Corus Bankshares: Fremont General and the Impairment Charge

Includes: CORS, FMT
by: Geoff Gannon

I haven't written about the sub-prime lending story on this blog, because it didn't involve the kinds of stocks I would normally write about. Despite the recent market tumult, very few financial services companies have seen their stock prices decline to levels where they would be worth writing about. However, there are a few exceptions. Last Thursday, one of these exceptions, Corus Bankshares (CORS), made an announcement that connected it to the wider sub-prime lending story.

Impairment Charge
Corus announced that it had determined the decline in the market value of its stake in Fremont General (FMT) constituted an "other than temporary" impairment (as defined by GAAP). As a result, Corus plans to record a charge in the first quarter of 2007.

At the time of the press release (March 15, 2007) Corus held 2.5 million shares of Fremont General purchased at an average cost of $12.73 a share. The most recent trade I saw on Fremont was at $8.81 a share. So, at present, Corus' common stock position in Fremont would be $31.83 million at cost and only $22.03 million at market. If the quarter ended today, Corus would record a $9.8 million pre-tax charge. The impairment charge would increase to the extent that Fremont General's share price falls between now and March 31st; conversely, the impairment charge would decrease to the extent that Fremont General's share price rises between now and March 31st.

Adding to the Position
At year end 2006, Corus held only 1.6 million shares of Fremont General. The recent increase is explained in the March 15th press release:

During 2007, and since the recent disclosures and decline in Fremont's stock price, Corus has opportunistically purchased an additional 967,000 shares, bringing its total position to 2.5 million shares with an average cost basis of $12.73 a share.

Common Stock Portfolio
The 2.5 million shares of Fremont General are held at the holding company level. The holding company has a portfolio consisting entirely of the common stock of companies within the financial services industry.

To give you an idea of what the portfolio looks like, here is a summary of Corus' common stock investments as of December 31st, 2006. Remember, this information is out of date – especially in regard to the Fremont General position:

Bank of America (NYSE:BAC): 16.5%

Fremont General (FMT): 11.8%

JP Morgan (NYSE:JPM): 11.1%

Wachovia (NASDAQ:WB): 10.4%

Regions Financial (NYSE:RF): 8.9%

Comerica (NYSE:CMA): 7.1%

Citigroup (NYSE:C): 5.8%

Merrill Lynch (MER): 5.7%

US Bancorp (NYSE:USB): 4.5%

MAF Bancorp (MAFB): 4.2%

Morgan Stanley (NYSE:MS): 3.1%

Compass Bancshares (CBSS): 3.0%

Associated Bancorp (ASBC): 1.9%

SunTrust Banks (NYSE:STI): 1.8%

Bank of New York (NYSE:BK): 1.8%

National City (NCC): 1.3%

Amcore Financial (AMFI): 1.0%

Both on December 31st, 2006 and March 15th, 2007 the holding company's common stock portfolio had a total market value in excess of $200 million. Therefore, it is unlikely the Fremont stake accounts for much more than 15% of Corus' common stock portfolio.

Future of the Fremont Position
In announcing the "other than temporary" impairment, Corus went out of its way to state it "has the intent and ability to retain its Fremont investment." This is a direct reference to one of the criteria for judging whether there has been an other than temporary impairment under GAAP.

Essentially, Corus is saying that its determination of an other than temporary impairment in its Fremont investment is the result of: "The financial condition and near term prospects of the issuer, including any specific events which may influence operations of the issuer or may impair the earnings potential of the investment" and/or "The discontinuance of a segment of the business that may affect the future earnings potential."

I'm going with "and" here, since Fremont announced it will exit its sub-prime lending operation as a result of the FDIC's cease and desist order. This is a textbook case of "other than temporary" impairment. Regardless of what Corus intends to do with its Fremont stake, it is appropriate to record an impairment charge here.

As Corus notes in the press release, one odd consequence of taking such a charge is that the company's earnings will certainly be reduced when the charge occurs (at the end of the first quarter of 2007); but, if Corus retains its investment in Fremont and the share price improves considerably, it is quite possible that any countervailing improvement will not be reflected in Corus' earnings for a very long time.

Corus filed its 2006 annual report on February 27, 2007. You can read it here.

The company's fiscal first quarter ends March 31st.