCIPAL SUBJECT TO INTEREST RATE RISK --
PRINCIPAL/NOTIONAL MATURITIES
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
--------------------------------------------------------------------------------------------
FOR THE YEAR ENDING DECEMBER 31, 1997, BASED ON CARRYING VALUE DECEMBER 31,
----------------------------------------------------------------------------- 1997
1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE
-------- -------- -------- -------- ------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate
loans................. $ 53,731 $ 32,326 $ 41,560 $ 84,519 $57,396 $179,646 $ 449,178 $ 468,084
Average interest
rate............... 7.72% 10.10% 9.44% 9.35% 8.81% 9.17% 9.07%
Variable interest
rate loans............ $291,191 $198,334 $136,698 $ 84,113 $76,485 $309,976 $1,096,797 $1,096,797
Average interest
rate............... 9.45% 9.51% 9.58% 9.60% 9.74% 9.54% 9.53%
Fixed interest rate
securities............ $225,933 $ 87,516 $ 27,487 $ 2,885 $ 2,881 $ 6,806 $ 353,508 $ 353,747
Average interest
rate............... 5.48% 6.18% 6.27% 7.86% 7.74% 6.91% 5.78%
Variable interest rate
securities............ $ 20,013 $ 16 $ 16 $ 516 $ 16 $ 8,404 $ 28,981 $ 28,981
Average interest
rate............... 6.08% 6.40% 6.53% 6.60% 6.68% 6.78% 6.29%
-------- -------- -------- -------- ------- -------- ---------- ----------
RATE SENSITIVE
LIABILITIES:
Noninterest-bearing
deposits.............. $ 38,148 $ 30,518 $ 24,415 $ 19,532 $15,625 $ 62,501 $ 190,739 $ 190,739
Average interest
rate............... -- -- -- -- -- -- --
Savings, NOW and money
markets............... $148,952 $127,617 $109,703 $ 94,609 $81,851 $604,749 $1,167,481 $1,167,481
Average interest
rate............... 4.09% 4.36% 4.53% 4.66% 4.80% 5.38% 4.93%
Time deposits........... $317,700 $159,216 $ 21,819 $ 2,406 $ 3,664 $ 41 $ 504,846 $ 505,765
Average interest
rate............... 5.57% 6.06% 6.18% 5.67% 5.88% 6.50% 5.76%
Variable rate short term
borrowings............ $ 9,264 -- -- -- -- -- $ 9,264 $ 9,264
Average interest
rate............... 5.86% -- -- -- -- -- 5.86%
Variable rate FHLB
advances.............. -- -- -- $ 40,000 -- -- $ 40,000 $ 40,000
Average interest
rate............... -- -- -- 6.15% -- -- 6.15%
-------- -------- -------- -------- ------- -------- ---------- ----------
RATE SENSITIVE
DERIVATIVE FINANCIAL
INSTRUMENTS:
Pay fixed, receive
floating interest rate
swaps................. $ 24,934 $ 20,576 $ 26,559 $ 68,370 $44,057 $ 73,802 $ 258,298 $ (5,696)
Average pay rate...... 7.32% 7.34% 6.38% 6.27% 6.37% 7.04% 6.70%
Average receive
rate............... 5.82% 5.95% 6.07% 6.15% 6.23% 6.47% 6.20%
Pay floating, receive
fixed interest rate
swaps................. $ 10,000 $ 10,000 $ 10,000 -- -- -- $ 30,000 $ 3
Average pay rate...... 5.81% 5.95% 6.07% -- -- -- 5.94%
Average receive
rate............... 5.91% 6.00% 6.07% -- -- -- 5.99%
Pay floating, receive
variable basis
swaps................. -- -- -- $100,000 -- -- $ 100,000 $ 100
Average pay rate...... -- -- -- 6.01% -- -- 6.01%
Average receive
rate............... -- -- -- 6.08% -- -- 6.08%
======== ======== ======== ======== ======= ======== ========== ==========
</TABLE>
70
<PAGE> 22
Year 2000 Readiness Disclosure
State of Readiness In June of 1997, responsibility for Corus' Year
2000-readiness project was assigned to the Project Management Group that reports
directly to the Chief Operating Officer who is also a member of the Corus Bank
Board of Directors.
Corus' Year 2000 project plan is designed after the Federal Financial
Institutions Examination Council (FFIEC) model:
<TABLE>
<S> <C>
Phase I -- Awareness June, 1997 -- Present
Phase II -- Assessment July, 1997 -- Present
Phase III -- Renovation January, 1998 -- December,
1998
Phase IV -- Validation June, 1998 -- June, 1999
</TABLE>
Corus' Board of Directors receives formal status reports quarterly updating
them on the progress of the project.
The assessment phase took the form of a mass inventory performed to
identify information technology systems including information systems, software
and equipment. The inventory also identified non-technology relationships such
as environmental systems, business partners and major borrowers. During the
assessment phase of Corus' readiness project, approximately 24% of Corus'
internal systems were identified as being mission critical. Of these mission
critical systems, 75% have been upgraded to a Year 2000 ready status or are not
date sensitive. The remaining 25% of the mission critical systems are in the
process of being renovated, replaced or upgraded to be Year 2000 ready.
Renovation, replacements, and upgrades are scheduled to be completed by the end
of the first quarter 1999.
Validation of the Year 2000 readiness status of these mission critical
systems is on schedule. Corus anticipates completing the last of the required
validation during the second quarter of 1999. In some instances, Corus
participates in a method of testing known as proxy testing. In proxy testing,
the service provider tests with a representative sample of financial
institutions that use a particular service on the same platform. Test results
then are shared with all similarly situated clients of the service provider.
Internal validation efforts were also aided through the use of an outside
consulting group. The consulting group formulated the test methodology and
provided guidance on the testing of individual applications.
Corus relies on third-party providers for the majority of data processing
needs. The core data processing systems for both customer information and
student lending have been upgraded and are running a version the third parties
have certified as Year 2000 ready. Testing of these two systems is scheduled to
be performed during the first quarter of 1999. The core data processing system
that maintains account and customer information for Corus' Trust area has also
been upgraded to a Year 2000 ready version. This system is scheduled to be proxy
tested during the first quarter.
Costs to Address Year 2000 Issues Although Corus does not currently
expect the costs of Year 2000 readiness to be material, some expenses will be
incurred. Corus estimates total costs, which include expenses and capital
expenditures associated with the project, to be approximately $1.3 million.
71
<PAGE> 23
The Risks of Year 2000 Issues and Contingency Planning Information
technology and non-information technology elements that expose Corus to Year
2000 risk have been internally classified into three levels of importance.
Critical A items are those that would, upon failure, severely limit our ability
to participate in the business of banking. Eight items have been deemed to be
Critical A. The eight items include various data processing and information
systems, the interface between Corus' information systems and the ATM network,
the telecommunications system, and the wire transfer system. A specific example
of a Critical A item is Corus' core data processing system whose failure would
inhibit Corus' ability to process, record, and access account information. The
second tier of items which would impact Corus, but not as severely as Critical A
items, are Critical B items. Some examples of Critical B items are an ATM
terminal and a security system. All other elements, such as photocopy machines,
are considered non-critical.
The most reasonably likely worst case scenario relating to the Year 2000
issue would involve the failure of the Critical A items. At this stage of the
overall readiness project, Corus does not believe that any failure is reasonably
likely to occur. Nonetheless, Corus' goal is to be prepared for a worst case
scenario. Corus currently has a written Business Recovery Plan in place. Corus
is in the process of modifying this plan to address how to deal with Critical A
and Critical B failures caused by Year 2000 events. Department managers are
creating remediation and business resumption contingency plans for their
respective functions that will be used in the modification of Corus' plan. Corus
intends to have contingency plans in place and validated no later than June 30,
1999.
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;
- Corus' ability to adapt successfully to technological changes to meet
customers' needs and developments in the marketplace;
72
<PAGE> 24
- The impact of Year 2000 on Corus' data processing vendors, customers and
other vendors;
- Corus' ability to access cost-effective funding;
- The purchase of the second mortgage high-loan-to-value portfolio and the
capability of Corus to minimize loan delinquencies and charge-offs of the
acquired loans;
- The ability of Corus to generate additional fee income from its
acquisition of an investment management business; and
- Economic conditions.
73
<PAGE> 25
CORUS BANKSHARES INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks -- noninterest-bearing...... $ 72,050 $ 62,217
Federal funds sold.................................. 2,000 21,500
Interest-bearing deposits with banks................ 13,000 26,999
Securities:
Available for sale, at fair value (amortized cost
$829,113 and $462,207)........................ 897,668 531,863
Held to maturity, at amortized cost (fair value
$6,802 and $9,525)............................ 6,610 9,279
---------- ----------
Total Securities........................ 904,278 541,142
Loans, net of unearned discount..................... 1,551,587 1,545,975
Less: Allowance for loan losses.................. 35,773 30,660
---------- ----------
Net Loans............................... 1,515,814 1,515,315
Premises and equipment, net......................... 34,105 30,950
Accrued interest receivable and other assets........ 37,804 44,767
Goodwill, net of accumulated amortization of $26,581
and $24,874...................................... 10,364 9,037
---------- ----------
Total Assets............................ $2,589,415 $2,251,927
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing........................... $ 212,616 $ 190,739
Interest-bearing.............................. 1,942,060 1,672,327
---------- ----------
Total Deposits.......................... 2,154,676 1,863,066
Short-term borrowings............................ 24,933 9,264
Federal Home Loan Bank advances.................. 40,000 40,000
Accrued interest payable and other liabilities... 51,676 47,964
---------- ----------
Total Liabilities....................... 2,271,285 1,960,294
Commitments and contingent liabilities.............. -- --
Shareholders' equity:
Preference stock................................. -- --
Common stock, $0.05 par value, 50,000,000 shares
authorized; 14,551,142 and 14,681,442 shares
issued, respectively.......................... 727 734
Surplus.......................................... 4,065 4,101
Retained earnings................................ 268,777 241,522
Accumulated other comprehensive income........... 44,561 45,276
---------- ----------
Total Shareholders' Equity.............. 318,130 291,633
---------- ----------
Total Liabilities and Shareholders'
Equity............................... $2,589,415 $2,251,927
========== ==========
</TABLE>
See accompanying notes.
74
<PAGE> 26
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable.................................. $148,953 $155,178 $164,871
Tax-advantaged........................... 971 1,383 1,642
Deposits with banks......................... 1,461 491 723
Federal funds sold.......................... 4,626 5,514 2,508
Securities:
Taxable.................................. 26,727 17,741 19,650
Tax-advantaged........................... 156 232 331
Dividends................................ 3,579 2,633 1,225
Trading account.......................... 1,052 760 --
-------- -------- --------
Total Interest Income................. 187,525 183,932 190,950
-------- -------- --------
INTEREST EXPENSE:
Deposits.................................... 86,641 79,714 77,077
Short-term borrowings....................... 391 630 895
Federal Home Loan Bank advances............. 2,273 2,317 1,639
-------- -------- --------
Total Interest Expense................ 89,305 82,661 79,611
-------- -------- --------
Net Interest Income......................... 98,220 101,271 111,339
Provision for loan losses................... 10,000 16,000 16,000
-------- -------- --------
Net Interest Income After Provision
for Loan Losses.................... 88,220 85,271 95,339
-------- -------- --------
NONINTEREST INCOME:
Service charges on deposit accounts......... 8,836 8,616 9,590
Gain on dispositions of loans............... 8,036 11,115 8,134
Trust and investment management services.... 1,626 588 492
Other income................................ 2,249 1,713 1,535
Trading account losses, net................. (208) (221) -
Securities and other financial instruments
gains, net............................... 5,127 5,102 3,316
-------- -------- --------
Total Noninterest Income.............. 25,666 26,913 23,067
-------- -------- --------
</TABLE>
75
<PAGE> 27
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NONINTEREST EXPENSES:
Salaries and employee benefits.............. 29,314 27,833 25,483
Net occupancy............................... 4,073 4,123 3,975
Data processing............................. 2,306 1,977 2,417
Furniture and equipment depreciation........ 2,679 2,502 1,883
Goodwill amortization....................... 1,707 3,018 2,896
Other expenses.............................. 11,810 12,224 13,842
-------- -------- --------
Total Noninterest Expenses............ 51,889 51,677 50,496
-------- -------- --------
Income before income taxes.................. 61,997 60,507 67,910
Income tax expense.......................... 21,369 21,136 24,005
-------- -------- --------
Net Income.................................. $ 40,628 $ 39,371 $ 43,905
======== ======== ========
Net Income per Share:
Basic.................................... $ 2.79 $ 2.66 $ 2.96
Diluted.................................. 2.75 2.63 2.93
Weighted Average Common Shares & Common
Share Equivalents Outstanding............ 14,773 14,966 14,994
</TABLE>
See accompanying notes.
76
<PAGE> 28
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME TOTAL
------ ------- -------- ------------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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)
Change in other comprehensive
income, net of tax........ -- -- -- 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, $0.530 per
common share.............. -- -- (7,829) -- (7,829)
Change in other comprehensive
income, net of tax........ -- -- -- 29,508 29,508
---- ------ -------- ------- --------
Balance at December 31,
1997...................... 734 4,101 241,522 45,276 291,633
Net income................... -- -- 40,628 -- 40,628
Retirement of 130,300 common
shares.................... (7) (36) (5,297) -- (5,340)
Cash dividends declared on
common stock, $0.555 per
common share.............. -- -- (8,076) -- (8,076)
Change in other comprehensive
income, net of tax........ -- -- -- (715) (715)
---- ------ -------- ------- --------
Balance at December 31,
1998...................... $727 $4,065 $268,777 $44,561 $318,130
==== ====== ======== ======= ========
</TABLE>
See accompanying notes.
77
<PAGE> 29
CORUS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................. $ 40,628 $ 39,371 $ 43,905
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses............ 10,000 16,000 16,000
Depreciation and amortization........ 3,441 3,198 3,247
Accretion of investment
and loan discounts................ (16,670) (13,980) (19,276)
Goodwill amortization................ 1,707 3,018 2,896
Deferred income tax expense
(benefit)......................... (424) 343 (1,740)
Net securities gains................. (13,637) (4,239) (1,985)
Gain on dispositions of loans........ (8,036) (11,115) (8,134)
Decrease (increase) in accrued
interest receivable and other
assets............................ 15,008 (3,848) (12)
Increase (decrease) in accrued
interest payable and other
liabilities....................... 5,954 (2,522) 4,965
----------- --------- -----------
Net Cash Provided by Operating
Activities........................... 37,971 26,226 39,866
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of held to
maturity securities............... 2,601 1,975 3,313
Proceeds from maturities of available
for sale securities............... 825,126 526,270 328,855
Proceeds from sales of available for
sale securities................... 271,459 42,285 3,377,908
Purchases of available for sale
securities........................ (1,436,991) (662,275) (3,700,208)
(Purchases) maturities of term
federal funds sold................ 20,000 (20,000) --
(Purchases) maturities of
interest-bearing deposits with
banks............................. 13,999 (26,999) 25,000
Purchases of loans................... (15,064) (1,000) (22,550)
Net decrease (increase) in loans..... 8,433 75,779 (29,463)
Purchases of premises and equipment,
net............................... (6,596) (5,498) (5,103)
Purchases of minority interest and
additional consideration for bank
subsidiaries...................... (4,521) (1,690) (4,139)
----------- --------- -----------
Net Cash Used in Investing Activities... (321,554) (71,153) (26,387)
</TABLE>
78
<PAGE> 30
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposit
accounts.......................... 291,610 (37,613) 2,139
Increase in short-term borrowings.... 15,669 2,947 4,489
Proceeds from Federal Home Loan Bank
advances.......................... -- -- 40,000
Issuance of common shares under stock
option plan....................... -- -- 9
Retirements of common shares......... (5,340) (5,007) (5,392)
Cash dividends paid on common
shares............................ (8,023) (7,691) (6,691)
----------- --------- -----------
Net Cash Provided by (Used in)
Financing Activities.............. 293,916 (47,364) 34,554
----------- --------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents.......................... 10,333 (92,291) 48,033
Cash and Cash Equivalents at January
1.................................... 63,717 156,008 107,975
----------- --------- -----------
Cash and Cash Equivalents at December
31................................... $ 74,050 $ 63,717 $ 156,008
----------- --------- -----------
Supplemental disclosures:
Interest paid........................ $ 87,251 $ 82,156 $ 77,523
Income taxes paid.................... 21,890 19,799 27,914
=========== ========= ===========
</TABLE>
See accompanying notes.
79
<PAGE> 31
CORUS BANKSHARES, INC.
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 which have an original maturity of 90 days or
less.
Securities Securities are classified based on management's intention at
time of purchase. Trading securities, which are generally held in anticipation
of short-term gains, are carried at their fair value. Realized and unrealized
gains and losses on trading account securities are included in trading account
income.
Available for sale securities are those securities to be held for
indefinite periods of time. These securities include those that management
intends to use as part of its asset/liability management strategy and may be
sold in response to changes in interest rates, market conditions or other
reasons. These securities are carried at fair value. The difference between
amortized cost and fair value, less deferred income taxes, 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
80
<PAGE> 32
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
Allowance for Loan Losses The allowance for loan losses is available to
absorb losses inherent in the loan portfolio. Loan losses 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. Additionally, purchased second mortgage high-loan-to-value loans 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, the valuation allowances for specific impaired loans, 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.
81
<PAGE> 33
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 reduce 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 primarily A or better.
Amounts receivable or payable under interest rate swap and floor agreements
that qualify for hedge accounting treatment are accrued and reported in 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.
Interest rate swap agreements that do not qualify for hedge accounting
treatment are carried at fair value. Changes in fair value are included in
securities and other financial instrument gains and losses.
Corus utilizes individual options and option combinations to reduce the
market risk associated with the common stock portfolio. Certain options not
qualifying for hedge accounting are carried at market value. Changes in the
market value of such options are included in securities and other financial
instruments gains and losses. Any realized gains or losses from the exercise or
settlement of these options are also included in securities and other financial
instruments gains and losses.
Reclassifications Certain prior year amounts have been reclassified to
conform with the 1998 presentation.
2. ACCOUNTING CHANGES
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement establishes
standards for the way companies report information about operating segments in
annual financial statements and requires that those companies report selected
information about operating segments in annual and interim financial reports
issued to shareholders. The new segment reporting requirements are in note 14.
The adoption of SFAS No. 131 had no impact on Corus' results of operations,
financial position or cash flows.
In February 1998, SFAS No. 132, "Employer's Disclosures about Pensions and
Other Postretirement Benefits" was issued. This statement standardizes the
disclosure requirements for pensions and other postretirement benefits. It does
not change measurement or recognition of amounts related to those plans. Corus
has adopted the new disclosure requirements of this statement for 1998 in note
9.
82
<PAGE> 34
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. The statement establishes accounting and
reporting standards requiring that every derivative instrument 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 accounting criteria are met and the hedge
is considered to be highly effective. 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. Corus uses derivative instruments to manage interest rate risk
and market risk in its loan and common stock portfolios, respectively. The
statement is effective for Corus for the fiscal quarter beginning January 1,
2000. Corus has not yet quantified the impact of adopting this statement on its
financial position or results of its operations.
In December 1997, Corus adopted SFAS No. 128, "Earnings per Share." This
statement 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.
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 changes in shareholders'
equity. 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.
83
<PAGE> 35
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SECURITIES
The amortized cost, gross unrealized gains and losses, and fair value of
securities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------
GROSS UNREALIZED
AMORTIZED -----------------
COST GAINS LOSSES FAIR
--------- ------- ------ --------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government and agencies........ $529,421 $ 100 $(147) $529,374
Corporate debt securities........... 30,031 151 (9) 30,173
Common stocks....................... 116,524 69,174 -- 185,698
Other............................... 153,137 67 (781) 152,423
-------- ------- ----- --------
Total............................... $829,113 $69,492 $(937) $897,668
======== ======= ===== ========
HELD TO MATURITY:
State and municipal................. $ 2,168 $ 120 $ -- $ 2,288
Other............................... 4,442 72 -- 4,514
-------- ------- ----- --------
Total............................... $ 6,610 $ 192 $ -- $ 6,802
======== ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
GROSS UNREALIZED
AMORTIZED -----------------
COST GAINS LOSSES FAIR
--------- ------- ------ --------
<S> <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>
84
<PAGE> 36
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled maturities for securities were as follows at December 31,
1998 (in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
-------------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR
DUE IN COST VALUE COST VALUE
- ------ --------- -------- --------- ------
<S> <C> <C> <C> <C>
One year or less...................... $544,706 $544,675 $ 365 $ 374
After one year through five years..... 14,746 14,872 1,022 1,071
After five years through ten years.... 12,938 12,740 1,437 1,491
After ten years....................... 133,367 132,851 1,051 1,131
-------- -------- ------ ------
705,757 705,138 3,875 4,067
Securities not due at a single
maturity........................... 123,356 192,530 2,735 2,735
-------- -------- ------ ------
Total................................. $829,113 $897,668 $6,610 $6,802
======== ======== ====== ======
</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
$13.6, $5.9 and $2.6 million during 1998, 1997 and 1996, respectively. Gross
losses realized on sales of available for sale securities totaled $9,000, $1.7
million and $658,000, respectively.
At December 31, 1998, Federal Home Loan Bank stock with a book value of
$6.8 million was pledged as collateral to secure Federal Home Loan Bank
advances.
Securities having an aggregate carrying value of $57.9 and $49.7 million at
December 31, 1998 and 1997, 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 $3.3 million were pledged as
collateral at December 31, 1998 for the option collar agreements discussed in
note 10.
85
<PAGE> 37
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS
Total loans, net of unearned discount of $8.3 and $13.3 million at December
31, 1998 and 1997, respectively, were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Commercial real estate:
First mortgage........................... $ 533,253 $ 554,545
Construction............................. 228,311 156,950
Student..................................... 431,304 412,926
Residential first mortgage.................. 137,683 209,669
Commercial.................................. 108,759 55,062
Home equity................................. 85,408 131,868
Medical finance............................. 24,821 21,440
Consumer.................................... 2,048 3,515
---------- ----------
Total....................................... $1,551,587 $1,545,975
========== ==========
</TABLE>
Changes in the allowance for loan losses were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Balance at January 1................. $30,660 $ 32,668 $ 25,640
Provision for loan losses............ 10,000 16,000 16,000
Charge-offs.......................... (6,852) (19,095) (11,341)
Recoveries........................... 1,965 1,087 2,369
------- -------- --------
Balance at December 31............... $35,773 $ 30,660 $ 32,668
======= ======== ========
</TABLE>
At December 31, 1998 and 1997, loans that were considered to be impaired
totaled $1.4 million and $3.4 million, respectively. Management does not
individually evaluate certain smaller-balance loans for impairment. These loans
are evaluated on an aggregate basis using a formula-based approach in accordance
with 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, 1998 and 1997, the related allowance allocated to impaired loans was
$135,000 and $310,000, respectively. The contractual interest due on impaired
loans for the years ended December 31, 1998 and 1997, was $84,000 and $297,000,
respectively. Interest income of $34,000 was recognized on impaired loans for
the year ended December 31, 1998. No interest income was recognized on impaired
loans during 1997.
At December 31, 1998 and 1997, nonaccrual loans totaled $5.3 and $8.6
million, respectively. The interest income foregone on these loans during 1998
and 1997 was $405,000 and $503,000, respectively.
86
<PAGE> 38
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of Corus' performing residential first mortgage loans are pledged as
collateral for its Federal Home Loan Bank advances.
Changes in the balance of loans to directors and principal officers of
Corus and its subsidiaries, were as follows (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1997........................ $12,222
New loans........................................... 8,962
Repayments.......................................... (2,849)
-------
Balance at December 31, 1998........................ $18,335
=======
</TABLE>
These loans were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers. In the opinion of management, these loans do
not involve more than the normal risk of collection or possess other favorable
features.
5. PREMISES AND EQUIPMENT, NET
Premises and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1998 1997
------- -------
<S> <C> <C>
Land............................................. $ 7,735 $ 7,422
Buildings and improvements....................... 29,198 26,467
Furniture and equipment.......................... 14,277 12,544
------- -------
51,210.. 46,433
Less accumulated depreciation.................... 17,105 15,483
------- -------
Total premises and equipment, net................ $34,105 $30,950
======= =======
</TABLE>
Two banking locations occupy offices under long-term operating lease
agreements. Rent expense under these lease agreements totaled $324,000, $322,000
and $311,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Minimum fixed lease obligations, excluding taxes, insurance and other
expenses payable directly by Corus, for leases in effect at December 31, 1998
were as follows (in thousands):
<TABLE>
YEAR ENDING DECEMBER 31
- ---------------------------------------------
<S> <C>
1999......................................... $ 325
2000......................................... 331
2001......................................... 337
2002......................................... 344
2003......................................... 350
2004 and thereafter.......................... 467
------
Minimum payments............................. $2,154
======
</TABLE>
87
<PAGE> 39
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. TIME DEPOSITS
Interest-bearing deposits included certificates of deposit in amounts of
$100,000 or more totaling $510.4 and $324.6 million at December 31, 1998 and
1997, respectively. Interest expense on these deposits was $25.4 and $17.0
million in 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of certificates of deposit
were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
1999............................ $498,757
2000............................ 140,435
2001............................ 79,295
2002............................ 14,550
2003 and thereafter............. 29,370
--------
Total........................... $762,407
========
</TABLE>
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 the 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
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal income tax.......................... $21,281 $20,746 $25,649
State income tax............................ 512 47 96
------- ------- -------
Total current expense.......................... 21,793 20,793 25,745
Deferred federal expense (benefit)............. (424) 343 (1,740)
------- ------- -------
Income tax provision........................... $21,369 $21,136 $24,005
======= ======= =======
</TABLE>
88
<PAGE> 40
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective
rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax rate....................... 35.0% 35.0% 35.0%
Goodwill amortization................................... 0.9 1.7 1.5
Dividends received deduction............................ (1.5) (1.1) (0.4)
Tax-exempt income....................................... (0.6) (0.9) (0.9)
Minority interest....................................... -- -- 0.1
Other, net.............................................. 0.7 0.2 --
---- ---- ----
Effective rate.......................................... 34.5% 34.9% 35.3%
==== ==== ====
</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
--------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses........................... $ 11,528 $ 9,540
Deferred loan fees and discounts.................... -- 2,384
Other deferred tax assets........................... 1,317 535
-------- --------
Gross deferred tax assets.............................. 12,845 12,459
-------- --------
Deferred tax liabilities:
Unrealized securities gains......................... (23,995) (24,380)
Purchase accounting adjustments..................... (1,739) (2,045)
Deferred loan fees and discounts.................... (355) --
Other deferred tax liabilities...................... (643) (730)
-------- --------
Gross deferred tax liabilities......................... (26,732) (27,155)
-------- --------
Net deferred tax liability............................. $(13,887) $(14,696)
======== ========
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The following reflects the disclosure requirements set forth by Statement
of Accounting Standards No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits."
89
<PAGE> 41
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Corus maintains a noncontributory defined benefit plan (Pension plan) and a
defined contribution plan (Employees' savings plan and trust). Expenses (income)
for each of the plans were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1998 1997 1996
------ ----- ----
<S> <C> <C> <C>
Pension plan.......................................... $(463) $(97) $ 3
Employees' savings plan and trust..................... 166 94 95
----- ---- ---
Total................................................. $(297) $ (3) $98
===== ==== ===
</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, 1998. Pension plan assets are primarily
invested in common stocks and bank deposits.
Net periodic benefit cost (income) was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost........................... $ 556 $ 423 $ 362
Interest cost.......................... 920 874 825
Actual return on plan assets........... (3,296) (5,255) (3,175)
Amortization of transition asset....... (202) (202) (202)
Net amortization and deferral.......... 1,559 4,063 2,193
------- ------- -------
Net periodic benefit cost (income)..... $ (463) $ (97) $ 3
======= ======= =======
</TABLE>
A reconciliation of the plan's benefit obligations, fair value of plan
assets, funded status and amounts recognized in Corus' statement of financial
position follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1.......................... $13,521 $11,913
Service cost............................................. 556 423
Interest cost............................................ 920 874
Actuarial gain........................................... 170 988
Benefit paid............................................. (722) (677)
------- -------
Benefit obligation at December 31........................ $14,445 $13,521
======= =======
</TABLE>
90
<PAGE> 42
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at January 1................... $19,829 $15,175
Actual return on plan assets............................. 3,296 5,331
Benefits paid............................................ (722) (677)
------- -------
Fair value of plan assets at December 31................. $22,403 $19,829
======= =======
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
FUNDED STATUS
Funded status at January 1............................... $ 7,958 $ 6,308
Unrecognized transition asset............................ (606) (808)
Unrecognized actuarial gain.............................. (6,108) (4,719)
------- -------
Prepaid benefit cost at December 31...................... $ 1,244 $ 781
======= =======
</TABLE>
The following weighted-average assumptions were used in accounting for the
pension plan:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Discount rate............................................... 7.00% 7.00%
Expected return on plan assets.............................. 8.00% 8.00%
Rate of compensation increase............................... 5.00% 5.00%
</TABLE>
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 year ended December 31, 1998, Corus matched 20% of
participants' contributions, up to a maximum of $1,500. For the years ended
December 31, 1997 and 1996, Corus matched 20% of participants' contributions, up
to $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.
91
<PAGE> 43
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial Assets Corus had the following financial assets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------
1998 1997
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents...... $ 74,050 $ 74,050 $ 63,717 $ 63,717
Federal funds sold with
original maturities greater
than 90 days................ -- -- 20,000 19,994
Interest-bearing deposits with
banks....................... 13,000 13,009 26,999 26,976
Securities..................... 904,278 904,470 541,142 541,388
Loans.......................... 1,515,814 1,529,121 1,515,315 1,534,221
Accrued interest receivable.... 20,963 20,963 25,562 25,562
========== ========== ========== ==========
</TABLE>
Cash and cash equivalents and accrued interest receivable are short-term in
nature and, as such, their fair value approximates carrying 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. The fair
value of fixed-rate loans is based on the discounted amount of scheduled cash
flows or the estimated fair value of the underlying collateral. The discount
rate used is equal to the current rate of the appropriate index plus the average
spread on the existing portfolio.
Financial Liabilities Corus had the following financial liabilities (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1998 1997
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Deposits without a stated
maturity............... $1,392,269 $1,392,269 $1,358,220 $1,358,220
Certificates of deposit... 762,407 766,836 504,846 505,765
Short-term borrowings..... 24,933 24,933 9,264 9,264
Federal Home Loan Bank
advances............... 40,000 40,000 40,000 40,000
Accrued interest
payable................ 10,739 10,739 8,685 8,685
========== ========== ========== ==========
</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.
92
<PAGE> 44
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
93
<PAGE> 45
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following lending-related financial instruments had contract amounts
that represented credit exposure (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
STANDBY LETTERS OF CREDIT
Commercial real estate:
First mortgage...................................... $ -- $ 229
Construction........................................ 2,048 809
Commercial............................................. 5,996 3,330
Home equity............................................ -- --
Consumer............................................... -- --
-------- --------
Total standby letters of credit........................ $ 8,044 $ 4,368
-------- --------
COMMITMENT LETTERS OUTSTANDING
Commercial real estate:
First mortgage...................................... $ 7,005 $ 1,766
Construction........................................ 121,867 70,933
Commercial............................................. 1,605 720
Home equity............................................ -- --
Consumer............................................... -- --
-------- --------
Total commitment letters............................... $130,477 $ 73,419
-------- --------
UNUSED COMMITMENTS UNDER LINES OF CREDIT
Commercial real estate:
First mortgage...................................... $ 8,679 $ 6,070
Construction........................................ 234,152 148,093
Commercial............................................. 21,008 25,918
Home equity............................................ 26,352 22,084
Consumer............................................... 807 895
-------- --------
Total unused commitments under lines of credit......... $290,998 $203,060
-------- --------
TOTAL COMMITMENTS
Commercial real estate:
First mortgage...................................... $ 15,684 $ 8,065
Construction........................................ 358,067 219,835
Commercial............................................. 28,609 29,968
Home equity............................................ 26,352 22,084
Consumer............................................... 807 895
-------- --------
Total commitments outstanding.......................... $429,519 $280,847
======== ========
</TABLE>
94
<PAGE> 46
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following financial instruments were used by Corus to hedge its
interest rate risk (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------
NOTIONAL FAIR CARRYING
AMOUNT VALUE VALUE
-------- -------- --------
<S> <C> <C> <C>
Interest rate swap agreements:
Amortizing pay fixed rate, receive
floating rate.......................... $265,011 $(10,348) $ 270
Non-amortizing pay fixed rate, receive
floating rate.......................... 11,480 (912) 42
Non-amortizing pay floating rate, receive
fixed rate............................. 20,000 253 (14)
Basis swap agreements:
Non-amortizing variable pay/variable
receive................................ 100,000 (804) --
-------- -------- -----
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)
======== ======== =====
</TABLE>
The fair values of interest rate and basis swaps 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. At December 31, 1998,
the fair value of all interest rate swaps 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, securities, and deposits. The
terms of the swaps match the terms of the hedged loans, securities, and
deposits. For the amortizing pay fixed rate, receive floating rate swaps, Corus
paid a weighted-average rate of 6.44% and received a weighted-average rate of
5.60% in 1998. For the non-amortizing pay fixed rate, receive floating rate
swaps, Corus paid a weighted-average rate of 8.70% and received a
weighted-average rate of 5.72% in 1998. For non-amortizing pay floating rate,
receive fixed rate swaps, Corus paid a weighted-average rate of 6.00% and
received a weighted-average rate of 5.66% in 1998. At December 31, 1998,
interest rate swaps with notional amounts of $23.2, $170.2 and $103.1 million
had maturity dates within one year, from one to five years and greater than five
years, respectively.
Corus entered into a basis swap which entails the payment of 3 month LIBOR
and the receipt of 3 month Treasury plus a spread. For the basis swap, Corus
paid a weighted-average rate of 5.65% and received a weighted-average rate of
5.57% in 1998. At
95
<PAGE> 47
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, the basis swap with a notional amount of $100 million had a
maturity date from one to five years.
The following financial instruments were used by Corus to hedge the market
risk associated with the common stock portfolio (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
CONTRACTUAL FAIR CARRYING
AMOUNT VALUE VALUE
----------- ------- --------
<S> <C> <C> <C>
Over the counter options:
Purchased put options..................... $12,500 $ 126 $ 126
Written put options....................... 12,500 (20) (20)
Written call options...................... 25,000 (2,475) (2,475)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------
CONTRACTUAL FAIR CARRYING
AMOUNT VALUE VALUE
----------- ------- --------
<S> <C> <C> <C>
Over the counter options:
Purchased put options..................... $302,500 $10,199 $10,199
Written put options....................... 302,500 (5,009) (5,009)
Written call options...................... 302,500 (6,987) (6,987)
======== ======= =======
</TABLE>
The fair values of the option contracts are based on dealer prices. The
carrying value represents the fair value at December 31, 1998 and 1997. Corus
entered into the transactions to hedge its market risk with respect to the
common 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.
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 possibly for 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 investiga-
96
<PAGE> 48
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tion. The Department's investigation expanded in 1995 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 $14.5 million of loans subject to the interim
agreement were charged-off against the allowance for loan losses since 1996. The
ultimate collectibility of these 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 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.
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, 1998 and 1997, 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
97
<PAGE> 49
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998. At December 31, 1998, the total amount of the subsidiary bank's
retained earnings available for dividends without prior regulatory approval and
maintaining well-capitalized status was $4.3 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, 1998, there were 17,785 shares available for grant.
Changes in stock options were as follows:
STOCK OPTIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. AVG. AVG.
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
(NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance............. 398 $18.16 359 $16.53 347 $15.52
Granted....................... 45 37.88 44 31.96 29 30.00
Exercised..................... -- -- -- -- (1) 20.30
--- ------ --- ------ --- ------
Canceled...................... (11) 27.74 (5) 21.88 (16) 19.05
--- ------ --- ------ --- ------
Ending balance................ 432 $19.98 398 $18.16 359 $16.53
--- ------ --- ------ --- ------
Exercisable at December 31.... 313 $15.86 289 $15.09 271 $14.57
--- ------ --- ------ --- ------
</TABLE>
At December 31, 1998, the range of exercise prices for outstanding options
and weighted-average term remaining was $10.50 to $37.88 and 4.3 years,
respectively. If Corus
98
<PAGE> 50
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expensed the fair value of options granted in 1998, 1997 and 1996, the pro forma
net income and earnings per share would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Reported net income...................... $40,628 $39,371 $43,905
After-tax fair value of options
granted............................... 139 97 66
------- ------- -------
Pro forma net income..................... $40,489 $39,274 $43,839
======= ======= =======
Pro forma net income per share:
Basic................................. $ 2.78 $ 2.66 $ 2.96
Diluted............................... 2.74 2.62 2.92
</TABLE>
The fair value of options granted was computed using the Black-Scholes
model using the following assumptions: a risk-free rate of 4.9% in 1998, between
5.8% and 6.6% in 1997, and 6.6% in 1996; expected life of 5 years in 1998, 1997
and 1996; expected volatility of 22.5% in 1998, and 21.0% in 1997 and 1996; and,
expected dividend yield of 1.5% in 1998 and 1997, and 1.7% in 1996. For the pro
forma disclosure, the estimated fair value of the options is amortized to
expense over the options' five year vesting period.
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, 1998 and 1997,
Corus and its subsidiary bank were classified as well-capitalized. There have
been no events since December 31, 1998, that management believes would have
changed that classification. The minimum ratios to be well-capitalized and
Corus' and its subsidiary bank's regulatory capital and ratios were as follows:
REGULATORY CAPITAL AND RATIOS
<TABLE>
<CAPTION>
TOTAL RISK-BASED
LEVERAGE TIER I CAPITAL CAPITAL
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
Minimum ratios for well-
capitalized............. 5.0% 6.0% 10.0%
December 31, 1998:
Corus................... $262,999 10.3% $262,999 15.0% $316,549 18.1%
Subsidiary bank......... 142,115 6.0% 142,115 9.1% 162,199 10.4%
December 31, 1997:
Corus................... $237,320 10.5% $237,320 15.1% $256,701 16.4%
Subsidiary bank......... 141,703 6.7% 141,703 9.6% 160,134 10.9%
</TABLE>
99
<PAGE> 51
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Comprehensive Income Changes in other comprehensive income were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Net Income.............................. $ 40,628 $39,371 $43,905
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized gains on securities.... 12,529 49,635 16,422
Less: reclassification adjustment
for gains included in net
income......................... (13,629) (4,238) (1,985)
-------- ------- -------
Net unrealized gains (losses) on
securities........................... (1,100) 45,397 14,437
Income tax expense (benefit) related to
items of other comprehensive
income............................... (385) 15,889 5,053
-------- ------- -------
Change in other comprehensive income,
net of tax........................... (715) 29,508 9,384
-------- ------- -------
Comprehensive income.................... $ 39,913 $68,879 $53,289
======== ======= =======
</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
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Denominator for basic earnings per
share -- average common shares
outstanding......................... 14,562 14,788 14,833
Dilutive common stock options.......... 211 178 161
------- ------- -------
Denominator for diluted earnings per
share 14,773 14,966 14,994
------- ------- -------
Numerator: Net income attributable to
common shares $40,628 $39,371 $43,905
======= ======= =======
Net income per share:
Basic............................... $ 2.79 $ 2.66 $ 2.96
Diluted............................. 2.75 2.63 2.93
</TABLE>
14. SEGMENT REPORTING
The following reflects the disclosure requirements set forth by Statement
of Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information". For purposes of this statement, Management
has determined that Corus, Corus Bank and Bancorp Operations Company (BOC) are
the primary operating segments within Corus. Corus Bank derives a significant
portion of its total revenues from interest income offering commercial,
mortgage, home equity, student and personal loans. It also provides general
banking services such as checking, savings, money market and time deposit
100
<PAGE> 52
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounts; trust and investment management and a variety of other services. BOC
provides item processing, bookkeeeping and other ancillary bank support services
to Corus Bank. Substantially all revenues of BOC are intersegment and eliminated
from consolidated total revenues. Both Corus Bank and BOC are wholly owned
subsidiaries of Corus.
Transactions between the reportable segments are recorded on the reportable
segments' financial statements and significant inter-segment accounts and
transactions have been eliminated in the preparation of the consolidated
financial statements. The inter-segment eliminations include revenues and
dividends from Corus' subsidiaries and certain interest income for bank accounts
of the parent company held at the bank subsidiary. In addition, inter-segment
eliminations include other income and expense for transactions between BOC and
Corus Bank.
The following is a summary of significant segment information as required
by SFAS No. 131:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31, 1998
-------------------------------------------------------------
CORUS INTER-SEGMENT
CORUS BANK BOC ELIMINATIONS CONSOLIDATED
-------- ---------- ------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest income(1).... $ 37,158 $ 183,718 $ 15 $ (33,366) $ 187,525
Interest expense...... 137 89,534 -- (366) 89,305
Provision for loan
loss............... -- 10,000 -- -- 10,000
-------- ---------- ------ --------- ----------
Net interest income after
provision for loan
losses................ 37,021 84,184 15 (33,000) 88,220
-------- ---------- ------ --------- ----------
Noninterest income:
Other income(2)....... 2,006 20,539 6,823 (8,829) 20,539
Net securities and
other financial
instruments gains,
net................ 4,801 327 -- -- 5,128
-------- ---------- ------ --------- ----------
Total noninterest
income................ 6,807 20,866 6,823 (8,829) 25,667
-------- ---------- ------ --------- ----------
Noninterest expense:
Goodwill
amortization....... -- 1,707 -- -- 1,707
Depreciation.......... 43 2,872 526 -- 3,441
Other expense......... 1,478 46,232 5,855 (6,823) 46,742
-------- ---------- ------ --------- ----------
Total noninterest
expense............... 1,521 50,811 6,381 (6,823) 51,890
-------- ---------- ------ --------- ----------
Income before income
taxes................. 42,307 54,239 457 (35,006) 61,997
Income tax expense....... 1,679 19,533 157 -- 21,369
-------- ---------- ------ --------- ----------
Net income............... $ 40,628 $ 34,706 $ 300 $ (35,006) $ 40,628
======== ========== ====== ========= ==========
Segment assets........... $348,656 $2,402,386 $1,551 $(163,178) $2,589,415
Expenditures to acquire
long-lived assets..... 13 5,955 628 -- 6,596
</TABLE>
101
<PAGE> 53
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31, 1997
-------------------------------------------------------------
CORUS INTER-SEGMENT
CORUS BANK BOC ELIMINATIONS CONSOLIDATED
-------- ---------- ------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest income(1) $ 40,698 $ 181,109 $ 15 $ (37,889) $ 183,933
Interest expense...... 327 83,199 25 (889) 82,662
Provision for loan
losses............. -- 16,000 -- -- 16,000
-------- ---------- ------ --------- ----------
Net interest income after
provision for loan
losses................ 40,371 81,910 (10) (37,000) 85,271
-------- ---------- ------ --------- ----------
Noninterest income:
Other income(2)....... (2,677) 21,326 5,699 (3,022) 21,326
Net securities and
other financial
instruments gains,
net................ 4,785 317 -- -- 5,102
-------- ---------- ------ --------- ----------
Total noninterest
income................ 2,108 21,643 5,699 (3,022) 26,428
-------- ---------- ------ --------- ----------
Noninterest expense:
Goodwill
amortization....... -- 3,018 -- -- 3,018
Depreciation.......... 51 2,684 463 -- 3,198
Other expense......... 1,330 44,561 4,784 (5,699) 44,976
-------- ---------- ------ --------- ----------
Total noninterest
expense............... 1,381 50,263 5,247 (5,699) 51,192
-------- ---------- ------ --------- ----------
Income before income
taxes................. 41,098 53,290 442 (34,323) 60,507
Income tax expense....... 1,727 19,258 151 -- 21,136
-------- ---------- ------ --------- ----------
Net income............... $ 39,371 $ 34,032 $ 291 $ (34,323) $ 39,371
======== ========== ====== ========= ==========
Segment assets........... $324,268 $2,089,728 $1,229 $(163,298) $2,251,927
Expenditures to acquire
long-lived assets..... 27 4,838 633 -- 5,498
</TABLE>
102
<PAGE> 54
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31, 1996
-------------------------------------------------------------
CORUS INTER-SEGMENT
CORUS BANK BOC ELIMINATIONS CONSOLIDATED
-------- ---------- ------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest income(1).... $ 37,926 $ 190,262 $ 15 $ (37,253) $ 190,950
Interest expense...... 414 80,413 37 (1,253) 79,611
Provision for loan
losses............. -- 16,000 -- -- 16,000
-------- ---------- ------ --------- ----------
Net interest income after
provision for loan
losses................ 37,512 93,849 (22) (36,000) 95,339
-------- ---------- ------ --------- ----------
Noninterest income:
Other income(2)....... 5,929 19,747 5,144 (11,069) 19,751
Net securities and
other financial
instruments gains,
net................ 3,587 (271) -- -- 3,316
-------- ---------- ------ --------- ----------
Total noninterest
income................ 9,516 19,476 5,144 (11,069) 23,067
-------- ---------- ------ --------- ----------
Noninterest expense:
Goodwill
amortization.......... 740 2,156 -- -- 2,896
Depreciation 54 2,886 307 -- 3,247
Other expense......... 1,489 43,681 4,327 (5,144) 44,353
-------- ---------- ------ --------- ----------
Total noninterest
expense............... 2,283 48,723 4,634 (5,144) 50,496
-------- ---------- ------ --------- ----------
Income before income
taxes................. 44,745 64,602 488 (41,925) 67,910
Income tax expense....... 839 22,991 175 -- 24,005
-------- ---------- ------ --------- ----------
Net income............... $ 43,906 $ 41,611 $ 313 $ (41,925) $ 43,905
======== ========== ====== ========= ==========
Segment assets........... $252,598 $2,124,452 $1,304 $(163,298) $2,215,056
Expenditures to acquire
long-lived assets..... 68 4,512 523 -- 5,103
</TABLE>
- -------------------------
(1) Interest income for Corus includes dividends received from Corus Bank
totaling $33, $37 and $36 million in 1998, 1997 and 1996, respectively.
(2) Other income for Corus includes equity in undistributed (distributed) net
income of subsidiaries totaling $2.01, $(2.68) and $5.93 million in 1998,
1997 and 1996, respectively.
103
<PAGE> 55
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. PARENT COMPANY FINANCIAL STATEMENTS
Corus condensed parent company financial statements were as follows (in
thousands, except per share data):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
---------- --------
<S> <C> <C>
Assets:
Cash....................................... $ 9,249 $ 11,227
Available for sale securities, at fair
value................................... 185,698 158,660
Investment in subsidiaries................. 153,718 152,031
Other assets............................... (9) 2,350
---------- --------
Total......................................... $ 348,656 $324,268
========== ========
Liabilities and shareholders' equity:
Liabilities................................... $ 30,526 $ 32,635
Shareholders' equity.......................... 318,130 291,633
---------- --------
Total......................................... $ 348,656 $324,268
========== ========
</TABLE>
104
<PAGE> 56
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary.................. $33,000 $37,000 $36,000
Other income.................................... 8,959 8,483 5,516
------- ------- -------
Total Income....................................... 41,959 45,483 41,516
------- ------- -------
Expenses:
Interest expense................................ 137 327 414
Other expenses.................................. 1,521 1,381 1,247
Goodwill and purchase accounting amortization... -- -- 1,036
------- ------- -------
Total Expenses..................................... 1,658 1,708 2,697
------- ------- -------
Income before income taxes and equity in
undistributed net income of subsidiaries........ 40,301 43,775 38,819
Income tax expense................................. 1,679 1,727 839
------- ------- -------
Income before equity in undistributed (distributed)
net income of subsidiaries...................... 38,622 42,048 37,980
Equity in undistributed (distributed) net income of
banking subsidiary.............................. 1,706 (2,968) 5,612
Equity in undistributed net income of non-bank
subsidiary...................................... 300 291 313
------- ------- -------
Net Income......................................... $40,628 $39,371 $43,905
======= ======= =======
Net Income per Share:
Basic........................................... $ 2.79 $ 2.66 $ 2.96
Diluted......................................... 2.75 2.63 2.93
</TABLE>
105
<PAGE> 57
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Operating activities:
Net income...................................... $40,628 $39,371 $43,905
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................... 43 51 54
Amortization of goodwill and purchase accounting
adjustments.................................. -- -- 1,036
Net securities and other financial instruments
gains........................................ (11,764) (4,220) (2,656)
Decrease (increase) in other assets............. 2,324 (1,688) (215)
Increase (decrease) in other liabilities........ 345 1,372 (1,747)
Equity in (undistributed) distributed net income
of subsidiaries.............................. (2,006) 2,677 (5,925)
------- ------- -------
Net Cash Provided by Operating Activities.......... 29,570 37,563 34,452
------- ------- -------
Investing activities:
Proceeds from maturities of available for sale
securities................................... -- -- 1,000
Proceeds from sales of available for sale
securities................................... 31,516 42,023 6,075
Purchases of available for sale securities...... (47,349) (58,300) (46,311)
Purchases of premises and equipment, net........ (7) (27) (68)
Return of capital from banking subsidiary....... -- -- 8,000
Purchases of minority interest and additional
consideration for bank subsidiary............ (2,345) (1,690) (4,139)
------- ------- -------
Net Cash Used in Investing Activities.............. (18,185) (17,994) (35,443)
------- ------- -------
Financing activities:
Issuance of common shares under stock option
plan......................................... -- -- 9
Retirement of common shares..................... (5,340) (5,007) (5,392)
Cash dividends paid on common stock............. (8,023) (7,691) (6,691)
------- ------- -------
Net Cash Used in Financing Activities.............. (13,363) (12,698) (12,074)
------- ------- -------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... (1,978) 6,871 (13,065)
Cash and Cash Equivalents at January 1.......... 11,227 4,356 17,421
------- ------- -------
Cash and Cash Equivalents at December 31........... $ 9,249 $11,227 $ 4,356
======= ======= =======
</TABLE>
106
<PAGE> 58
CORUS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly financial information for the years
ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
----------------- ----------------- ----------------- ----------------- -------------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income...... $44,734 $45,709 $45,756 $47,018 $49,126 $45,829 $47,909 $45,376 $187,525 $183,932
Interest expense..... 20,498 20,284 21,191 20,531 24,758 20,639 22,858 21,207 89,305 82,661
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Net interest
income............. 24,236 25,425 24,565 26,487 24,368 25,190 25,051 24,169 98,220 101,271
Provision for loan
losses............. 3,000 4,000 3,000 4,000 3,000 4,000 1,000 4,000 10,000 16,000
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Net interest income
after provision for
loan losses........ 21,236 21,425 21,565 22,487 21,368 21,190 24,051 20,169 88,220 85,271
Noninterest income,
net of trading,
securities and
other financial
instruments
gains.............. 4,418 5,771 4,620 6,286 6,545 5,140 5,164 4,835 20,747 22,032
Trading, securities
and other financial
instruments gains,
net................ 1,805 27 1,916 699 600 1,934 598 2,221 4,919 4,881
Noninterest expense.. 12,413 12,942 12,716 12,834 12,998 12,634 13,762 13,267 51,889 51,677
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Income before income
taxes.............. 15,046 14,281 15,385 16,638 15,515 15,630 16,051 13,958 61,997 60,507
Income tax expense... 5,144 4,978 5,223 5,848 5,290 5,466 5,712 4,844 21,369 21,136
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Net income available
to common
shareholders....... $ 9,902 $ 9,303 $10,162 $10,790 $10,225 $10,164 $10,339 $ 9,114 $ 40,628 $ 39,371
======= ======= ======= ======= ======= ======= ======= ======= ======== ========
Earnings per share:
Basic.............. $ 0.68 $ 0.63 $ 0.70 $ 0.73 $ 0.70 $ 0.69 $ 0.71 $ 0.62 $ 2.79 $ 2.66
Diluted............ 0.67 0.62 0.69 0.72 0.69 0.68 0.70 0.61 2.75 2.63
</TABLE>
COMMON STOCK MARKET INFORMATION AND DIVIDEND HIGHLIGHTS
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER YEAR
--------------- --------------- --------------- --------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock price range
High............... $46.88 $34.50 $45.00 $33.25 $40.63 $37.25 $39.50 $41.00 $46.88 $41.00
Low................ 37.50 31.50 39.63 23.50 28.63 28.00 30.50 32.75 28.63 23.50
Close.............. 43.88 33.25 40.25 28.25 34.00 36.13 32.25 39.56 32.25 39.56
Cash dividends
declared........... 0.135 0.125 0.140 0.135 0.140 0.135 0.140 0.135 0.555 0.530
</TABLE>
Corus' common stock is a NASDAQ National Market Issue trading under the
ticker symbol CORS.
107
<PAGE> 59
CORUS BANKSHARES, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Corus Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of Corus
Bankshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Corus Bankshares, Inc. and
subsidiaries as of December 31, 1996 and for the year ended December 31, 1996,
were audited by other auditors whose report dated January 10, 1997, expressed an
unqualified opinion on those statements.
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, 1998 and 1997, and the results
of their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 18, 1999
108
