Regulation

“Hey, Let’s Just Not Lend Any Money”

The answer to terrible economic conditions at one bank — Chicago-based Corus — involves cutting off new-loan originations.
Stephen TaubOctober 31, 2008

It may seem a strange way for a bank to do business. But Chicago-based Corus Bankshares Inc.’s plan for dealing with unfavorable conditions is to stop lending altogether.

The financial institution, which has a loan portfolio consisting primarily of loans secured by condominium construction projects, had originated $1.2 billion of construction loans in the first half, but made no loans in the third quarter. “Given the uncertain condition of the commercial real estate market, and our desire to bolster our capital ratios, management has decided that this is not the right time to originate new loans,” the company said in its third-quarter earnings report. It added, “We hope that events will transpire over the coming quarters such that we will again feel comfortable originating loans.”

Perhaps reinforcing the lack of activity, executive vice president Michael Stein, head of the commercial lending department for the past 12 years, announced his resignation “to pursue other opportunities.”

In the earnings report, Corus reported a net loss for the third quarter of $128 million, compared with net income of $35.5 million a year ago. Year-to-date, it said, the bank lost $139.7 million. A year earlier, net income had been $104.3 million in the first three quarters. Nonperforming loans accounted for nearly 21 percent of total loans, more than quadruple the level a year ago.

“We are operating in an economic environment that is more challenging and volatile than any we have ever seen,” says Robert J. Glickman, president and CEO. He adds that the housing slump is among the worst the country has experienced, and has rippled through the economy to hurt credit markets that include home mortgages, auto loans, and credit-card loans.

“The combination of these forces, coupled with Corus’ focus on condominium construction lending, have led to significant increases in loan loss provisions, and, as a result, significant operating losses,” says Glickman, and “we anticipate these difficulties will persist for some time.”

While the bank had planned for the possibility of a downturn, with associated nonaccrual loans and provisions for credit losses, adds Glickman, “in our corporate planning, the current housing calamity is worse than even the ‘severe downturn’ for which we had planned.” Still, he says the bank had built “unusually strong” capital and liquidity levels during the good years.

Management has had preliminary conversations with the banking regulators concerning the federal Troubled Asset Relief Program Capital Purchase Program, says Glickman, but it is not certain whether Corus will apply to participate.

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