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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.0-22391
COMSTOCK BANCORP
(Exact Name of Registrant as Specified in its Charter)
Nevada 86-0856406
(State or Other Jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
6275 Neil Road, Reno, Nevada 89511
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (702) 824-7100
NA
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 1, 1997: Common Stock - Authorized 15,000,000 shares at $0.01 par
value; issued and outstanding - 4,421,668
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TABLE OF CONTENTS
Item
Number Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition
June 30, 1997 and December 31, 1996..................... 4
Consolidated Statements of Income
Three and six months ended June 30, 1997 and 1996....... 5
Consolidated Statements of Changes in Stockholders' Equity
For the periods ended June 30, 1996, December 31,
1996, and June 30, 1997................................. 6
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996................. 7
Notes to Consolidated Financial Statements ...................... 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 11
PART II - OTHER INFORMATION
1. Legal Proceedings ............................................... 25
2. Changes in Securities ........................................... 25
3. Defaults Upon Senior Securities ................................. 25
4. Submission of Matters to a Vote of Securities' Holders........... 25
5. Other Information ............................................... 26
6. Exhibits and Reports on Form 8-K ................................ 26
Signatures ............................................................... 27
Part I. Financial Information
Item I. Financial Statements
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
As of June 30, 1997 and December 31, 1996
(Dollars in Thousands)
(Unaudited) (Audited)
06/30/97 12/31/96
Assets:
Cash and Due from Banks (Non-Interest Bearing).......... $8,487 $6,738
Fed funds and Overnight Mutual Funds Sold 6,066 13,593
Interest-bearing Deposits in Domestic
Financial Institutions............................... 1,395 1,498
Trading Account Securities.............................. 13 28
Investment Securities................................... 23,833 17,223
Federal Home Loan Bank Stock............................ 423 378
Loans Held for Sale..................................... 6,280 7,806
Loans (Net of Deferred Fees)............................ 108,648 88,718
Less: Allowance for Credit Losses................... 947 857
Net Loans.......................................... 113,981 95,667
------- ------
Premises and Equipment.................................. 7,394 6,447
Other Real Estate Owned................................. 14 0
Accrued Interest Receivable............................. 851 840
Other Assets............................................ 4,138 2,568
----- -----
TOTAL ASSETS......................................... $166,595 $144,980
======== ========
Liabilities and Stockholders' Equity:
Deposits:
Demand Deposits (Non-Interest Bearing).............. $30,635 $26,334
Savings, Money Market and NOW Accounts.............. 56,339 51,717
Time Deposits Under 100,000......................... 41,304 33,958
Time Deposits $100,000 and Over..................... 23,308 19,295
------ ------
Total Deposits....................................... 151,586 131,304
------- -------
Other Borrowed Funds.................................... 15 0
Accrued Interest Payable................................ 185 189
Accounts Payable and Accrued Expenses................... 314 478
Income Taxes Payable.................................... 76 0
-- -
TOTAL LIABILITIES.................................... 152,176 131,971
------- -------
Stockholders' Equity:
Common Stock-$0.01 par value, 15,000,000 shares authorized;
4,421,668 and 4,235,268 shares issued and outstanding on
June 30, 1997 and December 31, 1996.................... 44 42
Paid-in Surplus......................................... 8,898 8,184
Unrealized Gain (Loss) on Securities Available for Sale,
Net of Applicable Deferred Income Taxes................ (11) (9)
Retained Earnings....................................... 5,488 4,792
----- -----
TOTAL STOCKHOLDERS' EQUITY........................... 14,419 13,009
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $166,595 $144,980
======== ========
[See accompanying notes to financial statements.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 1997 and 1996
(Dollars in Thousands except per share amounts)
For the Three Months Ended For the Six Months Ended
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
Interest Income:
Interest and Fees on Loans.............................. $3,357 $3,056 $6,208 $6,183
Interest on Investments and Interest-Bearing
Deposits in Domestic Financial Institutions........... 384 223 693 434
Interest on Fed Funds and Overnight Mutual Funds........ 108 233 255 337
--- --- --- ---
Total Interest Income................................. 3,849 3,512 7,155 6,954
----- ----- ----- -----
Interest Expense:
Interest on Deposits.................................... 1,330 1,105 2,540 2,133
Interest on Long-Term Debt.............................. 0 3 0 3
- - - -
Total Interest Expense................................ 1,330 1,108 2,540 2,136
----- ----- ----- -----
Net Interest Income....................................... 2,520 2,404 4,615 4,819
Provision for Credit Losses............................... 60 60 120 150
-- -- --- ---
Net Interest Income after Credit Loss Provision......... 2,460 2,344 4,495 4,669
----- ----- ----- -----
Non-Interest Income:
Service Charges on Deposit Accounts..................... 69 67 136 129
Gain on Sale of Securities and Other Assets............. (11) (8) (13) 4
Other Income............................................ 30 20 46 52
-- -- -- --
Total Non-Interest Income............................. 88 79 169 185
-- -- --- ---
Non-Interest Expense:
Salaries and Employee Benefits.......................... 1,036 1,143 2,099 2,254
Occupancy Expense....................................... 183 129 333 259
Furniture and Equipment Expense......................... 141 122 261 234
Other Operating Expenses................................ 578 459 1,005 929
--- --- ----- ---
Total Non-Interest Expense............................ 1,938 1,853 3,698 3,675
----- ----- ----- -----
Income before Taxes....................................... 610 571 966 1,178
Provision for Income Taxes................................ 179 188 270 386
--- --- --- ---
NET INCOME.............................................. $431 $383 $696 $792
==== ==== ==== ====
Primary Earnings per Share.............................. $0.09 $0.09 $0.15 $0.18
===== ===== ===== =====
[See accompanying notes to financial statements
and Exhibit 11-Computation of earnings per share.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY For Periods Ended June 30,
1996, December 31, 1996, and June 30, 1997
(Dollars in Thousands)
(Unaudited)
Unrealized Gain/
(Loss) on Securities
Retained Held for Sale, Net Total
Common Paid-in Earnings Of Applicable Stockholders'
Stock Surplus (Deficit) Deferred Inc. Taxes Equity
Balances, December 31, 1995................ $42 $8,164 $2,699 ($21) $10,884
Net Income............................... 792 792
Sale of Common Stock..................... 1 19 20
Change in Unrealized Gain/(Loss)
on Securities Available for Sale
Net of Applicable Deferred
Income Taxes (93) (93)
Stock Dividends Declared................. 0 0 0 0
- - - -
Balances, June 30, 1996.................... $43 $8,183 $3,491 ($114) $11,603
Net Income............................... 1,300 1,300
Sale of Common Stock..................... 0 1 1
Change in Unrealized Gain/(Loss)
on Securities Available for Sale
Net of Applicable Deferred
Income Taxes........................... 105 105
--- ---
Balances, December 31, 1996................ $43 $8,184 $4,791 ($9) $13,009
Net Income............................... 696 696
Sale of Common Stock..................... 2 714 716
Change in Unrealized Gain/(Loss)
on Securities Available for Sale
Net of Applicable Deferred
Income Taxes (2) (2)
--- ---
Balances, June 30, 1997.................... $45 $8,898 $5,487 ($11) $14,419
=== ====== ====== ===== =======
[See accompanying notes to financial statements.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996
(Dollars in Thousands)
(Unaudited) (Unaudited)
June 30, 1997 June 30, 1996
Cash Flows from Operating Activities:
Net Income...................................................... $696 $792
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses................................... 120 150
Depreciation and Amortization................................. 311 247
Net (Gain) Loss on Sale of Investment Securities.............. (3) (1)
Net (Gain) Loss on Sales of Trading Securities................ 10 (5)
Purchases of Trading Securities............................... 0 0
Proceeds from Sales of Trading Securities..................... 1 0
Amortization of Servicing Asset............................... (13) 0
Increase/(Decrease) in Deferred Taxes Due to Change in
Unrealized Gain or Loss on Securities Available for Sale..... 1 48
Net (Increase) Decrease in:
Accrued Interest (10) 83
Other Assets................................................ (1,568) 62
Accrued Interest Payable.................................... 4 (31)
Loans Held For Sale......................................... 1,070 6,576
Net Increase (Decrease) in:
Accounts Payable and Accrued Expenses....................... (165) (250)
Income Taxes Payable........................................ 76 (48)
-- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... $529 $7,623
Cash Flows from Investing Activities:
Net Change in Interest-Bearing Deposits in Domestic
Financial Institutions........................................ 103 44
Proceeds from Sales of Available for Sale Securities............ 676 6,476
Proceeds from Maturities of Available for Sale Securities....... 340
Purchases of Available for Sale Securities...................... (3,511) (7,076)
Proceeds from Sales and Maturities of Investment Securities..... 1,545 350
Purchases of Investment Securities.............................. (5,629) (103)
Net Change in Loans Held to Maturity............................ (19,528) (4,201)
Purchases of Premises and Equipment, Net........................ (1,272) (381)
Purchase of FHLB Stock.......................................... (45) (52)
---- ----
NET CASH PROVIDED FOR INVESTING............................... ($27,321) ($4,943)
Cash Flows from Financing Activities:
Net Change in Demand, Savings, NOW
And Money Market Accounts..................................... 8,924 4,205
Net Change in Time Deposits..................................... 11,359 10,785
Proceeds on Line of Credit Payable.............................. 15 1,000
Payments on Other Liabilities................................... 0 0
Proceeds from Sale of Common Stock, Net......................... 716 19
Cash Dividends Paid............................................. 0 0
- -
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... $21,014 $16,009
Increase (Decrease) in Cash and Equivalents....................... (5,778) 18,689
Cash and Equivalents:
Beginning of Period............................................. 20,331 11,082
------ ------
End of Period................................................... $14,553 $29,771
======= =======
[See accompanying notes to financial statements.]
Comstock Bancorp
Notes to Condensed Consolidated Financial Statements
1. ACCOUNTING POLICIES
Comstock Bancorp, (the "Company") is a bank holding company formed in 1997
which became the parent company of Comstock Bank (the "Bank") on June 16,
1997 through a tax-free exchange of shares of the Bank for shares of the
Company. The Company's primary holding is Comstock Bank. The Bank provides
its range of services primarily to businesses and individuals in the
northern Nevada area, with some commercial lending in the Las Vegas market.
The Bank's principal activities include residential lending and retail
banking. References to the Company include the Bank unless otherwise noted.
The accompanying unaudited consolidated financial statements have been
prepared in condensed format and therefore, do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, all adjustments, consisting only of normal recurring
adjustments considered necessary for a fair presentation have been
reflected in the financial statements. The Company believes the disclosures
herein are adequate to make the information not misleading. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in Comstock Bank's Annual Report to
shareholders for the fiscal year ended December 31, 1996 which is included
in the Company's Registration Statement on Form S-4 dated March 25, 1997
(Commission File No. 333-23923). The results of operations for the six
months ended June 30, 1997, are not necessarily indicative of the results
to be expected for the full year. Certain reclassifications have been made
to prior period amounts to present them on a basis consistent with
classifications for the six months ended June 30, 1997.
2. COMMITMENTS & CONTINGENT LIABILITIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as commitments to extend credit and
letters of credit, which are not reflected in the financial statements.
Management does not anticipate any material loss as a result of these
transactions.
3. SERVICING ASSETS
Effective January 1, 1997, the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". In accordance with the accounting standards provided by this
statement, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred.
The resulting assets and/or liabilities are amortized until control has
been surrendered. The assets and/or liabilities are then extinguished.
As of June 30, 1997, the Company recognized a servicing asset of $14,000.
The servicing asset is carried at cost, less any valuation allowance and is
classified as an other asset. The servicing asset is amortized over the
expected remaining life of the underlying loans. The Bank amortized
approximately $1,000 during the period ended June 30, 1997. The fair value
of the servicing asset as of June 30, 1997 based on current quoted market
prices for similar instruments was estimated at $14,000, which exceeded the
carrying value net of amortization by $1,000.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128). The Company is required to adopt SFAS 128 for financial
statements issued for periods ending after December 15, 1997. Earlier
application is not permitted, and all prior period earnings per share
figures are to be restated. Basic and diluted earnings per share figures
are required on the face of the income statement.
SFAS 128 replaces current EPS reporting requirements by replacing primary
earnings per share with basic earning per share and by altering the
calculation of diluted EPS, which replaces fully diluted EPS. Basic EPS
excludes potential dilution and is calculated by dividing income available
to Common Stockholders by the weighted average number of outstanding common
shares. Diluted earnings per share reflect the potential dilution that
could occur if contracts to issue common stock were exercised.
Had SFAS 128 been in effect during the current and prior year periods,
basic earnings per share would have been $.10 and $.09 for the quarter
ending June 30, 1997 and 1996 respectively. Diluted earnings per share
under SFAS 128 would have been unchanged at $.08 and $.08 for the same
periods. Basic earnings per share would have been $.16 and $.19 for the six
months ending June 30, 1997 and 1996 respectively, while diluted earnings
per share would have been unchanged at $.13 and $.17 for the same period.
5. CAPITAL STRUCTURE
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure"
(SFAS 129). The statement is effective for financial statement periods
ending after December 15, 1997. The statement is intended to consolidate
disclosures about capital structure into a single standard. The disclosure
shall include the rights and privileges of the various securities
outstanding, the number of shares issued upon conversion, exercise, or
satisfaction of required conditions during the most recent annual fiscal
period and any subsequent interim period.
Had SFAS 129 been in effect during the current and prior year periods,
disclosures would not have been significantly different than reported.
6. COMPRESHENSIVE INCOME
In June 1997, the FASB issued Statement for Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130). The standard is
effective for financial statements beginning after December 15, 1997 and
comparative statements of prior periods will require estimated
comprehensive income data.
SFAS 130 requires the presentation of the financial statements to include
the change in net income of the Company during the period, from
transactions and other events and circumstances derived from nonowner
sources. The Company will be required to report all components of
comprehensive income, together with the total amount, in the financial
statements in the period they are recognized. As an example, an item that
would be included in other comprehensive income, not included in net income
in the current period, would be unrealized gains and losses on securities
available for sale.
If SFAS 130 had been in effect during the current and prior year periods,
comprehensive income for the six months ending June 30, 1997 and 1996 would
have been $694,000 and $700,000 respectively. Equity would have been
unchanged on an after tax basis. For the quarters ended June 30, 1997 and
1996, comprehensive income would have been $464,000 and $323,000
respectively. For the same three month periods ending June 30, 1997 and
1996, equity would be unchanged on an after tax basis.
7. SEGMENT REPORTING
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information"(SFAS 131). The standard is effective for fiscal years
beginning after December 15, 1997.
SFAS 131 requires public companies to report financial information by the
segments of the business. The Company will have no disclosure changes as a
result of this standard as the only business segment of the Company is
banking.
COMSTOCK BANCORP AND SUBSIDIARY
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following financial review presents an analysis of the asset and
liability structure of the Company and a discussion of the results of
operations for each of the periods presented in the quarterly report and
sources of liquidity and capital resources. Certain statements under this
caption, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", constitute `forward-looking statements' under the
Private Securities Litigation Reform Act of 1995.
Discussion of Forward-looking Statements
When used or incorporated by reference in disclosure documents, the words
"anticipate", "estimate", "expect", "project", "target", "goal", and
similar expressions are intended to identify forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933. Such
forward-looking statements are subject to certain risks, uncertainties and
assumptions, including those set forth below. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated, expected or projected. These forward-looking statements speak
only as of the date of the document. The Company expressly disclaims any
obligation or undertaking to publicly release any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectation with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
Economic Conditions and Real Estate Risk. The Company's lending operations
are concentrated in Northern Nevada and Southern Nevada. As a result, the
financial condition and results of operations of the Company will be
subject to general economic conditions prevailing in these regions. If
economic conditions in these regions worsen, the Company may experience
higher default rates in its existing portfolio as well as a reduction in
the value of collateral securing individual loans. Separately, the
Company's ability to originate the volume of loans or achieve the level of
deposits currently anticipated could be affected. As a result, the
occurrence of any of these events could affect the accuracy or previously
made forward-looking statements.
Interest Rate Risk. The Company realizes income principally from the
differential or spread between the interest earned on loans, investments
and other interest-earning assets and the interest paid on deposits and
borrowings. Loan volumes and yields, as well as the volume of and rates on
investments, deposits and borrowings are affected by market interest rates.
Additionally, because of the terms and conditions of many of the Company's
loan documents and deposit accounts, and the nature of its investments, a
change in interest rates could also affect the duration of the loan
portfolio and/or the deposit base and/or the investment portfolio, which
could alter the Company's sensitivity to future changes in interest rates.
As a result, significant shifts in interest rates could affect the accuracy
of any forward-looking statements.
Financial Condition
As of June 30, 1997, the Company's assets had grown from $145 million
(measured as of December 31, 1996) to $166.5 million, an increase of $21.5
million. Using average assets rather than end of period figures, growth was
$10.1 million, from an average of $142.4 million in December, 1996 to an
average of $152.5 million June, 1997. Management believes that the average
asset measures are more indicative of asset size because of the large
volume of mortgage loan closings, which occur during the last few days of
each month. In addition, several title company clients' deposits swell the
last few days of the month, as loan closings tend to be concentrated near
month's end.
Loan Volume
The Company has two major lending departments, real estate and commercial.
The real estate department specializes in single family home mortgage
lending including construction loans for custom homes. The commercial
lending department makes short-term commercial loans including real estate
development loans. The loans made by the real estate department are
generally fixed rate with 15 or 30 year maturities. Management does not
believe such loans are an appropriate match for the generally short-term
deposit liabilities the Company acquires due to interest rate risk
considerations. But, because the commercial loans are generally carry a
variable rate or, if fixed in rate, generally have short maturities,
management considers such loans appropriate for the Company's loan
portfolio.
Overall, loan volume (both real estate and commercial) decreased from
$150.5 million of loan originations representing 1,067 loans in the six
months ended June 30, 1996 to $120.3 million representing 733 new loan
originations in the six months ended June 30, 1997, a 20.1% decrease in
dollar volume and a 31.3% decrease in number of loans. For the quarter
ended June 30, 1997, total loan originations were 6.8% lower in number (493
versus 529) than the same period of 1996 and the dollar volume of $72.9
(versus $79.3 million) million was 8.1% lower for the quarter ended June
30, 1997 compared to the same quarter of 1996. Management believes that the
lower number of loans and lower dollar volume in the first quarter of 1997
versus the same 1996 period is partly due to the severe weather conditions
which included an unusually hard winter as well as substantial flooding ,
and partly due to the heightened liquidity in the local financial
institutions. (The flooding was so severe in early January, 1997, that
there was a federal disaster declaration. Such a declaration for the area
has never happened in the Company's history.)
According to Rocky Mountain Statistical Reports, throughout the period, the
Company maintained its market share of northern Nevada real estate
originations (measured in dollars closed by the Company versus total
dollars of real estate loans closed in the geographic area), an indication
that the slow down was felt by all real estate lenders. The Northern Nevada
Real Estate Division originated 235 loans for a dollar volume of $34.7
million in the three months ended June 30, 1997 compared to 283 loans for a
dollar volume of $39.1 million in the same period of 1996. For the six
month period ended June 30, 1997, total northern Nevada real estate loan
originations included 406 loans for a dollar volume of $58.6 million
compared to 545 loans at a dollar volume of $72.8 million for the same
period of 1996. The statistics for the Southern Nevada Real Estate Division
(Las Vegas) were: 44 loans for $5.3 million in the three months ended June
30, 1996 versus 6 loans for $.7 million for the same 1997 period and 131
loans for $16.5 million for the six months ended June 30, 1996 versus 20
loans for $2.5 million for the same period of 1997. In April, the Company
announced the closing of the Las Vegas real estate office due to high
personnel turnover and low lending volumes.
Total Residential Real Estate Lending
Three Months ---Number--- Volume (Mill $)
Ended 1997 1996 1995 1997 1996 1995
----- ---- ---- ---- ---- ---- ----
March 31 185 349 205 $25.8 $ 44.9 $ 28.5
June 30 241 327 335 $35.4 $ 44.4 $ 40.5
September 30 N/A 289 382 N/A $ 39.4 $ 48.7
December 31 N/A 281 320 N/A $ 41.5 $ 42.5
--- --- --- ---- ------ ------
Total 426 1,246 1,242 $61.2 $170.2 $160.2
The Commercial Division originated 265 loans for $58.1 million in the six
months ended June 30, 1997 versus 367 loans for $60.1 million in same 1996
period. For the three month period ended June 30, 1997 the Commercial
Division originated 222 loans for $36.7 million versus 187 loans for $34.1
million for the same period of 1996. The local area community financial
institutions experienced large liquidity increases. Management believes
that recent acquisitions of Nevada financial institutions by large
out-of-state institutions created a significant opportunity during 1997 for
local institutions, including the Company, to lure deposit customers away
from the acquired institutions. As a result of the large liquidity infusion
at local community oriented financial institutions, there has been downward
pressure on the Bank's interest margins and fee structures. Furthermore,
management has refused to lower traditional underwriting guidelines by
reducing prices and terms to higher risk credits, a practice it sees at the
other local community financial institutions with excess liquidity.
Management believes that its posture on this issue will pay off in the
long-term. As a result, commercial loan volume in the six months ended June
30, 1997 was below the level generated in the same 1996 period. Despite the
closure of the Las Vegas real estate office, the commercial loan department
continues to make commercial real estate loans in the Las Vegas market as a
result of continuing relationships with borrowers, referrals, and as an
overline lender with small commercial banks in Las Vegas.
For the six months ended June 30, 1997, the average balance of the
Company's loan portfolio was $103.2 million and represented an average
loan/deposit ratio in excess of 74.4%. The average balance for the same
year earlier period was $84.6 million representing an average loan/deposit
ratio of 73.0%. The result of the increase in the level of loans in the
Company's loan portfolios caused loan interest income to increase $680,000
(33.5%) in the three months ended June 30, 1997 as compared to the same
period of 1996 and to increase $957,000 (43.7%) in the six months ended
June 30, 1997 as compared to the same 1996 period.
Management has noted that the larger banks in the state have begun intense
lending campaigns. This was in contrast to the withdrawal of the large
banks from the lending marketplace in the recession in the early part of
the decade. In addition, management notes that other smaller institutions
and some larger out of state institutions have entered the northern Nevada
mortgage market. Such an increase in competition has had a negative impact
on the mortgage lending growth rates, and also on the profit margins for
the these loans.
Late in the first quarter of 1996, mortgage interest rates began to fall
and continued lower until February, 1997. This stimulated residential
mortgage activity. Loan origination volumes are dependent on interest rate
levels and an escalation of rates could adversely impact Company profits.
Rates began to increase in the first quarter of 1997 as speculation that
the Federal Reserve would increase the Federal Funds rate. In late March,
1997, the Federal reserve did increase the Federal Funds rate by 25 basis
points, and there continues to be uncertainty as to the direction of rates
in the near future. In order to mitigate the possibility of adverse impacts
from interest rate movements, management has significantly expanded the
Company's loan portfolios with interest sensitive assets. This is an effort
to provide the Company a more stable income base, and to offset the loan
volume decline in the mortgage business that occurs when rates rise.
Asset Quality
The Company's asset quality is often measured by its delinquencies and
non-performing assets. The Company's registration statement on Form S-4
dated March 25, 1997 (Commission File No. 333-23923) as amended April 14,
1997 and the form of Proxy Statement/Prospectus included therein indicated
that the majority of the Company's non-performing assets were composed of
two credits totaling $3.0 million. As of June 30, 1997 the Company had
non-performing (non-accruing) loans of approximately $2.5 million,
comprised of the same two fully secured construction and development loans
totaling $2.3 million and two commercial loans totaling $200,000. The
Company had $13,000 of loans past due 90 days or more that were still
accruing. As of June 30, 1997, the Company had two properties, with a value
of $14,000, taken as repayment on a loan. In the same period of 1996, the
Company had one property, with a value of $134,000, taken in foreclosure.
These assets are designated as "Other Real Estate Owned" property.
Deposit Volumes
As of June 30, 1997, the Company's deposit base had grown from $131.3
million (measured as of December 31, 1996) to $152.2 million, an increase
of $20.9 million (15.9%). Using average balances rather than end of period
figures, deposits grew $17.7 million (14.6%), from an average of $120.9
million in December, 1996 to $138.6 million in June, 1997. The increase is
partially attributed to the addition of a fourth full service branch
location in February of 1997 and to the influx of deposits transferred from
the branches of financial institutions recently acquired by large
out-of-state companies. Management believes the deposit base will continue
to grow for several reasons: 1) the continued economic growth in the
northern Nevada region; 2) the addition of a fifth full service branch on
July 28, 1997; and 3) management's strategic goal of attracting small
business clients. Based on the most recent estimates available from the
U.S. Census Bureau, Nevada's population grew faster than any other state's
population between July 1, 1995 and July 1, 1996. Within Nevada, Las Vegas
and environs is the most rapidly growing metropolitan area. Based on
information available from the Nevada State Demographer's Office as of
February 1, 1997, the Bank's deposit service area of Washoe County has
experienced population growth of approximately 45% over the last 13 years.
The deposit service area of Carson City grew 41% over the same period.
Reno, in Washoe County, is expected to remain Nevada's second largest city
through the end of the century, with a projected population growth of 3.4%
from July 1, 1996 to July 1, 2000. According to estimates from the Nevada
State Demographer's office, Las Vegas and the surrounding cities are
projected to have even more rapid growth through the end of the century
(population growth projected to be in excess of 17%). As a locally managed
community banking organization, the Company is well positioned for
continued growth.
Liquidity
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Cash and short-term investments are the Company's primary
sources of asset liquidity. As a result of its loan and deposit growth, the
Company's liquidity, as measured by the ratio of cash, overnight
investments less required reserves to total liabilities, stood at 25.0% as
of June 30, 1997, a decrease from 34.2% on June 30, 1996. The investment
portfolio is the Company's principal source of secondary asset liquidity.
The availability of this source is influenced by market conditions. The
Company generally pledges investment portfolio securities to secure credit
at the Federal Home Loan Bank of San Francisco and at the Federal Reserve
Bank of San Francisco.
The FASB's accounting rules, beginning in 1994, required the Company to
mark to market a portfolio which could be sold prior to maturity.
Management believes that this accounting policy, known as SFAS 115, has
skewed, and will continue to skew, Company investments toward the very
short end of the maturity spectrum in order to prevent large fluctuations
in the value of the "available-for-sale" portfolio. This has and will
continue to result in overall investment portfolio yields that are lower
than they otherwise would have been in the absence of the SFAS 115 rules.
The Company's "available-for-sale" portfolio consists of $6.3 million in
U.S. Treasury and Agency securities with various maturities of two years or
less, $5.1 million in mortgage backed securities (non-derivative types),
$1.7 million in tax exempt municipal bonds and $423,000 in Federal Home
Loan Bank stock. The duration of the "available-for-sale" portfolio was
1.27 years on June 30, 1997. Management believes the investments in the
"available-for-sale" portfolio should be of short duration so that
"interest rate risk" is low and that capital fluctuations, as a result of
the mark to market requirements of SFAS 115, are manageable in the volatile
interest rate environment in which the Company is operating. As of December
31, 1996, the value of the "available-for-sale" portfolio was $14,000 below
its book value. As of June 30, 1997, the market value of the
"available-for-sale" portfolio had decreased to $17,000 below book value, a
decrease of $3,000.
The Company also has a $10.7 million book value portfolio of
"held-to-maturity" securities as defined by SFAS 115. These securities
cannot be sold in the normal course of business and must be held to
maturity. In the second half of 1996, due to rising liquidity, the Company
decided to add longer term higher yielding mortgage paper and municipal
securities to the investment portfolio. The mortgage paper can be pledged
to the Federal Home Loan Bank of San Francisco (see Borrowing Capacity
below) and turned into cash should the need for liquidity arise in the
future. As of June 30, 1997, the duration of the portfolio was 2.60 years.
The market value was $370,000 below book value. In contrast, at December
31, 1996, the book value of this portfolio was $5.5 million in book value
with an unrealized loss of $77,000. The increase in the unrealized loss in
the "held-to-maturity" portfolio was due to rising interest rates in the
general economy from February to June, 1997. Overall, the duration of the
entire investment portfolio (investments classified as "available-for-sale"
and "held-to-maturity") is 1.9 years.
Borrowing Capacity
The Company maintains a secured line of credit at the Federal Home Loan
Bank of San Francisco (FHLB) which is available for up to 30% of the
Company's assets. As of June 30, 1997, the Company had collateralized this
line with loans and securities giving the Bank approximately $23 million of
borrowing capacity. The Company has a $2 million line of credit with Union
Bank of California to meet short term funding requirements. This line has a
$200,000 compensating balance. As of June 30, 1997, there were no
outstanding draws on these lines. The Company also has a $30,000 line of
credit with InterWest Bank for the cash requirements of the holding
company. As of June 30, 1997, $15,000 was outstanding on this line. Both
the FHLB and Union Bank of California are routinely used for the purchase
or sale of overnight Federal funds. First USA Bank has also been utilized
for the sale of Federal funds since August, 1995.
Individual and commercial deposits are the Company's primary source of
funds for credit activities. The Company's end of period ratio of loans to
deposits, as of June 30, 1997, was 78.6%. Management believes that the
Company's liquidity sources are adequate to meet its current operating
needs and any additional needs that may be generated by lending activities.
Capital Base
The capital base for the Company increased by $1,410,000 during the six
months ended June 30, 1997 of which $696,000 was generated from profits,
$716,000 was the result of exercised employee stock options and stockholder
warrants and $2,000 was lost on the SFAB 115 mark to market adjustment on
the "available-for-sale" portfolio. In March, in conjunction with the
formation of the holding company (Comstock Bancorp), the Company called
outstanding warrants to purchase 103,400 shares of Common Stock at $7.73
per share. The warrant holders were given the option to accept similar but
more restrictive warrants in Comstock Bancorp if approved by the
shareholders of Comstock Bank at the annual meeting held on May 28, 1997.
By the May 16, 1997 call date, 77,000 of the 103,400 shares were exercised.
As a result of the conversion of Bank stock to Company stock on a 1 for 2
basis, the remaining warrants to purchase 26,400 shares of Bank stock were
converted to warrants to purchase 52,800 shares of Bancorp stock at $3.86
per share.
Capital Adequacy
As of December 31, 1990, a regulatory risk-based capital adequacy standard
became effective. The risk-based capital requirements were phased in over a
period of two years with the final implementation effective on December 31,
1992. In addition, the regulatory agencies have continued the process of
fine tuning the capital standards to meet their current policy objectives,
and it is likely that the standards will undergo further change. The table
below compares the risk-based capital ratios as of June 30, 1997 for
Comstock Bank and Comstock Bancorp with December 31, 1992 minimum
requirements:
Comstock Comstock 1992 Minimum
Bank Bancorp Requirements
Tier I (core capital) 11.68% 11.82% 4.0%
Total capital 12.46% 12.60% 8.0%
Leverage ratio 8.96% 9.02% 3.0%
COMSTOCK BANCORP AND SUBSIDIARY
RESULTS OF OPERATIONS (Three and Six Months Ended June 30, 1997 and 1996)
The company earned $696,000 in the six months ended June 30,1997, a
decrease in post tax earnings of 12.1% when compared to the $792,000 earned
for the six months ended June 30, 1996. On a per share basis, earnings were
$.15 through June 30, 1997 versus $.18 for the same period of 1996 (see
exhibit (a) 11 for earnings per share computations). For the three months
ended June 30, 1997, the Company earned $431,000, an increase of 12.5% or
$48,000 over the same period of 1996. On a per share basis, earnings for
the three month period were $.09 for the period ending June 30, 1997 versus
$.09 for the same period of 1996. Return on average assets for the six
months ended June 30, 1997 was .92% versus 1.24% for the same 1996 period.
Return on average equity was 10.36% versus 14.08% in the 1996 comparable
period.
Management believes that the following items had the largest impacts on
income for the three and six month periods ended June 30, 1997:
1. Because construction and housing sales slow down in the winter,
especially in the first quarter in northern Nevada, the Company
generally experiences seasonality in its real estate lending. In
early January, the Reno/Sparks area and much of northern Nevada
experienced severe flooding which management believes exacerbated
the seasonal lending patterns in northern Nevada.
2. Loan volumes decreased over last year as a result of increased
liquidity at other community financial institutions and the
resulting increased risk those institutions appeared to be willing
to accept in order to invest that liquidity.
3. Second quarter earnings were augmented by the receipt of
`additional' interest from a development loan in the Company's
portfolio. Under the terms of the loan, the Company collects
normal interest payments plus an additional $2,100 for each lot
the developer sells. In the second quarter 50 lots were sold ,
which added $105,000 in additional pre-tax interest for the
Company. In the first six months of 1997 , 80 lots were sold,
adding $168,000 in additional pre-tax income. In July another 26
lots were sold. To date, 234 lots have sold and 577 remain to be
sold. No lots were sold and no `additional' interest was
recognized in the first six months of 1996.
4. The effective tax rate for the first six months of 1997 was 27.9%
as compared to 32.8% for same 1996 period. The reduction is due to
the exercise of employee stock options in 1997, which increase
compensation expense for tax ( but not for financial accounting)
purposes.
5. The Company is required to calculate its quarterly regulatory Call
Report in accordance with rules prescribed by the regulatory
authorities. While Call Report accounting rules generally attempt
to follow GAAP, they do not always do so. In addition, GAAP often
has different valid approaches for the same accounting problem
(FIFO and LIFO in inventory accounting being an example). At the
start of 1997, as a result of regulatory recommendations on the
Company's accounting practices, the Company decided that it would
defer a greater portion of the commercial and residential
construction and lot loan fee income than had previously been the
Company's practice. In addition, for the first time, again due to
regulatory recommendations, the Company began to apply some the
fees as a contra-expense. The Company believes that the accounting
practices for fee income deferral prior to the adoption of the
regulatory recommendations were in accordance with GAAP, and the
Company's independent accountant so certified the 1996 financial
statements. The Company adopted the accounting changes recommended
by the regulators (which are also in accordance with GAAP) for its
financial statements so that the Company would not have to
calculate two sets of financial books, one for the regulatory Call
Report, and one for financial accounting purposes.
The changes in loan fee deferrals and expense recognition had an
impact on the Company's reported earnings which management
believes must be adjusted to make valid comparisons with the prior
year's data. Management has estimated that changes in accounting
for loan fee deferrals trimmed $368,000 from pre tax income from
what income would have been had management used the fee deferral
accounting that it used in 1996. (It is important to note that
such income has not been lost, but simply deferred to future
periods.) In addition, due to the changes in expense recognition,
the Company credited $385,000 from fee income to offset salary and
benefits costs in the first six months of 1997, and $208,000 in
the three months ended June 30, 1997. Management believes that a
more appropriate comparison for fee income between 1997 and 1996
for the six months ended June 30, 1997 to be $1,961,000 (composed
of the $1,208,000 reported plus the $368,000 and the $385,000
discussed above). This represents an 8.3% decrease in fee income
for the six month ended June 30, 1997 versus the same period of
1996. For the three month period ended June 30, 1997, management
estimates that changes in loan fee deferrals trimmed $272,000 from
pre tax income. The adjusted comparison for fee income for the
three month period of 1997 would be $1,130,000 (composed of the
$643,000 reported plus the $179,000 deferral estimate and the
$208,000 credited against salaries and benefits). This represents
a 10.5% increase in fee income in the three month period of 1997
versus the same period of 1996.
The table below shows actual loan fee and servicing income as
reported for the six and three month periods of 1997 and 1996 and
management's estimated adjustments to the 1997 data had the
accounting for deferred fees been the same.
Loan and Servicing Fee Income ($000)
Six months ended June 30 Three months ended June 30
------------------------ --------------------------
As reported: 1997 1,208 643
As reported: 1996 2,138 1,022
1997 adjusted for accounting
differences 1,961 1,130
Salaries and employee benefits showed a decline from 1996 levels
in both the three and six month periods. However, the declines
were caused by the changes in accounting for deferred fees
discussed above. Under the regulatory recommendations, some of the
fees the Company formerly booked as income have been transferred
to offset commissions earned by the originating loan
representative, and thus impact salaries and benefits. Had the
accounting been the same for both 1997 and 1996, the salary and
benefit account would have excluded $385,000 in fees credited to
this account year to date and $208,000 credited in the second
quarter of this year. As a result, on a comparable basis with
1996, salaries and benefits would have increased by $289,000
(13.9%) for the six months ended June 30, 1997. For second quarter
of 1997, on a comparable basis, salaries and benefits would have
increased $101,000 (8.8%) over the second quarter of 1996. The
table below shows actual salaries and benefits as reported for
1997 and 1996 six and three month periods, and management's
estimated adjustments to the 1997 data had the accounting for fee
income not changed.
Salary and Benefit Expenses ($000)
Six months ended June 30 Three months ended June 30
------------------------ --------------------------
As reported: 1997 2,099 1,036
As reported: 1996 2,254 1,143
1997 adjusted for accounting
differences 2,543 1,244
6. Management has estimated that the change in loan fee deferrals and
expense recognition resulted in a timing difference of $243,000
($.05 per share) in primary earnings for the six months ended June
30, 1997. For the three month period, the estimated difference in
earnings was $179,000 ($.04 per share). Management estimates that
the change will also impact third quarter earning comparisons, but
to a much lesser extent than the impact on first and second
quarter results, and that the impact will be neutralized by the
first quarter of 1998 as larger amounts of fees already deferred
accrete to income in both the third and fourth quarters of 1997.
7. Non-interest rate related events also had a significant impact on
net income. The Company provided $30,000 less to its loan loss
reserve (Provision for Credit Losses) in the first six months of
1997 than it did in the same 1996 period. The contribution to the
loan loss reserve was the same for the second quarter of 1997 as
it was for 1996. As a result of the new Galena branch and the
lease and remodel of the new operations center (discussed below),
occupancy expenses rose $74,000 (28.6%), and furniture and
equipment expenses rose $27,000 (11.5%) when comparing the six
months ended June 30, 1997 to the same 1996 period. For the second
quarter of 1997, occupancy expenses rose $54,000 (41.9%), and
furniture and equipment expenses rose $19,000 (15.6%) versus the
second quarter of 1996. Other operating expenses rose $76,000
(8.2%) in the six months ended June 30, 1997 over the same 1996
period. For the second quarter, other operating expenses rose
$119,000 (25.9%) for 1997 over the second quarter of 1996.
8. Non-interest income was lower by $16,000 for the six months ended
June 30, 1997 than the same period of 1996, largely as a result of
a recovery of a charged-off loss in the first quarter of 1996.
Non-interest expenses increased moderately. The increases (after
adjustment for the fee recognition) in salaries and benefits, use
and occupancy, furniture and equipment expenses were due to the
addition of a forth full service branch in early February, 1997,
the addition of a computer operations center in late March , 1997
and increased staffing in the commercial lending division. The
increase in other operating expenses for both the three and six
months periods ended June 30, 1997 was the result of increased
advertising and data processing costs.
The Company bore approximately $15,000 in additional expenses in
the second quarter due to the closing of the Las Vegas office. The
fixed overhead expenses for that office (excluding personnel and
benefits expenses) of approximately $12,000 per month were
eliminated in June.
9. The Company completed the remodeling of a 7,000 square foot
operations center and took occupancy in late March of 1997.
Included in the operations center is accounting and the retail
branch back office operations. In addition, the center will serve
as the Company's center for computer operations. The center was
planned as part of the Company's commitment to become independent
in its development and delivery of electronic banking services and
products. In addition, the commercial loan division moved from the
first floor of the headquarters building to the third floor and
now occupies approximately twice its former space. At the same
time, the real estate lending division expanded into the space
vacated by the commercial department. They too now occupy
approximately twice their former space.
10. The Company committed a significant amount of resources for
expansion and technological modernization in 1996 and 1997. As
discussed elsewhere in this filing, the Company opened two full
service branches (one in February, 1997 and one in July, 1997);
leased, remodeled and occupied a 7,000 square foot operations
center; and remodeled space in its headquarters building for the
expansion of both its real estate and commercial lending
departments. In addition, the Company purchased an acre of land in
an industrial/commercial/residential development in south Reno for
future branch development. Finally, the Company is in the process
of installing a significant computer resource with conversion from
its current data processor scheduled for completion in the fourth
quarter.
Management believes that, in order to effectively compete in the
rapidly changing technological world, the Company must be able to
deliver its products and services in an electronic format.
Management believes that the pace of change is so rapid that
delays in modernizing its systems could significantly threaten the
Company's core deposits. Furthermore, it is management's view that
many northern Nevadans would prefer to bank with a community bank
if it offered products and services similar to those offered by
large financial institutions. The Company has targeted small
business and individual relationship banking as a strategic goal.
Thus, management considers the rapid deployment of capital for
technological modernization as both a defensive move and a
strategic opportunity.
The deployment of capital for additional branches is a strategy
that enhances the Company's deposit acquisition capability.
Management believes that the Company needs a strong presence in
northern Nevada to continue on the growth path of the recent past.
Such capital investments (nearly $2 million) have an initial
start-up period in which there are zero or negative returns.
Because of the volume of such investments in 1996 and 1997,
management believes that the ROA and ROE are likely to be lower
for the immediate future (at least through the end of 1997) than
they have been in the recent past. Management also believes that
such investments are necessary for future returns to match those
of the recent past.
The following Interest Rate Sensitivity Analysis Tables provide a picture of
income and interest sensitivity for selected categories in a comparative format
for the three and six month periods ended June 30, 1997 and 1996. The tables
show the interest sensitive assets and liabilities in both periods, their
yields, the difference in income, and the amount of the difference due to volume
change, rate change, and the combination of volume and rate change.
COMSTOCK BANCORP
CONSOLIDATED INTEREST RATE SENSITIVITY ANALYSIS
For the Three Months Ended June 30, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
For Quarter Ended: June 30, 1997 Rate June 30, 1996 Rate Change Variance Variance Variance
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Loan Income................. $2,714,698 10.00% $2,034,237 9.55% $680,461 $558,118 $96,003 $26,340
Loan Fees and
Servicing Income.......... 643,485 1,022,257 (378,772) - - -
------- --------- ---------
Total Loan, Servicing,
And Fee Income.......... 3,358,182 12.37% 3,056,493 14.35% 301,689 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Investments:
Fed Funds and Mutual
Fund Income............... 108,126 5.53% 233,278 5.29% (125,152) (129,733) 10,321 (5,740)
Income from
Investment Securities..... 353,418 6.14% 190,172 5.48% 163,246 125,309 22,868 15,068
Interest-Bearing
Deposit Income............ 23,951 6.45% 27,220 6.42% (3,269) (3,357) 101 (12)
------ ------ ------- ------- --- ----
Total Investment Income... 485,495 6.00% 450,670 5.43% 34,825 (11,643) 47,700 (1,232)
Trading Account Assets
And Other Investments..... 6,127 5.70% 5,667 5.61% 460 368 86 6
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Total Interest Income..... $3,200,192 9.05% $2,484,906 8.36% $715,286 $546,475 $143,703 $25,107
Total Interest, Servicing,
Fee, and Trading
Account Income......... $3,849,804 10.89% $3,512,830 11.82% $336,974 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Interest on Deposits:
Transaction Accounts..... $373,600 3.26% $301,752 3.29% $71,848 75,278 (2,745) (685)
Time and Savings
Deposits............... 956,441 5.20% 803,121 5.17% 153,320 141,662 4,593 804
------- ------- ------- ------- ----- ---
Total Deposit
Interest Expense..... 1,330,041 4.46% 1,104,873 4.47% 225,168 224,774 (3,801) (770)
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS:
Other Borrowed Funds..... 286 7.64% 2,977 17.91% ($2,691) ($2,314) ($1,711) $1,326
--- ----- -------- -------- -------- ------
Total Interest $1,330,327 4.46% $1,107,850 4.48% $222,477 $224,650 ($5,942) ($1,199)
Expense..............
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
DIFFERENTIAL.............. $1,869,866 4.60% $1,377,056 3.88% $492,810 $321,826 $149,645 $26,307
(Excludes fee income)
NET INTEREST
DIFFERENTIAL.............. $2,519,478 6.44% $2,404,980 7.34% $114,498 - - -
(Includes fee income)
- ------------------------------------------------------------------------------------------------------------------------------------
Notes to Interest Rate Sensitivity Analysis Table:
[1] The variance analysis above excludes non-interest rate sensitive earning
assets and borrowed funds.
[2] "Yield/Rate" is the interest income or interest expense, annualized,
divided by the average respective outstanding balance for the period.
[3] "Total Change" represents the change in the interest income or interest
expense between the respective periods.
[4] "Volume Variance" equals the change in average volumes (balances) between
the periods times the previous period interest rate.
[5] "Rate Variance" equals the change in yields or rates between the periods
times the previous period average balance.
[6] "Rate/Volume Variance" reflects the change in interest income or interest
expense attributable to simultaneous changes in both rates and Volumes between
the respective time periods.
COMSTOCK BANCORP
INTEREST RATE SENSITIVITY ANALYSIS
For the Six Months Ended June 30, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
Year-To-Date Ended: June 30, 1997 Rate June 30, 1996 Rate Change Variance Variance Variance
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Loan Income............... $5,001,408 9.66% $4,044,381 9.49% $957,028 $886,770 $72,312 $15,926
Loan Fees and
Servicing Income........ 1,207,888 2,138,432 (930,544) - - -
--------- --------- ---------
Total Loan, Servicing,
and Fee Income........ 6,209,296 12.00% 6,182,813 14.51% 26,483 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Investments:
Fed Funds and Mutual
Fund Income............. 254,688 5.43% 337,133 5.31% (82,444) ($86,373) $7,787 ($2,006)
Income from
Investment Securities... 636,846 6.07% 369,355 5.39% 267,491 $197,899 $46,545 $25,076
Interest-Bearing
Deposit Income.......... 49,048 6.54% 54,516 6.40% (5,469) ($6,251) $1,224 ($141)
------ ------ ------- -------- ------ ------
Total Investment Income... 940,582 5.90% 761,004 5.41% 179,578 $105,428 $68,754 $9,578
Trading Account Assets
And Other Investments... 6,932 3.34% 9,832 5.07% (2,900) $734 ($3,330) ($250)
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Total Interest Income... $5,948,923 8.76% $4,805,385 8.45% $1,143,538 $955,720 $173,838 $34,724
Total Interest, Servicing,
Fee, and Trading
Account Income........ $7,163,743 10.55% $6,953,650 12.23% $210,093 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Interest on Deposits:
Transaction Accounts.... $716,084 3.27% $591,129 3.31% $124,955 $137,866 ($7,828) ($1,836)
Time and Savings
Deposits.............. 1,823,908 5.18% 1,541,784 5.14% 282,124 276,371 12,052 2,172
--------- --------- ------- ------- ------ -----
Total Deposit
Interest Expense.... 2,539,992 4.45% 2,132,913 4.46% 407,079 425,265 (5,387) (1,080)
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS:
Other Borrowed Funds.... 286 23.18% $2,977 18.11% ($2,691) ($2,737) $830 ($767)
--- ------ -------- -------- ---- ------
Total Interest Expense.. $2,540,278 4.45% $2,135,890 4.46% $404,388 $425,038 ($7,427) $1,486)
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
DIFFERENTIAL......... $3,408,645 4.31% $2,669,495 3.99% $739,151 $530,682 $181,265 $36,210
(Excludes fee income)
NET INTEREST
DIFFERENTIAL........... $4,623,465 6.10% $4,817,760 7.77% ($194,294) - - -
(Includes fee income)
- --------------------------------------------------------------------------------------------------------------------------------
Notes to Interest Rate Sensitivity Analysis Table:
[1] The variance analysis above excludes non-interest rate sensitive earning
assets and borrowed funds.
[2] "Yield/Rate" is the interest income or interest expense, annualized,
divided by the average respective outstanding balance for the period.
[3] "Total Change" represents the change in the interest income or interest
expense between the respective periods.
[4] "Volume Variance" equals the change in average volumes (balances) between
the periods times the previous period interest rate.
[5] "Rate Variance" equals the change in yields or rates between the periods
times the previous period average balance.
[6] "Rate/Volume Variance" reflects the change in interest income or
interest expense attributable to simultaneous changes in both rates and
Volumes between the respective time periods.
The comparison of interest sensitive assets between the six month periods ended
June 30, 1996 and 1997 shows higher yields in loan income before fees and lower
yields in loan income when fees are included. The comparison of the three month
period ended June 30, 1996 and 1997 shows the same increase in interest yield
and decrease in yield when fees are factored in. The yields on investment
portfolio are higher in both the three and six month periods. The comparison of
interest sensitive liabilities in both the three and six month periods show no
change in the rates paid on transaction accounts and a negligible increase in
the rates paid on time and savings accounts. Balances in these accounts show a
significant increase.
For loan income the increase in the level of commercial loans held in portfolio
resulted in a positive volume variance and the `additional' interest realized on
the development loan mentioned above resulted in an increase in yield and a
positive rate variance. For the six month period, the result was an increase of
$957,000 income, of which $887,000 was directly attributable to the larger
portfolio balances and $72,000 to increased yields. A reduction in fee income
resulted in a decrease of $931,000 in income when compared to the same six month
period of 1996 and was affected by both change in deferral methods and by the
increased liquidity position of local competitors. For the three months ended
June 30, 1997 compared to the same period of 1996, loan income increased
$680,000 of which $558,000 was due to larger portfolio balances and $96,000 to
increased yields. Again, for this period, when loan fees and servicing income
are factored in, the result is a decrease of $379,000 in total loan servicing
and fee income. Because the Company is a large originator and seller of mortgage
loans, fee income plays a major role in Company earnings, because when the
Company sells loans, all of the deferred fee income on the sold loans is
immediately recognized as income. Total loan and fee income yields decreased
from 14.51% to 12.00% in the six month period and decreased from 14.35% to
12.37% in the three month period.
Income from Fed Funds and Mutual Funds decreased by $82,000 in the six month
period and by $125,000 in the three month period ended June 30, 1997 over the
same 1996 period. Both decreases were the result of reduced invested balances.
Yield increases in both periods resulted in the addition of $8,000 and $10,000
in the six and three month periods respectively.
Higher yields on Investment Securities combined with an increase in the invested
balances netted the Company an increase of $268,000 for the six month period and
an increase of $163,000 for the three month period ending June 30, 1997 over the
same 1996 period.
Interest bearing deposits with other financial institutions showed higher yields
and lower invested balances which netted to a decrease in income. Matured time
deposits have not been replaced.
Overall, total investment income increased by 23.6% or $180,000 for the six
month and by 5.5% or $35,000 for the three month period
The cost of interest sensitive liabilities was higher on transaction accounts
for both the six and three month periods as a result of increased balances.
Despite the influx of deposits from the institutions acquired by out-of-state
companies, rates remained substantially the same because of competition for the
deposits among the community banks who, in management's opinion, were anxious to
establish long-term profitable relationships with the businesses and individuals
exiting the acquired institution. Over the six month period deposit costs
increased $125,000 and over the three month period costs increased $72,000.
Costs were also higher, for both periods, on time and savings deposits resulting
from both an increase in balances and a slight increase in the rates paid on the
deposits. Over the six month period ended June 30, 1997, costs increased
$282,000 over the same 1996 period. Over the three month period the increase was
$153,000. Rates increased from 5.17% to 5.20% over the three months ended June
30, 1997 and from 5.14% to 5.18% over the six month period of 1997 versus 1996.
In summary, on the asset side, increased commercial loan and investment
portfolio levels increased income by $1,137,000 in the six months ended June 30,
1997 over the same period of 1996 and increased income by $715,000 in the three
months ended June 30, 1997 over the same 1996 period. When fee income is
included, the increase is income in the six months and three month periods in
1997 over 1996 is $206,000 and $337,000 respectively. When the increased costs
of deposits of $407,000 and $225,000 for the respective six and three month
periods are taken into account, the Company's net interest income differential,
excluding servicing and fee income, increased $739,000 for the six month period
and $493,000 for the three month period.
Part II.
Item 1. Legal Proceedings.
The Company is subject to minor pending and threatened legal
actions which arise out of the normal course of business and,
in the opinion of management and the Company's counsel, the
disposition of these claims will not have a material adverse
affect on the financial position of the Company.
The Company's registration statement on Form S-4 dated March
25, 1997 (Commission File No. 333-23923) as amended April 14,
1997 and the form of Proxy Statement/Prospectus included
therein described certain legal proceedings initiated by the
Bank against Raymond B. Graber pertaining to Bank enforcement
of Mr. Graber's personal guarantee of the debt of Outdoor
Posters, Inc. During the most recent stage of this litigation,
the First judicial District Court of the State of Nevada in
and for Carson City had remanded the case to the arbitrator
for specific clarifications as to the basis for the
arbitrator's determination that Mr. Graber's personal
guarantee was enforceable. In the opinion of management, the
arbitrator's clarifications issued on May 6, 1997 strengthen
the Bank's position in its attempt to enforce Mr. Graber's
continuing guarantee.
Item 2. Changes in Securities. On June 16, 1997, as a result of the
agreement between the Bank and the Bancorp, each share of
Comstock Bank common stock (Par Value: $0.50) was converted
into two shares of Comstock Bancorp common stock (Par Value:
$0.01) as approved by the Bank's shareholders at the annual
meeting.
At the organizational meeting of the Board of Directors which
immediately followed the annual meeting, the following options
were automatically granted under the Bank's Non-Employee
Director Stock Option Plan (the "Directors' Plan"). As of June
16, 1997, the Directors' Plan was assumed by Bancorp. The data
shown below are the resultant options granted after the
conversion of the Bank options to Bancorp options under the
one for two exchange discussed above. All of the options
granted have a strike price of $6.125 and an expiration date
of 5/28/07. The additional shares purchased were at a price of
$6.125.
Automatic Additional Additional
Director Option Grants Shares Purchased Options Granted
- --------- ------------- ---------------- ---------------
Edward Allison 2,200 400 400
Stephen Benna 2,200 200 200
John Coombs 2,200 800 800
Michael Dyer 2,200 2,000 2,000
Mervyn Matorian 2,200 0 0
Samuel McMullen 2,200 0 0
Item 3. Defaults Upon Senior Securities. Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders.
a. An annual stockholders' meeting of Comstock Bank (the
Company's predecessor as an issuer reporting under
the Securities Exchange Act of 1934) was held on May
28, 1997 for holders of record as of April 7. There
were 2,125,934 shares eligible to vote.
b. Included in the meeting was the election of
directors. The following directors were elected to
succeed themselves for a one year period or until
their successors are elected and qualified or until
their death or resignation. There was no solicitation
in opposition to the nominees of the Board of
Directors as listed in the Proxy Statement.
Director For Withheld Broker Non-Votes
- --------- ----------------- -------- ----------------
Edward Allison 2,045,528 220 7,511
Robert Barone 2,045,380 368 7,511
Stephen Benna 2,045,528 220 7,511
John Coombs 2,045,528 220 7,511
Michael Dyer 2,045,528 220 7,511
Mervyn Matorian 2,045,528 220 7,511
Samuel McMullen 2,045,528 220 7,511
Larry Platz 2,045,528 220 7,511
c. Other matters voted on:
1. Ratification of the appointment of Kafoury,
Armstrong & Co. as independent auditors for the
Company for the fiscal year ending December 31,
1997.
Number of votes cast:
In Favor: 2,053,259
Against or Withheld: 295
Abstentions: 10,600
Broker Non-Votes: 9,809
2. Consider and vote upon the Plan of Reorganization
pursuant to which each outstanding share of Comstock
Bank Common Stock (other than shares held by
stockholders exercising dissenters' rights) will be
converted into and exchanged for two shares of
Comstock Bancorp Common Stock and Comstock Bank will
become a wholly-owned subsidiary of Comstock Bancorp.
Number of votes cast:
In Favor: 1,230,074
Against or Withheld: 2,722
Abstentions: 2,598
Broker Non-Votes: 817,465
Item 5. Other Information. Not applicable.
Item 6. Exhibits. The following exhibits are filed with or
incorporated by reference into this Form 10-QSB (numbering
corresponds to Exhibit Table in Item 601 of Regulation S-K):
No. Exhibit Page
--- ------- ----
11. Computation of per share earnings 26
27. Financial Data Schedule 28
SIGNATURES
In accordance with the requirements of the Exchange Act, The registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMSTOCK BANCORP
Date: August 8, 1997 /s/ Robert N. Barone
-------------- --------------------
Robert N. Barone,
Chairman, CEO and Treasurer
(Principal Accounting
and Financial Officer)
Date: August 8, 1997 /s/ Larry A. Platz
-------------- ------------------
Larry A. Platz,
President and Secretary
COMSTOCK BANCORP
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The following computation methodology is used to determine primary earnings
per share:
1. The Stock Price:
The high "bid" and "low" asked prices are retrieved from the
Nasdaq Stock Market on the last day of each quarter, and an
average of these "bid" and "asked" prices are taken to
determine the price for that particular end of quarter. The
average of two such end of quarter averages is considered to
be the stock price for the quarter.
Quarter High Low
Ended Bid Asked Average
-------- ----- ----- -------
03/31/97 $6.00 $6.25 $6.125
06/30/97 $6.50 $7.25 $6.875
------
Average: $6.500
03/31/96 $4.63 $5.00 $4.813
06/30/96 $4.63 $4.88 $4.750
------
Average: $4.781
2. Options:
The number of "in the money" options is computed for the end
of each period being measured based on the average computed
stock price and assuming the exercise of the "in the money"
options. A computation is made to determine how much money the
Company would collect from the "strike" price of each option.
Then, it is assumed that the Company would "repurchase" stock
from the market, again using the above-determined stock price.
Using the shares purchased by those assumed to be exercising,
and subtracting the shares assumed to be "repurchased" by the
Company, a net figure is determined. This is added to the
number of outstanding shares in 3. below.
As of June 30, 1997, the number of "in the money" options was
797,432. If exercised, these would net the Company $2,449,979.
The Company would use these funds to "repurchase" 376,920
shares at an average price of $6.50. On net, the options add
420,515 shares to the total outstanding shares in 3. below.
As of June 30, 1996, the number of "in the money" options was
700,032. If exercised, these would net the Company $2,204,608.
The Company would use these funds to "repurchase" 461,094
shares at an average price of $4.781. On net, the options add
238,938 shares to the total outstanding shares in 3. below.
3. Shares Outstanding:
The shares outstanding at the end of each quarter are averaged
between consecutive quarters to determine the average number
of shares outstanding. The number of shares from 2. above is
added to determine the average outstanding shares for purposes
of the calculation of primary earnings per share. Note: the
shares outstanding for all periods represented have been
adjusted to reflect the one for two share conversion effective
on June 16, 1997.
Quarter Quarter
Ended Shares Ended Shares
-------- --------- -------- ---------
03/31/97 4,611,588 03/31/96 4,405,560
06/30/97 4,756,280 06/30/96 4,472,106
--------- ---------
Average: 4,683,934 Average: 4,438,833
4. Determination of Primary Earnings Per Share:
For each quarter, the earnings are divided by the "average
outstanding shares" as determined in 3. above to determine the
earnings for the quarter. For the six month period, the
earnings are divided by the average of the "average
outstanding shares" to determine primary earnings per share.
Quarter Primary
Ended Shares Earnings Shares
-------- --------- -------- ------
03/31/97 4,572,606 $264,616 $ 0.06
06/30/97 4,683,934 $431,006 $ 0.09
03/31/96 4,216,201 $408,841 $ 0.10
06/31/96 4,438,833 $383,230 $ 0.09
6 Months Primary
Ended Shares Earnings Shares
-------- --------- -------- ------
06/30/97 4,633,831 $695,622 $ 0.15
06/30/96 4,301,503 $792,071 $ 0.18
COMSTOCK BANCORP
EXHIBIT 27
FOR THE SIX MONTHS ENDED JUNE 30, 1997
FINANCIAL DATA SCHEDULE
$ in Thousands
Cash and Due from Banks(Non-Interest Bearing) $8,487
Interest-bearing Deposits in Domestic Financial Institutions 1,395
Fed funds and Overnight Mutual Funds Sold 6,066
Trading Account Securities 13
Investment and Mortgage back Securities Held for Sale 13,086
Investment and Mortgage back Securities Held to Maturity-Carrying Value 11,170
Investment and Mortgage back Securities Held to Maturity - Market Value 11,099
Loans 114,928
Allowance for Credit Losses 947
Total Assets 166,595
Deposits 151,586
Short-term borrowings 15
Other Liabilities 575
Long-term debt 0
Preferred stock - manditory redemption 0
Preferred stock - no manditory redemption 0
Common Stock 44
Other Stockholders Equity 14,375
Total Liabilities and Stockholders Equity 166,595
Interest and Fees on Loans 6,208
Interest and Dividends on Investments 637
Other Interest Income 311
Total Interest Income 7,155
Interest on Deposits 2,540
Total Interest Expense 2,540
Net Interest Income 4,615
Provision for Loan Losses 120
Investment Securities Gaines/Losses (3)
Other Expense 3,698
Income/Loss Before Income Tax 966
Income/Loss Before Extraordinary Items 966
Extraordinary Items, Less Tax 0
Cumulative Change in Accounting Principals 0
Net Income or Loss 966
Earnings Per Share - Primary 0.15
Earnings Per Share - Fully Diluted 0.13
Net Yield - interest earning assets - actual 8.76%
Loans on Non-accrual 2,575
Accruing Loans past due 90 Days or More 13
Troubled Debt Restructuring 0
Potential Loan Problems 0
Allowance for Loan Losses - Beginning of Period 857
Total Charge-Offs 57
Total Recoveries 27
Allowance for Loan Losses - End of Period 947
Loan Loss Allowance allocated to Domestic Loans 947
Loan Loss Allowance allocated to Foreign Loans 0
Loan Loss Allowance - Unallocated 0