Corus Bankshares Inc.'s first quarterly loss in its history likely will not be its last, but the Chicago company says it has the capital to absorb further losses and that it intends to ride out the downturn in the condominium market by financing more office, hotel, and apartment projects.
The $9.2 billion-asset Corus has focused almost exclusively on condo construction lending this decade, and until recently the strategy had paid off handsomely. As the condo market boomed, particularly in fast-growing markets such as south Florida, Corus enjoyed quarter after quarter of record earnings, and for a stretch of eight years it did not charge off a single condo loan.
But now nearly 18% of its loans — roughly $833 million — are nonperforming as condos sales have slowed and builders struggle to repay their loans, and Corus says it expects loan problems to persist at least through 2009. In a news release last month, Robert J. Glickman, Corus' president and chief executive, said, "The effects from this downturn have rippled through many parts of the economy, adversely impacting credit markets (including mortgage availability for home buyers) and are clearly placing a drag on consumer confidence and the broader economy."
Mr. Glickman did not return calls to American Banker, but in its detailed second-quarter earnings report, he said Corus' $1 billion of capital is $300 million more than it needs to be classified as "well-capitalized." It also has $200 million in cash and $4.3 billion in investments that he described as "fully available for any liquidity needs." He did not address the possibility of raising more capital.
"We have always recognized that a severe downturn in the residential real estate markets was a possible, if not likely, occurrence," Mr. Glickman said. "It is now clear that our advance building of capital and liquidity were the right moves." He did not addres
Corus' capital levels are sufficient to quell the concerns of analysts, at least for now.
"I think they have enough capital to weather the nonperforming assets that they currently have," said Peyton Green, an analyst with First Horizon National Corp.'s FTN Midwest Securities Corp. "But how are those going to grow?" The real estate slump "doesn't seem to be turning the corner this quarter or next. I think it is going to be difficult at best."
Of the $7.6 billion of loan commitments Corus had at June 30, 82% were for condo construction and conversion projects. Corus did not charge off any condo loans from 1999 through 2006, but since the start of 2007 it has charged $59.6 million of condo loans.
The company lost $16.2 million in the second quarter, after turning a $42.4 million profit in last year's second quarter. It charged off just $54,000 in the quarter, but in its call report filed with Federal Deposit Insurance Corp. it reported that nearly $140 million of loans were 30 to 89 days past due.
The company said three risk factors are affecting borrowers' ability to repay. The first is the risk that projects will not be completed. Construction on two projects has been halted as developers have run short of cash, and the loans are now nonaccruing. Corus expects one project will restart once it gets an equity infusion from the developers, but it said the other property is headed for foreclosure.
The second risk is a cost overrun. In those cases the company said it is inclined to increase the loan amount to get a project completed, because "it is generally better to have a larger loan on a completed building, than a smaller loan on a partially built structure."
The third risk, and the biggest, is in the borrowers' ability to sell condo units once the complex is completed, the company said. That problem is amplified in Florida, where there is an oversupply of condos, against a national backdrop of tightened mortgage lending. Corus warned that the projects currently under construction in Florida are among its largest loans per square foot and carry more risk than those completed in the past.
Corus first alerted investors in mid-2006 that the condo market was softening, and said it was scaling back its lending. That spooked investors: Corus' shares, which were trading at around $25 at the time, fell steadily the rest of 2006 and have fallen more sharply in the last year as the company reported higher levels of problem loans. Its shares were trading at $4.51 late Wednesday.
Karen Dorway, the president and director of research at BauerFinancial Inc. in Coral Gables, Fla., said that after Corus released its second-quarter results, her firm lowered its rating on the company from 3.5 stars to three stars (it had four stars, out of five, a year ago) because of the loss and "further deterioration of nonperforming assets." However, she called the company's capital levels "a positive factor" that kept it at an "adequate rating."
While many commercial banks are focusing on commercial and industrial lending until the real estate market rebounds, Corus said it remains committed to commercial real estate lending. Instead of focusing primarily on condo construction, however, it is now making more loans for construction of new office buildings, apartments, and hotels. Loans to those sectors made up 56% of the $1.2 billion of loans Corus originated in the first half.
Daniel Cardenas, an analyst with Howe Barnes Hoefer & Arnett Inc. in Chicago, said it is wise for Corus to continue focusing on commercial real estate, because that is what it knows best.
"You don't want to a see a company shifting strategies too much," he said. "They rode it up, and now they will ride it down."
