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Corus Dividend May Disappear

The lender's big bet on the condo market turns from sweet to sour.

Hard times ahead in the condo market eventually could cost Corus its dividend.

Condominium financing is another part of the banking business that is suffering with the real estate downturn, as

reported recently by


While it may not seem fair to pile on Corus Bank NA (the main subsidiary of Chicago-based

Corus Bankshares Inc.


), the institution is an example of how overconcentration in one area can pay off in a bubble market, but lead to major risk during a cooling off.

The holding company's stock price has plummeted along with condominium loan quality. And while Corus' management would certainly disagree, its attractive stock dividend could be threatened if loan quality weakens further.

Corus Bankshares common stock currently yields 7.1%, based on quarterly dividends of 25 cents a share. The company also paid out a special dividend of $1 a share on Aug. 1 to return excess capital to shareholders.

In its announcement of the special dividend, the holding company stated that it could afford the $56 million payout, as it had $308 million in cash and marketable securities. The holding company also stated that Corus Bank had total capital of just over $1 billion and only needed $700 million to be considered well capitalized under regulatory requirements.

While the current numbers make it appear unlikely that the holding company's dividend payments will be threatened in the near future, the possibility exists. Further weakness in condominium-loan asset quality will continue to hurt earnings.

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Another thing to consider is that Corus Bank's ratio of loan loss reserves to adjusted nonperforming loans was a low 23.7% as of June 30. If worsening loan quality or regulatory concerns force the institution to sharply increase its loan loss reserves, earnings could effectively be wiped out for one or more quarters, threatening the dividend.

As of June 30, 2007, Corus Bank reported nonperforming multifamily mortgages of $200.9 million. The institution's adjusted ratio of nonperforming assets to total assets was 2.14%. Its adjusted ratio of nonperforming loans total loans was 5.06%. In comparison, Corus reported zero nonperforming multifamily loans in June of 2006, and its ratio of nonperforming loans of all types to total loans was negligible, at 0.01%.

As of March 31, 2007 (the last date for which aggregate industry figures are available), Corus Bank had 17% of the total nonperforming multifamily mortgages for all U.S. banks and thrifts. This was quite an achievement for an institution with less than 1% of the industry's total assets.

Only four other U.S. banks and thrifts with more than $5 billion in assets had higher nonperforming asset ratios:

During the real-estate boom, rampant speculation in condominiums caused two forms of excess: overdevelopment of new condo projects, and a host of conversions of rental apartments to condominium units. Now that the irrational run-up has ended, many condominium projects are in danger of failing because the developers can't sell the units fast enough. Several areas are facing a serious oversupply of condominium units.

In its second-quarter 2007 earnings release, Corus Bankshares provided a detailed analysis of its asset quality problems. Four condominium projects represented the majority of Corus Bank's problem loans. Two of them were on the Gulf Coast of Florida.

Corus stated that because of additional contributions from other lenders subordinate to Corus, interest and principal payments were actually still "current" for all of its nonaccruing condominium loans. This means that while the institution couldn't book all of these payments as interest income, the money was still coming in. There was no assurance that these payments would continue.

Condo Financing During the Boom

During the real estate bubble, Corus' condominium loans were a fairly safe bet. In its filing, Corus describes the Florida presale market, where condominium sales contracts generally require a 20% nonrefundable deposit.

Large deposits worked well during the real estate boom to ensure that buyers would fulfill their contracts. These days, however, condominium unit prices have fallen so much that many buyers simply walk away and forfeit their deposits.

Until 2007, Corus's condominium focus worked like a charm. The institution was not forced to charge a net loss against any condominium loans for nine years, through 2006. The focus on condominium loans also protected the institution from interest rate risk -- the majority of these loans have adjustable rates, resetting each quarter.

Corus' earnings performance has stacked up quite well vs. the industry aggregate for banks and thrifts:

Corus long-term shareholders were sitting pretty at the end of 2006, with a five-year total return of 133%. This compared favorably with returns over the same period for the S&P 600 Small Cap Index (80%) and the S&P 600 Financial Index (103%).

Since then, Corus shares have been hit hard by the real estate downturn, dropping from $24.16 at year-end to around $13.88. The stock's split-adjusted high was $33.74, back on April 28, 2006.

Philip van Doorn joined TSC Ratings this year as a banking analyst. He has a bachelor's degree in business administration from Long Island University, and previously worked as a loan operations officer with Riverside National Bank in Fort Pierce, Fla. Earlier, he was a credit analyst, monitoring banks and thrifts at the Federal Home Loan Bank of New York.