Corus Finally Takes Its Medicine

Bank eliminates dividend because of 49% rise in nonperforming loans from previous quarter.
By Philip van Doorn ,

Way back on Aug. 29, I was thrashed by some readers for saying that

Corus Bankshares, Inc.

(CORS)

might eventually have to

eliminate its dividend.

This story followed Nicholas Yulico's

detailed look at Corus' condominium lending activities.The best piece of hate mail included these gems:

"Your journalism is most irresponsible."

"Do you understand how smart the management of CORS is?"

And my favorite:

"You should be ashamed of yourself."

Well, shame was my middle name until last Wednesday, when Corus released its first-quarter earnings results and announced the elimination of its 25-cent dividend on common stock. Shares dropped 24% on the day, to $7.33. According to

Bloomberg

, Corus' shares returned a negative 36% in the period from Aug. 29 to the market close Friday, May 2. For the one-year period ending last Friday the return was a negative 45%. For two years it was negative 71%.

Corus announced the elimination of the dividend because of a 49% increase in nonperforming loans from the previous quarter.

The following summarizes the declining loan quality for Corus and its main subsidiary, Corus Bank NA:

Click here for larger image.

Loan loss reserves totaled $87.5 million, covering a relatively low 21% of nonperforming loans, as of March 31, 2008.

When we first looked at the company using June 2007 figures, Corus's risk-based capital ratio was 17.07%. This ratio takes loan quality and loan loss reserves into account, and needs to be at least 10% for the company to be considered well-capitalized under regulatory guidelines. Corus maintained what is normally considered a very strong risk-based capital ratio of 17.0%, as of March 31, 2008. Thus, from its action on the dividend, it's pretty clear that Corus expects loan quality to get much worse over the coming quarters.

Cutting the dividend will save Corus roughly $13.8 million each quarter. The company noted at the end of its earnings release that under its current share repurchase plan, it could buy back up to $4.7 million additional shares. Corus didn't repurchase any during the first quarter, but stated in the release that it was "quite interested in additional share repurchases," and that buybacks would be "an excellent use of the company's capital." It's a bit of a surprise that the company would make this statement in the same document announcing the elimination of its dividend.

Here's a summary of earnings results:

Click here for larger image.

Corus Bankshares posted strong earnings results for many years, through September 2007. The company's returns on average assets exceeded 2% over the three years ended Dec. 31, 2006, while its return on equity usually exceeded 20% (a magic number for bankers). Even for the first three quarters of 2007, the company's return on average assets was 1.4% and its return on average equity was 16.6%.

Over the past two quarters, elevated provisions for loan losses have taken their toll, and reserves are still on the low-side. The company's net interest margin (essentially interest income less interest expense, divided by average assets) has suffered over the past two quarters, reflecting the increase in nonperforming loans, and what Corus describes as very high deposit yields in relation to U.S. Treasuries.

The net interest margin for the first quarter of 2008 was just 2.14%, down from 2.81% last quarter and 3.10% in March 2007.

More Trouble Ahead

In its earnings announcement, Corus also listed potential problem loans that were still considered performing, but which, according to

SEC

reporting requirements, "may result in disclosure of such loans as nonperforming." These loans totaled $589 million as of March 31, with another $167 million in lending commitments to the identified condominium construction and conversion projects.

Florida projects comprised 59% of the funded balances for the potential problem loans, with Miami condominium projects making up 34%. In light of the glut of condominium units in Miami -- Corus's largest lending market area -- it's conceivable that as more projects are completed and investors balk at following through on their commitments to purchase units, Corus will see another increase in nonaccrual loans in the months ahead.

As mentioned above, Corus' somewhat low loan loss reserve coverage of 21% doesn't tell the whole story, since the company's overall level of capital was relatively high as of March 31. Over the past year, the company has stayed ahead of net loan charge-offs. Provisions for reserves for the four quarters ended March 31 totaled $97.4 million, while net charge-offs totaled just $56.9 million. With such a high concentration of nonperforming and potential problem loans concentrated in regions with an oversupply of condominium units, it's hard to see how this pattern can continue.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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