Corus Bankshares filed for Chapter 11 protection with the Chicago bankruptcy court in June of 2010, declaring assets of $314 million and liabilities of $533 million in its bankruptcy petition.  US banking regulators had taken control of Corus on Sept. 11, 2009 and transferred $7 billion of Corus deposits to MB Financial Inc., at a cost of $1.7 billion to the Federal Deposit Insurance Corp.  According to Reuters, Corus was the 7th largest bank to fail in 2009.  Corus stock,  had been selling at a peak price of $31.61/share as recently as 2006, when the company also enjoyed an $845 million book value.

Lesson Learned:  Corus was very transparent in its shareholder reports about the “unorthodox” strategy it pursued, with a loan portfolio invested almost exclusively in loans to condominium developers.   Corus management believed that this approach let it concentrate on the market it knew best, and that they also had sufficient equity cushion to cover themselves in the event of a downturn.  Further, Corus had diversified nationwide, with 36% of their loan portfolio in Florida, 16% in California (primarily San Diego), 11% in Las Vegas, 11% in Washington DC, and no other metropolitan area representing more than 10% of their loan portfolio as of 12/31/06.

But according to the Comptroller’s Handbook: : Loan Portfolio Management: “Risk diversification is a basic tenet of portfolio management.  Concentrations of credit risk occur within a portfolio when otherwise unrelated loans are linked by a common characteristic.  If this common characteristic becomes a source of weakness for the loans in concentration, the loans could pose considerable risk to earnings and capital.”

Despite their specialization in the condominium market,  Corus management was not quick enough to realize that the condominium market had become speculatively overheated in many, if not all of the key markets where they had concentrated their portfolio,  and as the market softened, their geographic diversification would be insufficient to avert an eventual financial collapse.   As reported by CNBC in April of 2007, “The poster children for excess construction generally reside on the coasts in markets where home price appreciation have boomed,” according to Suzanne Mulvee, senior real estate economist with Property & Portfolio Research, a Boston-based real estate research firm.   “That includes Florida – especially Tampa, Miami and Orlando – Chicago, Las Vegas, Palm Beach and San Diego.”