Commercial Real Estate Loan Portfolio -- Unfunded Commitments In
addition to funded amounts, Corus has unfunded commitments totaling
$3.7 billion as of September 30, 2007, almost exclusively for
construction loans. Commercial Real Estate Loans - Unfunded
Commitments September 30 December 31 September 30 (in millions)
2007 2006 2006 Loans - unfunded portion $3,547 $4,217 $3,967
Commitment letters (1) 161 65 393 Letters of credit 1 2 3 Total
$3,709 $4,284 $4,363 (1) Commitment letters are pending loans for
which commitment letters have been issued to the borrower. These
commitment letters are also disclosed in the Commercial Real Estate
Loans Pending table of this report, included in the amounts labeled
as Commitments Accepted and Commitments Offered . Commercial Real
Estate Loan Portfolio -- Total Commitments Including unfunded
commitments, the commercial real estate loan portfolio totals $7.7
billion as of September 30, 2007, as detailed below: Total
Commercial Real Estate Loan Commitments (outstanding balances +
unfunded commitments) September 30 December 31 September 30 (in
millions) 2007 2006 2006 Condominium: Construction $6,630 $6,566
$6,473 Conversion 723 1,376 1,589 Total condominium 7,353 7,942
8,062 Other commercial real estate: Office 146 188 204 Hotel 128
128 155 Rental apartment 70 10 12 Other 30 79 189 Loans less than
$1 million 10 12 14 Total commercial real estate $7,737 $8,359
$8,636 Rental apartment includes one conversion loan (secured by a
property in Miami, Florida) and one construction loan (secured by a
property in Los Angeles, California) that were previously
classified as condominium loans. For the conversion loan
(outstanding balance and total commitment of $31.2 million as of
September 30, 2007), the borrower has opted not to convert the
property based on the weakness of the local condominium market and
will retain the collateral as an apartment building. As a result of
a principal reduction from additional equity and a new appraisal of
the collateral as an apartment project, the Company believes the
loan is adequately secured. As of September 30, 2007, the loan was
not classified as nonaccrual. For the construction loan
(outstanding balance of $23.2 million and total commitment of $36.6
million as of September 30, 2007), the borrower desires and expects
to sell the collateral as an apartment project based on the
strength of the local apartment market. Since no binding sales
agreement has yet been executed, it remains uncertain whether the
borrower will ultimately sell the entire building for use as
apartments or sell the individual units as condominiums. The
Company believes it is well secured by either exit strategy. As of
September 30, 2007, the loan was not classified as nonaccrual.
Commercial Real Estate Loan Portfolio By Size Total Commitment as
of September 30, 2007 (1) Condominium Condominium Other
Construction Conversion CRE Total (dollars in millions) # Amount #
Amount # Amount # Amount $180 million and above 2 $371 - $ - - $ -
2 $371 $140 million to $180 million 13 1,958 - - - - 13 1,958 $100
million to $140 million 15 1,809 - - - - 15 1,809 $60 million to
$100 million 13 1,001 2 138 3 236 18 1,375 $20 million to $60
million 33 1,306 9 320 3 106 45 1,732 $1 million to $20 million 14
185 28 265 5 32 47 482 Loans less than $1 million NM - NM - NM 10
NM 10 Total 90 $6,630 39 $723 11 $384 140 $7,737 NM - Not
Meaningful (1) Includes both funded and unfunded commitments,
letters of credit, and outstanding commitment letters. Commercial
Real Estate Loan Portfolio By Major Metropolitan Area Total
Commitment as of September 30, 2007 (1) Condominium Condominium
Construction Conversion (dollars in millions) # Amount # Amount
Florida: Miami/Southeast Florida 18 $2,034 4 $72 Tampa - - 4 136
Orlando - - 4 52 Other Florida 4 336 3 77 Florida Total 22 2,370 15
337 California: Los Angeles 11 780 - - San Diego 6 199 5 154
Sacramento - - 1 23 San Francisco 1 44 - - California Total 18
1,023 6 177 Atlanta 11 587 2 28 Las Vegas 7 486 1 28 New York City
8 496 - - Washington, D.C.(2) 4 231 4 40 Chicago 6 357 - -
Phoenix/Scottsdale 2 144 6 52 Other (3) 12 936 5 61 Loans less than
$1 million NM - NM - Total 90 $6,630 39 $723 Total Commitment as of
September 30, 2007 (1) Other CRE Total (dollars in millions) #
Amount # Amount Florida: Miami/Southeast Florida 2 $43 24 $2,149
Tampa - - 4 136 Orlando - - 4 52 Other Florida - - 7 413 Florida
Total 2 43 39 2,750 California: Los Angeles 4 144 15 924 San Diego
- - 11 353 Sacramento 1 38 2 61 San Francisco - - 1 44 California
Total 5 182 29 1,382 Atlanta - - 13 615 Las Vegas - - 8 514 New
York City - - 8 496 Washington, D.C.(2) 2 146 10 417 Chicago 1 2 7
359 Phoenix/Scottsdale - - 8 196 Other (3) 1 1 18 998 Loans less
than $1 million NM 10 NM 10 Total 11 $384 140 $7,737 NM - Not
Meaningful (1) Includes both funded and unfunded commitments,
letters of credit, and outstanding commitment letters. (2) Includes
northern Virginia and Maryland loans. (3) No other metropolitan
area exceeds three percent of the total. Originations An
origination occurs when a loan closes, with the origination amount
equaling Corus' full commitment under that loan (regardless of how
much is funded). Construction loans are rarely funded (to any
material degree) at closing, but rather funded over an extended
period of time as the project is built. In contrast, conversion
loans are largely funded at the time of closing. Originations (1)
2007 2006 2005 (in millions) 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q Condominium:
Construction $773 $622 $307 $950 $855 $737 $713 $327 Conversion 33
2 4 39 7 10 490 655 Total condominium 806 624 311 989 862 747 1,203
982 Other commercial real estate: Construction - - 10 2 - - 110 13
Non-construction - - - - - - - - Total commercial real estate $806
$624 $321 $991 $862 $747 $1,313 $995 (1) Includes commitment
increases to existing loans Originations in 2007 to date have been
primarily in Atlanta, New York City, Los Angeles and Chicago.
Paydowns/Payoffs Loan paydowns (partial payments) and payoffs
(payments of all outstanding balance) can fluctuate considerably
from period to period and are inherently difficult to predict. The
nature of condominium development lending is such that paydowns may
occur at anytime since they correlate with the sales of individual
condominium units. Payoffs are equally as unpredictable given that,
while each loan has a stated maturity date, many of Corus' loans
include extension options that allow borrowers who meet certain
conditions, to extend the maturity of the loan (generally for a
fee) for oftentimes six to twelve months. Finally, on a
case-by-case basis, Corus may choose to renegotiate the maturity
date of a loan. For the third quarter of 2007, loan paydowns and
payoffs were $702 million, up from $617 million during the second
quarter of this year, but down from $791 million in the third
quarter of 2006. On a year-to-date basis, 2007 paydowns were $2.3
billion, slightly lower than the $2.5 billion during the same
period in 2006. Paydowns/Payoffs 2007 2006 2005 (in millions) 3Q 2Q
1Q 4Q 3Q 2Q 1Q 4Q Total commercial real estate $702 $617 $939 $948
$791 $911 $791 $784 Pending Commercial Real Estate Loans The
following table presents pending commercial real estate loans
listed in descending order with respect to stage of completion. In
other words, a prospective loan categorized as Commitment Accepted
is essentially one step away from closing while a prospective loan
classified as Term Sheet Issued is in its earliest stages. It has
been the Company's experience that once a loan reaches the
Application Received stage it is likely to ultimately close.
Commercial Real Estate Loans Pending September 30, December 31,
September 30, 2007 2006 2006 (dollars in millions) # Amount #
Amount # Amount Commitment Accepted (1) - $ - - $ - 2 $283
Commitment Offered (1) 1 161 1 65 1 110 Application Received 8 888
11 1,003 8 780 Application Sent Out 5 243 4 254 12 1,194 Term Sheet
Issued 36 3,375 29 2,625 24 2,393 Total 50 $4,667 45 $3,947 47
$4,760 Condominium: Construction 41 $3,999 40 $3,561 43 $4,486
Conversion 3 118 2 152 3 207 Total condominium 44 4,117 42 3,713 46
4,693 Other commercial real estate 6 550 3 234 1 67 Total
commercial real estate 50 $4,667 45 $3,947 47 $4,760 (1) These
amounts are also included in the Commercial Real Estate Loans -
Unfunded Commitments table of this report. Commercial Lending
Commercial loans are primarily loans to Corus' customers in the
check cashing industry. Balances fluctuate based on seasonal cash
requirements and are generally secured by the equity of the check
cashing operation. Residential Real Estate and Other Lending
Residential real estate and other lending balances continue to
decline as the Bank allows these portfolios to "run-off." Minimal
new originations are expected. Asset Quality Overview Over the last
several years, Corus has had particularly good experience with
respect to problem loans. Few commercial real estate loans became
past due, even fewer were placed on non-accrual and there was a
virtual absence of charge-offs. Recently, however, Corus has begun
to report higher levels of problem loans and increases in
provisions for credit losses (see Allowance for Credit Losses
section below). This is the direct result of the recent slowdown in
the residential housing market. Conversion Loans At this point,
most of our problem loans are concentrated in the condominium
conversion loan portfolio. As of September 30, 2007, we had 39
condominium conversion loans with commitments totaling $723
million. We have seen many instances where either the borrower or a
mezzanine lender subordinate to us has supported problem loans with
substantial amounts of additional cash in order to support the
project. However, since most of our loans are non-recourse, past
financial support is no guarantee of future support, particularly
if the market weakens further (or, potentially, even if the market
stays at its currently depressed levels for an extended period of
time). For those problem loans where the borrower or mezzanine
lender chooses not to take the necessary steps to resolve issues,
we will not hesitate to foreclose. In the second quarter of this
year we completed foreclosing on the asset securing one such loan.
At this time, we do not have any other foreclosures underway, but
that could change rapidly. Keep in mind that these are all real
estate secured loans, so only some portion of the loan is at risk.
When originating these loans we focused on relatively new,
well-located apartment projects. Construction Loans In our
construction portfolio, problems can be broken down into three
categories: (1) projects where construction is at risk of coming to
a halt; (2) projects where there are material cost overruns that
are not being covered by borrowers, completion guarantors or
sponsors; and (3) projects where construction is complete, but
either (a) sales are weak, and/or (b) pre-sale buyers walk away
from their contracts. As of September 30, 2007, we had no projects
where construction problems put completion of the project in doubt.
One such loan had given us concerns last quarter, but the sponsor
in that loan invested a substantial amount of equity to rectify the
problems, and construction is moving ahead relatively smoothly
again. As for uncovered cost overruns, this is an issue many
projects experience. The Bank's position is that construction must
be completed, since a partially completed building is of little
value. In many cases, we have agreed to provide additional funds to
the borrower to enable them to complete the project. As a result,
our exposure in those projects is slightly higher than we
originally anticipated, but that is one of the risks that we
underwrite from the outset, and one of the reasons we target our
initial condominium construction loan exposures at approximately
55% to 65% of gross sellout value (i.e., the originally projected
sales prices of the condominium units, before associated selling
costs). That gives us leeway to absorb some degree of increased
exposure. The final source of risk, deals where construction is
complete but weak sales or cancelled contracts put our loan at
risk, is the most critical source of risk for Corus. We believe
construction coming to a halt will remain an isolated and
non-systemic problem. Cost overruns do not radically change the
nature of risk in our portfolio. But if condominiums don't sell to
a meaningful degree, the bank will end up foreclosing on projects
and taking losses. If the market deteriorates to the point where a
material number of large condominium projects are complete and
there are no buyers willing to close on the units at the borrowers'
asking prices, we will likely see a material increase in our
problem loans. Today that is not a severe problem. In several
cases, borrowers who failed to sell enough condominiums to make a
condominium exit viable have negotiated the sale of the asset as
apartments at a price more than adequate to pay us off. In some
other cases, enough units closed and generated paydowns such that
our remaining loan exposure is well secured by the remaining,
slow-to-sell inventory. But absorption risk remains an issue we
consider extensively. One of the main factors in much of our
underwriting is the existence and strength of pre-sale contracts.
In that regard, Florida, where Corus has its greatest concentration
of condominium construction loans, $2.4 billion as of September 30,
2007, is one of the more favorable pre-sale markets. Florida sales
contracts generally require a non-refundable earnest money deposit
of 20% of the purchase price. Las Vegas, another significant market
for Corus, is also a pre-sale market, and most of our construction
deals there involved deposits of up to 15%. While other markets
have pre-sales, the practice is either not pervasive or the deposit
percentages are not material. If a condominium buyer does not close
on their unit, they will lose their deposit. Unit buyers might
allege delays, unauthorized changes in the condominium itself, or
other claims, in their attempt to void contracts and get deposits
back. Whether or not such arguments are successful remains to be
seen. Currently, we have four loans totaling $237.9 million secured
by projects in Florida that are complete and are attempting to
close on their presales, as well as sell more units. The largest of
those loans, for $146.3 million, was completed late during the
third quarter, thus it is impossible to know if the project is
going to experience a concerning level of presale fallout or not.
The other three projects have all experienced a material degree of
presale fallout. As of today, we only perceive there to be a risk
of loss in one of those three loans. That loan, totaling $25.6
million, is also past due. However, enough sales have occurred that
our risk of loss, if any, should be modest. It is absolutely
critical to understand that projects need not sell out in their
entirety for our loan to become safe. With regard to our senior
secured loans, once the developer has sold between 40% to 50% of
the units at the originally projected prices, this is typically
sufficient to pay us down to a safe level. Once more than 50% of
the units are sold at original prices, our loan will be paid down
to a very low and well-secured balance, or even paid off
altogether. To the extent we still have balances on loans that are
paid down substantially, such balances are highly desirable, being
both safe and lucrative, and they might help us partially offset
lower origination volume. This situation may not be so desirable
for our borrowers or other financial sponsors, who might find it
necessary to invest substantial sums to carry the project to full
sellout. However, it is not necessarily bad for us. Of course, we
can make errors in our best estimates of value, and absorption is
also an absolutely critical consideration that loan-to-sellout
ratio often fails to address adequately. So, our sense of risk can
sometimes be wrong, and we could incur a loss even though we felt
safe at one point. Of course, we can also be overly concerned, and
we can get paid in full on loans we deemed to be concerning.
Guarantees Most (but not all) of the Bank's lending is done on a
non-recourse basis, meaning the loan is secured by the real estate
without further benefit of payment guarantees from borrowers.
However, the Bank routinely receives guarantees of completion and
guarantees that address "bad acts." These various guarantees can be
described as follows: Payment Guarantees -- Guarantor guarantees
repayment of principal and interest. Often there might be
limitations on the guaranteed amounts, and guarantors vary
dramatically in their financial strength and liquidity. Overall,
however, these guarantees would protect the Bank to a certain
degree even if the sale proceeds from the asset are insufficient to
repay the loan in full. The Bank does negotiate for and receive
repayment guarantees in certain situations, but the vast majority
of the Bank's lending activity is done without repayment
guarantees. Completion Guarantees (For Construction Loans) --
Guarantor guarantees to pay for costs necessary to complete the
asset, to the extent such costs exceed the original budget. Upon
completion of the asset, and provided there are no construction
liens filed by contractors, such guarantees typically lapse. These
guarantees do not protect the Bank from decreases in collateral
value. They do help ensure that the Bank's exposure in a bad deal
(or any deal for that matter) is not higher than originally
expected. Again, there are vast differences in the financial
strength of completion guarantors, and in certain (relatively
infrequent) circumstances, the Bank agrees to limits on, or even
does without, completion guarantees. Overall, however, the Bank
views completion guarantees from capable guarantors as a very
important part of the underwriting process. Bad Act Guarantees --
Guarantor guarantees repayment of losses incurred by the Bank in
the event borrower commits fraud, negligence, or a wide variety of
other "bad acts." The scope of bad acts is often heavily
negotiated. Very often it is defined to include bankruptcy filings,
in which case Bad Act guarantees can help ensure that the Bank
takes control of assets securing bad loans in a timely manner.
Asset Quality Measures As of September 30 (Dollars in thousands)
2007 2006 Allowance for Loan Losses $62,850 $42,157 Allowance for
Loan Losses / Total Loans 1.54% 0.97% Liability for Credit
Commitment Losses $5,500 $5,500 Nonaccrual and Loans 90 days or
more past due (NPLs) (1) $199,776 $36,616 Other Real Estate Owned
(OREO) (1) $40,387 $ - Total Nonperforming Assets (NPLs + OREO) (1)
$240,163 $36,616 NPLs / Total Loans 4.89% 0.84% (1) See the
Nonaccrual, Past Due, OREO and Restructured Loans section for
additional details Allowance for Credit Losses The Allowance for
Credit Losses is comprised of the Allowance for Loan Losses and a
separate Liability for Credit Commitment Losses. The Allowance for
Loan Losses is a reserve against funded loan amounts, while the
Liability for Credit Commitment Losses is a reserve against
unfunded commitments. Corus' methodology for calculating the
Allowance for Loan Losses is designed to first provide for specific
reserves associated with "impaired" loans, as defined by Generally
Accepted Accounting Principles. These loans are segregated from the
remainder of the portfolio and are subjected to a specific review
in an effort to determine whether or not a reserve is necessary
and, if so, the appropriate amount of that reserve. After
determining the specific reserve necessary for impaired loans, the
Company then estimates a general reserve to be held against the
outstanding balances of its remaining (i.e., non-impaired) loan
portfolio. For purposes of estimating the general reserve, Corus
segregates its commercial real estate secured loans (excluding
those which had been identified as impaired) by: -- Collateral Type
-- condominium construction, condominium conversion, etc., -- Lien
Seniority -- 1st mortgage or a junior lien ("mezzanine" loan) on
the project, and -- Regulatory Loan Rating -- Pass, Special
Mention, Substandard, etc. Corus segregates its small amount of
remaining loans (i.e., commercial, residential, overdrafts, and
other) by loan type only. Loss factors, which are based on
historical net charge-offs plus a management adjustment factor, are
then applied against the balances associated with each of these
loan portfolio segments, with the sum of these results representing
the total general reserve. The management adjustment factor is
intended to incorporate those qualitative or environmental factors
that are likely to cause estimated credit losses associated with
the Bank's existing portfolio to differ from historical loss
experience. Finally, the Allowance for Credit Losses may also
include an "unallocated" portion. The unallocated portion
represents a reserve against risks associated with environmental
factors that may cause losses in the portfolio as a whole but are
difficult to attribute to individual impaired loans or to specific
groups of loans. The process for estimating the Liability for
Credit Commitment Losses closely follows the process outlined above
for the Allowance for Loan Losses. In accordance with the
methodology discussed above, the Company recorded provisions for
credit losses of $32.5 million and $3.0 million in the first nine
months of 2007 and 2006, respectively. Of the $32.5 million, $15.0
million was recorded in the third quarter of 2007. No provision was
recorded during the third quarter of 2006. A reconciliation of the
activity in the Allowance for Credit Losses is as follows: Three
Months Ended Nine Months Ended September 30 September 30 (in
thousands) 2007 2006 2007 2006 Balance at beginning of period
$53,283 $47,686 $50,793 $44,740 Provision for credit losses 15,000
- 32,500 3,000 Charge-offs: Commercial real estate: Condominium:
Construction - - - - Conversion - - (15,476) - Total condominium -
- (15,476) - Other commercial real estate - - - - Commercial -
(182) - (756) Residential real estate and other (60) (177) (83)
(267) Total Charge-Offs (60) (359) (15,559) (1,023) Recoveries:
Commercial real estate - - - - Commercial - 3 2 3 Residential real
estate and other 127 327 614 937 Total Recoveries 127 330 616 940
Balance at September 30 $68,350 $47,657 $68,350 $47,657 In 2007,
Corus charged off a total of $15.5 million related to a condominium
conversion loan in Naples, Florida. Upon foreclosure, the asset was
transferred to Other Real Estate Owned ("OREO", see the OREO
section for further discussion and details). The Allowance for
Credit Losses is presented on Corus' balance sheet as follows:
Sept. 30 Dec. 31 Sept. 30 (in thousands) 2007 2006 2006 Allowance
for Loan Losses $62,850 $45,293 $42,157 Liability for Credit
Commitment Losses (1) 5,500 5,500 5,500 Total $68,350 $50,793
$47,657 (1) Included as a component of other liabilities Commercial
Real Estate Loan Charge-off History (in thousands) Charge-offs
Condominium Condominium Other Construction Conversion CRE Total
Period 2007 (YTD September 30, 2007) $0 $15,476 $0 $15,476 2006 0 0
1,512 1,512 2005 0 0 0 0 2004 0 0 0 0 2003 0 0 0 0 2002 0 0 0 0
2001 0 0 0 0 2000 0 0 0 0 1999 0 0 61 61 1998 0 0 18 18 Total
Charge-offs $ - $15,476 $1,591 $17,067 While Corus' long-term loss
history on commercial real estate lending has been quite
impressive, that history corresponded to a favorable period of
minimal losses for the banking industry. The favorable results of
that period were undoubtedly in part a reflection of what was
generally a very strong residential housing market across much of
the country. The housing market though has now been showing
broad-based signs of weakness for some time now. That weakness is
clearly placing meaningful stress on a number of Corus' condominium
loans, as evidenced by the recent increases in nonaccrual and
otherwise nonperforming loans (as discussed throughout this
document). As a result, it is quite possible that Corus may
experience significant charge-offs. With that said, predicting the
amount and/or timing of charge-offs is extremely difficult -- any
such estimate would hinge on making assumptions regarding, among
other things, the future strength of the U.S. economy, future
interest rates (all else being equal, higher interest rates will
have a damping effect on housing prices), and market perceptions
(which can drive behavior as much as any fundamental attributes).
It is Corus' strong belief that the measure of any company's
success must be done over an entire business cycle, and not by
looking at just "good" or "bad" years in isolation from one
another. Since 1998, Corus originated over $20 billion in
commercial real estate loans and, until recently, had zero
charge-offs. While we are now experiencing problem loans and
charge-offs, issues which may well get worse - if not materially
worse -- before they improve, we believe any measure of our overall
success in the commercial real estate loan business must also take
into account our results of the past decade. Nonaccrual, Past Due,
OREO and Restructured Loans September 30 December 31 September 30
(in thousands) 2007 2006 2006 Nonaccrual $199,039 $72,542 $36,230
Loans 90 days or more past due 737 34,365 386 Total Nonperforming
Loans $199,776 $106,907 $36,616 Other real estate owned ("OREO")
40,387 8,439 - Total Nonperforming Assets $240,163 $115,346 $36,616
Troubled debt restructurings * $26,515 $ - $ - * To the extent not
included in either nonaccrual or loans 90 days or more past due.
Nonaccrual loans at September 30, 2007 include one condominium
construction loan and three condominium conversion loans. The
construction loan had an outstanding balance of $24.5 million, an
unfunded commitment of an additional $1.1 million and is
collateralized by a property in Miami, FL. For the conversion
loans, the underlying properties are located in Tampa, FL (balance
$63.1 million, total commitment $63.4 million), Ft. Myers, FL
(balance and total commitment $59.2 million), and San Diego, CA
(balance $52.2 million, total commitment $53.4 million). During the
third quarter of 2007, a $20.6 million conversion loan (located in
Phoenix, AZ) previously reported as nonaccrual was returned to
accrual status. The Bank had received all required loan payments
for the last six months and management expects full collection of
all principal and interest on the loan. Loans past due 90 days or
more at September 30, 2007 primarily relate to a variety of
consumer loans. As to previous quarters, nearly the entire amount
listed as 90 days or more past due as of December 31, 2006 related
to a single loan, which was subsequently paid off in full. In many
cases where a condominium project is not performing as well as we
(or the developer) would like, the borrower, or a mezzanine lender
subordinate to Corus, has supported the loan with additional
equity. These additional equity contributions have come in many
forms, including cash payments that have been used to keep a loan
current or, in the case of a delinquent loan, bring it current. As
a result of such payments, three of the above nonaccrual loans,
totaling $175.4 million, were actually "current" relative to
principal and interest as of quarter-end. Payments received from
borrowers on nonaccrual loans can, under certain conditions, be
recognized as interest income. During the three and nine months
ended September 30, 2007, cash payments on nonaccrual loans
recognized as interest income totaled $2.3 million and $4.9
million, respectively. To the extent that either interest payments
on nonaccrual loans are not received or payments received are
applied to principal, no interest income is recorded. This is
referred to as foregone interest. For the three and nine months
ended September 30, 2007, foregone interest totaled $2.8 million
and $8.5 million, respectively. Importantly, management's decision
with respect to whether to recognize payments received on
nonaccrual loans as income or as a reduction of principal may
change as conditions dictate. As of September 30, 2007, Corus had
one condominium construction loan (located in San Diego, CA)
classified as a troubled debt restructuring ("TDR") not included
above in nonaccrual or 90 days past due. The loan had an
outstanding balance of $26.5 million at September 30, 2007 and a
total commitment of $38.3 million. Loans are classified as TDR when
management grants, for economic or legal reasons related to the
borrower's financial condition, concessions to the borrower that
management would not otherwise consider. A TDR oftentimes results
from situations where the borrower is experiencing financial
problems and expects to have difficulty complying with the original
terms of the loan. However, once the loan is restructured in a TDR,
the prospects of collecting all principal and interest on that loan
generally improve. OREO -- Other Real Estate Owned ("OREO")
consists of two properties. The first property is an office
building located in the suburbs of Chicago which Corus took
possession of in December 2006. The second property secures a
former condominium conversion loan that Corus foreclosed on in the
second quarter of 2007. This property is located in Naples, Florida
and is currently being operated as an apartment complex. Corus
charged off a total of $15.5 million related to this loan in 2007.
Management is currently assessing its options with respect to these
properties. Deposits The following table details the composition of
Corus' deposits by product type: September 30 December 31 September
30 (in millions) 2007 2006 2006 Retail certificates of deposit
$5,541 71% $6,001 69% $5,711 67% Money market 1,439 18 1,698 20
1,802 21 Demand 280 4 309 4 330 4 NOW 246 3 285 3 284 3 Brokered
certificates of deposit 213 3 280 3 289 3 Savings 127 1 132 1 134 2
Total $7,846 100% $8,705 100% $8,550 100% In 2007, the Bank lowered
the interest rates it offers on CDs, relative to the market, in an
effort to somewhat reduce deposits and begin to better match
deposits with loans. At September 30, 2007, approximately 57% of
the Bank's $7.6 billion in retail deposits (excluding brokered
deposits) were sourced from outside of Illinois. By marketing its
deposit products nationally, the Bank is able to attract deposits
without being limited to competing solely in the very competitive
Chicago market. Total retail deposits consisted of nearly 185,000
accounts. Long-Term Debt -- Subordinated Debentures ("Trust
Preferred") As of September 30, 2007, Corus had $404.6 million in
floating rate junior subordinated notes (the "Debentures"). The
Debentures each mature 30 years from their respective issuance
date, but are redeemable (at par) at Corus' option at any time
commencing on the fifth anniversary of their issuance (or upon the
occurrence of certain other prescribed events). Interest payments
on the Debentures are payable quarterly. So long as an event of
default has not occurred (described further below), Corus may defer
interest payments for up to 20 consecutive quarters. Events of
default under the terms of the debenture agreements include failure
to pay interest after 20 consecutive quarters of deferral (if such
election is ever made), failure to pay all principal and interest
at maturity, of filing bankruptcy. All of the outstanding
Debentures are variable-rate, with interest rates ranging from
LIBOR plus 1.33% to LIBOR plus 3.10% (resetting quarterly). As
such, management cannot say with certainty what the interest
payments on the Debentures will be in the future. However, based on
September 30, 2007 market interest rates, the interest payments
would be approximately $31 million per annum. Note that the
Debentures were issued to unconsolidated subsidiary trusts of the
Company. Each trust's sole purpose is to issue Trust Preferred
Securities with terms essentially identical to the Debentures and
then use the proceeds of the Trust Preferred issuance to purchase
debentures from the Company. This has been a very common form of
raising tax-advantaged capital, especially for bank holding
companies. Other Borrowings Corus, through its bank holding
company, has a $150 million revolving line of credit. The line of
credit matures on February 28, 2010, and is collateralized by 100%
of the common stock of the Bank. While the holding company can use
the line of credit for any general corporate purpose, it currently
uses the line of credit to fund loan participations that it has
entered into with the Bank. As of September 30, 2007, the line of
credit had an outstanding balance of $50.8 million. Share
Repurchase Program The Company has in place a Share Repurchase
Program (the "Program") that was approved by the Board of Directors
in April 2004. During the third quarter, Corus repurchased 383,930
shares. As of September 30, 2007, the remaining shares authorized
for repurchase under the Program were 1,204,870. The Program
expires in April 2009. The table below illustrates the Company's
share repurchase activity during the third quarter of 2007: Maximum
Number of Shares that May Yet Be Total Number Average Purchased of
Shares Price Paid Under the Period Purchased per Share Program July
1-31, 2007 - $ - 1,588,800 August 1-31, 2007 65,300 $14.67
1,523,500 September 1-30, 2007 318,630 $12.93 1,204,870 Total
383,930 $13.23 1,204,870 Liquidity and Capital Resources Bank
Holding Company Sources At September 30, 2007, the holding company
had cash and marketable equity securities of $167 million and $171
million, respectively, for a total of $338 million. By comparison,
the holding company had cash and marketable equity securities of
$51 million and $210 million, respectively, for a total of $261
million one year earlier. The cash is held on deposit at the Bank,
and the securities are generally investments in equity securities.
In order to be conservative, the holding company has 'designated'
$44 million of its cash to cover loan participations committed to
by the holding company but unfunded as of September 30, 2007 and
$14 million to cover dividends declared. It is important to note
that while the holding company has earmarked a portion of its cash
for participations, this action is one of prudence by management
and not the result of any regulatory or legal requirements.
Therefore, the holding company had "free and clear" cash and
marketable securities aggregating $280 million at September 30,
2007, which could be used for any corporate purpose, such as
additional cash dividends to our shareholders, share repurchases,
supporting the Bank's capital position and/or supporting the
holding company's cash flow needs. The loan participations
mentioned above refer to instances where the holding company has
purchased a participation in loans originated by the Bank. The
holding company generally enters into these participations so that
the Company can hold loans greater than the Bank alone would
otherwise be able to hold (banking regulations impose various
limitations on bank's extensions of credit). The loans participated
in are typically construction loans which, as is the nature of
construction loans, are unfunded at inception and may take two or
more years to be fully drawn down. The difference between the
holding company's total commitment and the amount actually funded
is referred to as the unfunded commitment. As of September 30, 2007
the holding company's total commitments were $71 million, of which
$27 million was funded leaving $44 million unfunded, as cited
above. Between 2003 and 2005, cash and liquidity needs of the
holding company were primarily met through the issuance of a form
of long-term debt, commonly referred to as "Trust Preferred
Securities" (the attributes of these securities are described in
the section titled "Long-Term Debt - Subordinated Debentures" of
this report). During this period, the holding company issued,
through unconsolidated subsidiary trusts, approximately $350
million of Trust Preferred Securities, infusing the majority of the
proceeds into the Bank, while retaining enough cash to satisfy its
own liquidity needs. Recently, the Bank's need for capital has
changed, and as a result, the holding company has been able to use
the Bank as a source of liquidity (see below). In 2006, $25 million
of Trust Preferred Securities were issued and the holding company
received $99 million of dividends from the Bank. In 2007, the
holding company issued an additional $20 million in Trust Preferred
securities and received $128 million in dividends from the Bank in
the first nine months of 2007. Depending on the Bank's capital
needs, the holding company could seek to issue additional Trust
Preferred Securities in the future. However, while the issuance of
Trust Preferred Securities has been a reliable source of capital in
the recent past, there is no assurance that it will be available in
the future. Additional sources of liquidity available to the
holding company include dividends from its marketable equity
securities portfolio, interest and points/fees earned from loan
participations, and cash that could be generated from sales of its
equity securities. Further, the holding company could draw on its
revolving line of credit (see discussion in the section titled
"Other Borrowings" of this report). Uses -- As mentioned above,
between 2003 and 2005, the holding company's primary use of cash
was capital infusions into the Bank. The Bank's capital needs have
changed such that the holding company has not made any capital
contributions to the Bank since 2005. Additional uses included
dividends to shareholders, interest and principal payments on debt,
share repurchases, the purchase of marketable securities, and the
payment of operating expenses. See the section below regarding the
Bank's liquidity and capital needs for a discussion of the factors
impacting the Bank's capital needs. Corus Bank, N.A. Sources -- At
September 30, 2007, the Bank's liquid assets totaled $4.9 billion,
or 54%, of its total assets versus $5.2 billion, or 54% of total
assets at September 30, 2006. The Bank's primary sources of cash
include: loan paydowns/payoffs, investment securities that matured
or were sold, Bank earnings retained (i.e., not paid to the holding
company as a dividend), and capital infusions from the holding
company. Uses -- The Bank's principal uses of cash include funding
loans (both new loans as well as drawdowns of unfunded loan
commitments) and funding the recent net decline in deposits. At
September 30, 2007, the Bank had unfunded commercial real estate
loan commitments of $3.7 billion. While there is no certainty as to
the timing of drawdowns of these commitments, management
anticipates the majority of the loan commitments will fund over the
next 30 months, although such fundings could occur more rapidly.
The Bank must also retain sufficient funds to satisfy depositors'
withdrawal needs and cover operating expenses. As a result of
management actions to better align deposit and loan levels, the
Bank has recently seen a slight decline in its total deposits,
essentially all of that change associated with retail certificates
of deposit ("CDs"). While the recent decline in retail CDs has been
as a direct result of management action, these CDs are short-term
in nature (virtually all have original maturities of 1 year or
less) and do present greater liquidity risk (than would longer-term
funding alternatives) and could experience shrinkage in the future
not tied to management actions. The Bank must therefore be prepared
to fund those withdrawals and, as such, internally allocates a
substantial pool of its investment securities "against" deposits.
This filing contains forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements may be identified
by, among other things, the use of forward-looking terms such as
"likely," "typically," "may," "intends," "expects," "believes,"
"anticipates," "estimates," "projects," "targets," "forecasts,"
"seeks," "potential," "hopeful," or "attempts" or the negative of
such terms or other variations on such terms or comparable
terminology. By their nature, these statements are subject to
risks, uncertainties and other factors, which could cause actual
future results to differ materially from those results expressed or
implied by such forward-looking statements. These risks,
uncertainties and other factors include, but are not limited to,
the following: -- The impact on Corus of the problems in the
residential housing and mortgage lending markets, including its
impact on Corus' loan originations, credit quality and charge-offs;
-- Continued financial support provided by borrowers, or second
mortgage holders, for underperforming loans; -- The Company's focus
on condominium lending and geographic concentration; -- The impact
of weak sales and/or cancelled contracts on loan paydowns and,
ultimately, collateral valuations; -- The borrower's ability to
complete building construction on time and within budget; -- The
interplay of originations, construction loan funding, and loan
paydowns on loan balances; -- The likelihood that condominiums will
remain a permanent fixture in the residential housing market; --
The risk that higher interest rates could dampen housing prices as
well as the demand for housing, which could therefore adversely
affect Corus' business; -- The occurrence of one or more
catastrophic events that may directly or indirectly, affect
properties securing Corus' loans. These events include, but are not
limited to, earthquakes, hurricanes, and acts of terrorism; -- The
likelihood that pending loans which reach the "Applications
Received" stage will ultimately close; -- Changes in management's
estimate of the adequacy of the allowance for credit losses; -- The
effect of competitors' pricing initiatives on loan and deposit
products and the resulting impact on Corus' ability to attract and
retain sufficient cost-effective funding; -- Corus' ability to
attract and retain experienced and qualified personnel; -- Corus'
ability to access the capital markets, including Trust Preferred
securities; -- Restrictions that may be imposed by any of the
various regulatory agencies that have authority over the Company or
any of its subsidiaries; -- Changes in the accounting policies,
laws, regulations, and policies governing financial services
companies; -- The concentration of ownership by the Chief Executive
Officer, Robert J. Glickman, and his immediate and extended family.
Any forward-looking statements should be considered in light of the
factors discussed above and the factors discussed from time to time
in Corus' filings with the Securities and Exchange Commission,
including those under Item 1A, Risk Factors in the Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2007 and in
Corus' Annual Report on Form 10-K for the year ended December 31,
2006. Corus undertakes no obligation to revise or update these
forward-looking statements to reflect events or circumstances after
the date of this filing. DATASOURCE: Corus Bankshares Inc. Web
site: http://www.corusbank.com/
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