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 September 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 November 4, 1997: Common Stock - Authorized 15,000,000 shares at $0.01 par
value; issued and outstanding - 4,423,668
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Item
Number Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Income
Three and six months ended September 30, 1997 and 1996 5
Consolidated Statements of Changes in Stockholders' Equity
For the periods ended Sept. 30, 1996, December 31, 1996,
and Sept. 30, 1997 6
Consolidated Statements of Cash Flows
Nine months ended September 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 25
6. Exhibits and Reports on Form 8-K 25
Signatures 26
Part I. Financial Information
Item I. Financial Statements
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
As of September 30, 1997 and December 31, 1996
(Dollars in Thousands)
(Unaudited) (Audited)
Sept. 30, 1997 Dec. 31, 1996
Assets:
Cash and Due from Banks (Non-Interest Bearing) $10,793 $6,738
Fed funds and Overnight Mutual Funds Sold 7 13,593
Interest-bearing Deposits in Domestic
Financial Institutions 1,294 1,498
Trading Account Securities 13 28
Investment Securities 24,756 17,223
Federal Home Loan Bank Stock 429 378
Loans Held for Sale 10,649 7,806
Loans (Net of Deferred Fees) 118,070 88,718
Less: Allowance for Credit Losses 997 857
--- ---
Net Loans 127,722 95,667
------- ------
Premises and Equipment 7,648 6,447
Other Real Estate Owned 9 0
Accrued Interest Receivable 995 840
Other Assets 4,315 2,568
----- -----
TOTAL ASSETS $177,981 $144,980
======== ========
Liabilities and Stockholders' Equity:
Deposits:
Demand Deposits (Non-Interest Bearing) $30,839 $26,334
Savings, Money Market and NOW Accounts 58,154 51,717
Time Deposits Under 100,000 43,125 33,958
Time Deposits $100,000 and Over 25,589 19,295
------ ------
Total Deposits 157,707 131,304
------- -------
Other Borrowed Funds 4,600 0
Accrued Interest Payable 210 189
Accounts Payable and Accrued Expenses 468 478
Income Taxes Payable 88 0
-- -
TOTAL LIABILITIES 163,073 131,971
------- -------
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 5,976 4,792
----- -----
TOTAL STOCKHOLDERS' EQUITY 14,908 13,009
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $177,981 $144,980
======== ========
[See accompanying notes to financial statements.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 1997 and 1996
(Dollars in Thousands except per share amounts)
For the Three Months Ended For the Nine Months Ended
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sept. 30,1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
------------- -------------- -------------- --------------
Interest Income:
Interest and Fees on Loans $3,563 $3,464 $9,743 $9,647
Interest on Investments and Interest-Bearing
Deposits in Domestic Financial Institutions 377 283 1,070 716
Interest on Fed Funds and Overnight Mutual Funds 73 225 328 562
-- --- --- ---
Total Interest Income 3,986 3,972 11,141 10,925
----- ----- ------ ------
Interest Expense:
Interest on Deposits 1,418 1,135 3,958 3,268
Interest on Long-Term Debt 13 13 14 16
-- -- -- --
Total Interest Expense 1,431 1,148 3,972 3,284
----- ----- ----- -----
Net Interest Income 2,555 2,824 7,169 7,642
Provision for Credit Losses 60 40 180 190
-- -- --- ---
Net Interest Income after Credit Loss Provision 2,495 2,784 6,689 7,452
----- ----- ----- -----
Non-Interest Income:
Service Charges on Deposit Accounts 71 69 208 198
Gain on Sale of Securities and Other Assets 1 23 (12) 29
Other Income 65 16 111 66
-- -- --- --
Total Non-Interest Income 137 108 308 293
--- --- --- ---
Non-Interest Expense:
Salaries and Employee Benefits 1,046 1,238 3,145 3,491
Occupancy Expense 198 131 532 389
Furniture and Equipment Expense 154 116 415 350
Other Operating Expenses 545 439 1,550 1,367
--- --- ----- -----
Total Non-Interest Expense 1,943 1,924 5,642 5,597
----- ----- ----- -----
Income before Taxes 689 968 1,654 2,148
Provision for Income Taxes 201 315 470 701
--- --- --- ---
NET INCOME $488 $653 $1,184 $1,446
==== ==== ====== ======
Primary Earnings per Share $0.10 $0.15 $0.25 $0.33
===== ===== ===== =====
[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 September 30,
1996, December 31, 1996, and September 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 $2,700 ($21) $10,885
Net Income 1,446 1,446
Sale of Common Stock 20 20
Change in Unrealized Gain/(Loss)
on Securities Available for Sale
Net of Applicable Deferred
Income Taxes (72) (72)
Balances, September 30, 1996 $42 $8,184 $4,147 ($93) $12,279
Net Income 646 646
Sale of Common Stock
Change in Unrealized Gain/(Loss)
on Securities Available for Sale
Net of Applicable Deferred
Income Taxes 84 84
-- --
Balances, December 31, 1996 $42 $8,184 $4,793 ($9) $13,009
Net Income 1,184 1,184
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, September 30, 1997 $44 $8,898 $5,977 ($11) $14,908
=== ====== ====== ===== =======
[See accompanying notes to financial statements.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(Dollars in Thousands)
(Unaudited) (Unaudited)
Sept. 30, 1997 Sept. 30, 1996
Cash Flows from Operating Activities:
Net Income $1,184 $1,446
Adjustments to Reconcile Net
Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses 180 190
Depreciation and Amortization 488 373
Net (Gain) Loss on Sale of Investment Securities 3 9
Net (Gain) Loss on Sales of Trading Securities 9 (7)
Purchases of Trading Securities 0 0
Proceeds from Sales of Trading Securities 0 0
Amortization of Servicing Asset 3 0
Increase/(Decrease) in Deferred Taxes Due to
Change in Unrealized Gain or Loss on Securities
Available for Sale 1 (36)
Net (Increase) Decrease in:
Accrued Interest Receivable (155) 99
Other Assets (1,783) 65
Accrued Interest Payable (21) (17)
Loans Held For Sale (2,843) 2,848
Net Increase (Decrease) in:
Accounts Payable and Accrued Expenses (10) (76)
Income Taxes Payable 88 78
-- --
NET CASH PROVIDED BY OPERATING ACTIVITIES ($2,855) $4,971
Cash Flows from Investing Activities:
Net Change in Interest-Bearing Deposits in
Domestic Financial Institutions 204 46
Proceeds from Sales of Available for Sale Securities 0 7,026
Proceeds from Maturities of Available for
Sale Securities 2,981
Purchases of Available for Sale Securities (6,410) (8,879)
Proceeds from Sales and Maturities of
Investment Securities 2,358 350
Purchases of Investment Securities (6,657) (2,427)
Net Change in Loans Held to Maturity (29,210) (11,247)
Purchases of Premises and Equipment, Net (1,610) (298)
Purchase of FHLB Stock (52) (58)
---- ----
NET CASH PROVIDED FOR INVESTING ($38,396) ($15,487)
Cash Flows from Financing Activities:
Net Change in Demand, Savings, NOW
And Money Market Accounts 10,943 5,697
Net Change in Time Deposits 15,461 9,351
Proceeds on Line of Credit Payable 4,600 0
Payments on Other Liabilities 0 0
Proceeds from Sale of Common Stock, Net 716 20
Cash Dividends Paid 0 0
- -
NET CASH PROVIDED BY FINANCING ACTIVITIES $31,720 $15,068
Increase (Decrease) in Cash and Equivalents (9,531) 4,552
Cash and Equivalents:
Beginning of Period 20,331 11,082
------ ------
End of Period $10,800 $15,634
======= =======
[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 nine
months ended September 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 nine months ended September 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 September 30, 1997, the Company recognized a servicing asset of
$31,000. 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 $3,000 during the nine month period ended
September 30, 1997. The fair value of the servicing asset as of September
30, 1997 based on current quoted market prices for similar instruments was
estimated at $31,000, which exceeded the carrying value net of amortization
by $3,000.
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 $.11 and $.15 for the quarter
ending September 30, 1997 and 1996 respectively. Diluted earnings per share
under SFAS 128 would have been $.10 and $.14 for the same periods. Basic
earnings per share would have been $.27 and $.35 for the nine months ending
September 30, 1997 and 1996 respectively, while diluted earnings per share
would have been $.25 and $.33 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 nine months ending September 30, 1997 and 1996
would have been $1,186,000 and $1,407,000 respectively. Equity would have
been unchanged on an after tax basis. For the quarters ended September 30,
1997 and 1996, comprehensive income would have been $492,000 and $706,000
respectively. For the same three month periods ending September 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 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 of 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 September 30, 1997, the Company's assets had grown from $145 million
(measured as of December 31, 1996) to $178 million, an increase of $33
million. Using average assets rather than end of period figures, growth was
$28.5 million, from an average of $142.4 million in December, 1996 to an
average of $170.9 million in September, 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, primarily residential land development. 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. These loans are sold in the secondary
market. But, because the commercial loans 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
$222.9 million of loan originations representing 1,545 loans in the nine
months ended September 30, 1996 to $193.3 million representing 1,176 new
loan originations in the nine months ended September 30, 1997, a 13.3%
decrease in dollar volume and a 23.9% decrease in number of loans. For the
quarter ended September 30, 1997, total loan originations were 7.3% lower
in number (443 versus 478) than the same period of 1996 and the dollar
volume of $73.0 (versus $72.4 million) million was .8% higher for the
quarter ended September 30, 1997 compared to the same quarter of 1996.
Management believes that the lower number of loans and lower dollar volume
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 first three months of 1997,
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. In the 6 months
ended September 30, 1997 (i.e., excluding the first quarter and excluding
the now closed Las Vegas real estate office), the dollar volume of real
estate loans was $1.4 million lower, and the dollar volume of commercial
lending was $6.0 million higher than in the same 1996 period.
In 1997, northern Nevada 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 nine months ended September 30, 1997 was
below the level generated in the same 1996 period in number of loans
originated.
The Northern Nevada Real Estate Division originated 261 loans for a dollar
volume of $36.2 million in the three months ended September 30, 1997
compared to 254 loans for a dollar volume of $33.7 million in the same
period of 1996. For the nine month period ended September 30, 1997, total
real estate loan originations in the Bank's northern Nevada real estate
area included 667 loans for a dollar volume of $94.8 million compared to
799 loans at a dollar volume of $106.5 million for the same period of 1996.
The statistics for the Southern Nevada Real Estate Division (Las Vegas)
were: 35 loans for $5.6 million in the three months ended September 30,
1996 versus zero originations for the same 1997 period and 166 loans for
$22.1 million for the nine months ended September 30, 1996 versus 20 loans
for $2.5 million for the same period of 1997. In April, the Company closed
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 30 261 289 382 $36.2 $39.4 $48.7
December 31 N/A 281 320 N/A $41.5 $42.5
--- --- --- ----- ----- -----
Total 687 1,246 1,242 $97.4 $170.2 $160.2
The Commercial Division originated 489 loans for $96.0 million in the nine
months ended September 30, 1997 versus 580 loans for $94.2 million in same
1996 period. For the three month period ended September 30, 1997 the
Commercial Division originated 182 loans for $36.7 million versus 189 loans
for $33.0 million for the same period of 1996. 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 month of September, 1997, the average balance of the Company's
loan portfolio was $123.8 million and represented an average loan/deposit
ratio in excess of 82.7%. The average balance for the same year earlier
period was $92.6 million representing an average loan/deposit ratio of
75.9%. The result of the increase in the level of loans in the Company's
loan portfolios caused loan interest income to increase $398,000 (16.8%) in
the three months ended September 30, 1997 as compared to the same period of
1996 and to increase $1,355,000 (21.1%) in the nine months ended September
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
these loans. In the third quarter, management began to implement
technologies which will significantly speed up the application, approval,
and funding times in the real estate department. Management believes that
the technologies will improve its competitiveness in the marketplace by
allowing very rapid loan approvals, perhaps even in the field at time of
first contact with the client and by attracting realtor business by
reducing the waiting time for the realtor commission. The new technologies
will also allow the process to be less people intensive, thereby reducing
costs for the Company which will show up either directly to the bottom
line, or in the form of higher volume if the cost savings are passed on.
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, causing a similar rise in interest rates all along the yield curve.
However, because inflation has remained benign, market interest rates,
especially at the long end of the maturity spectrum of the yield curve,
fell throughout the summer months, increasing demand for mortgage loans on
the national level. The Company benefited from this trend. There continues
to be uncertainty as to the direction of rates and inflation and the impact
on rates of the Asian currency crises which culminated in extreme
volatility in equity markets throughout the world in late October. 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. When interest rates rise and loan volume
declines in the mortgage business, income on the loan portfolio will rise
to offset the mortgage business decline. On the other hand, if rates fall,
the lower interest income from the loan portfolio will be offset by rising
loan volume and fee income in the mortgage business.
Asset Quality
The Company's asset quality is often measured by its delinquencies and
non-performing assets. As of September 30, 1997 the Company had
non-performing (non-accruing) loans of approximately $2.6 million,
comprised of two fully secured construction and development loans totaling
$2.3 million and two commercial loans totaling $305,000. The Company had
$353,000 of loans past due 90 days or more that were still accruing. As of
September 30, 1997, the Company had one property, with a value of $9,000,
taken as repayment on a loan. This asset is designated as "Other Real
Estate Owned" property. In the same period of 1996, the Company had no
properties taken in foreclosure.
Deposit Volumes
As of September 30, 1997, the Company's deposit base had grown from $131.3
million (measured as of December 31, 1996) to $157.7 million, an increase
of $26.4 million (20.1%). Using average balances rather than end of period
figures, deposits grew $29.2 million (24.1%), from an average of $120.9
million in December, 1996 to $150.1 million in September, 1997. The
increase is partially attributed to the addition of a fourth full service
branch location in February of 1997, a fifth full service branch location
in July 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
two reasons: 1) the continued economic growth in the northern Nevada region
and 2) management's strategic goal of marketing to 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 October 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, short-term investments and lines of credit from other
financial institutions 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 21.9% as of September 30,
1997, a decrease from 29.2% on September 30, 1996. The investment portfolio
is a principal source of secondary asset liquidity.
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 $5.7 million in
U.S. Treasury and Agency securities with various maturities of two years or
less, $5.4 million in mortgage backed securities (non-derivative types),
$2.2 million in tax exempt municipal bonds and $429,000 in Federal Home
Loan Bank stock. Management estimates that the duration of the
"available-for-sale" portfolio was approximately 1.5 years on September 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 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
September 30, 1997, the market value of the "available-for-sale" portfolio
was $11,000 below book value.
The Company also has a $11.5 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 September 30, 1997, management estimates that the duration of
the portfolio was approximately 2.5 years. The market value was $39,000
below book value. In contrast, at December 31, 1996, the book value of this
portfolio was $5.5 million with an unrealized loss of $77,000.
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 September 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 September 30, 1997, there
was an outstanding draw of $3 million on the FHLB line maturing in
September of 2000. The Company also has a $30,000 line of credit with
InterWest Bank for the cash requirements of the holding company. As of
September 30, 1997, there were no outstanding balances 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. The Company also has the
ability to borrow from the Federal Reserve Bank of San Francisco for short
periods of time.
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 September 30, 1997, was 82.7%. 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 $1,899,000 during the nine
months ended September 30, 1997 of which $1,184,000 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. Such stock, when and if issued, will carry restrictions
regarding its resalability.
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 September 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) 11.14% 11.2 3% 4.0%
Total capital 11.88% 11.98 % 8.0%
Leverage ratio 8.87% 8.89% 3.0%
COMSTOCK BANCORP AND SUBSIDIARY
RESULTS OF OPERATIONS (Three and Nine Months Ended September 30, 1997 and 1996)
The company earned $1,184,000 in the nine months ended September 30,1997, a
decrease in post tax earnings of 18.1% when compared to the $1,446,000
earned for the nine months ended September 30, 1996. On a per share basis,
earnings were $.25 through September 30, 1997 versus $.33 for the same
period of 1996 (see exhibit (a) 11 for earnings per share computations).
For the three months ended September 30, 1997, the Company earned $488,000,
a decrease of 25.3% or $165,000 over the same period of 1996. On a per
share basis, earnings for the three month period were $.10 for the period
ending September 30, 1997 versus $.15 for the same period of 1996. Return
on average assets for the nine months ended September 30, 1997 was 1.01%
versus 1.47% for the same 1996 period. Return on average equity was 11.39%
versus 16.74% in the 1996 comparable period.
Management believes that the following items had the largest impacts on
income for the three and nine month periods ended September 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. For the nine months ended September 30, 1997, loan volumes
decreased when compared to the same year earlier period 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. Third 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 third quarter 28 lots were sold,
producing "additional interest" income of $58,800. In the first
nine months of 1997, 134 lots were sold, adding $281,400 in
additional pre-tax income. In the third quarter of 1996, 128 lots
were sold, adding $268,800 to pre-tax income. No lots were sold
prior to the third quarter of 1996. To date, 262 lots have sold
and 549 remain to be sold. The table below provides the above data
in a tabular format.
Loan Interest Income ($000)
Nine months ended Three months ended
Sept. 30 Sept. 30
1997 1996 1997 1996
---- ---- ---- ----
Loan Interest Income 9,082 7,575 3,223 2,667
Additional Interest Income 281 269 59 269
4. The effective tax rate for the first nine months of 1997 was 28.4%
as compared to 32.7% 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, and to increased investments in tax exempt municipal
securities.
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 of 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 $201,000 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 $640,000 from fee income to offset salary and
benefits costs in the first nine months of 1997, and $255,000 in
the three months ended September 30, 1997. Management believes
that a more appropriate comparison for fee income between 1997 and
1996 for the nine months ended September 30, 1997 to be $2,821,000
(composed of the $1,980,000 reported plus the $201,000 and the
$640,000 discussed above). This represents a 12.9% decrease in fee
income for the nine months ended September 30, 1997 versus the
same period of 1996 and is more in line with the 13.3% drop in the
dollar volume of loans than the 38.9% reduction in fee income in
the reported numbers. For the three month period ended September
30, 1997, management estimates that changes in loan fee deferrals
trimmed $5,000 from pre tax income. The adjusted comparison for
fee income for the three month period of 1997 would be $1,034,000
(composed of the $774,000 reported plus the $5,000 deferral
estimate and the $255,000 credited against salaries and benefits).
This represents a 6.0% decrease in fee income in the three month
period of 1997 versus the same period of 1996. This, too, is more
in line with the 7.3% decrease in number of loans and .8% increase
in the dollar volume than the 29.6% difference in the dollars in
the reported fee income for the three month period.
The table below shows actual loan fee and servicing income as
reported for the nine 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)
Nine months ended Three months ended
Sept. 30 Sept. 30
----------------- ------------------
As reported: 1997 1,980 774
As reported: 1996 3,239 1,100
1997 adjusted for accounting
differences 2,821 1,034
Salaries and employee benefits showed a decline from 1996 levels
in both the three and nine 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 $640,000 in fees credited to
this account for the nine months ended September 30, 1997 and
$255,000 credited in the three months then ended. As a result, on
a comparable basis with 1996, salaries and benefits would have
increased by $304,000 (12.1%) for the nine months ended September
30, 1997. For the third quarter of 1997, on a comparable basis,
salaries and benefits would have increased $63,000 (5.1%) over the
third quarter of 1996. The table below shows actual salaries and
benefits as reported for 1997 and 1996 nine 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)
Nine months ended Three months ended
Sept. 30 Sept. 30
----------------- ------------------
As reported: 1997 3,145 1,046
As reported: 1996 3,491 1,238
1997 adjusted for accounting
differences 3,785 1,301
6. Management has estimated that the change in loan fee deferrals and
expense recognition resulted in a timing difference of $129,000
($.027 per share) in primary earnings for the nine months ended
September 30, 1997. For the three month period, the estimated
difference in earnings was $3,000 ($.001 per share). Management
estimates that the change will impact future earning comparisons
to a much lesser extent than the impact on first and second
quarter of 1997, and that the impact will be neutralized by the
first quarter of 1998 as larger amounts of fees already deferred
accrete to income.
7. Non-interest rate related events also had a significant impact on
net income. Non-interest income increased by $15,000 for the nine
months ended September 30, 1997 over the same period of 1996, as a
result of increased deposit service charges generated by the
addition of two branch locations and as a result of fees earned on
a new accounts receivable servicing product. The Company committed
a significant amount of resources for expansion in 1997. As a
result of the new Galena and Sparks branches, the lease and
remodel of the new operations center, and a partial remodel of the
headquarters building, occupancy expenses rose $143,000 (36.8%),
and furniture and equipment expenses rose $65,000 (18.6%) when
comparing the nine months ended September 30, 1997 to the same
1996 period. For the third quarter of 1997, occupancy expenses
rose $67,000 (51.1%), and furniture and equipment expenses rose
$38,000 (32.8%) versus the third quarter of 1996. The Company also
purchased an acre of land for future branch expansion. 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.
The Company provided $10,000 less to its loan loss reserve
(Provision for Credit Losses) in the first nine months of 1997
than it did in the same 1996 period. The contribution to the loan
loss reserve for the third quarter of 1997 was $20,000 greater
than the same period of 1996.
Other operating expenses rose $183,000 (13.4%) in the nine months
ended September 30, 1997 over the same 1996 period. For the third
quarter, other operating expenses rose $106,000 (24.1%) for 1997
over the third quarter of 1996. The increase in other operating
expenses for both the three and nine months periods ended
September 30, 1997 was the result of increased advertising and
data processing costs.
8. The Company committed a significant amount of resources for
technological modernization in 1997. The Company successfully
migrated from its computer service bureau to an in-house system in
October, 1997. Deployment of electronic products and services has
been scheduled for the next several quarters.
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.
Capital investments of nearly $2 million (including both branch
expansion and technology) have an initial start-up period in which
there are zero or negative returns. Because of the volume of such
investments in 1997, management believes that the ROA and ROE are
likely to be lower for the immediate future 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 nine month periods ended September 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 September 30, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
For Quarter Ended: Sept. 30,1997 Rate Sept. 30, 1996 Rate Change Variance Variance Variance
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Loan Income $2,761,358 9.36% $2,363,532 10.57% $397,826 $756,227 ($271,525) ($86,876)
Loan Fees and
Servicing Income 774,212 1,100,313 (326,100) - - -
------- --------- ---------
Total Loan, Servicing,
And Fee Income 3,535,570 11.98% 3,463,844 15.49% 71,726 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Investments:
Fed Funds and Mutual
Fund Income 73,114 5.59% 225,216 5.41% (152,102) (154,393) 7,285 (4,994)
Income from
Investment Securities 347,994 5.68% 249,057 5.78% 98,937 105,586 (4,669) (1,980)
Interest-Bearing
Deposit Income 21,906 6.48% 28,073 6.40% (6,166) (6,451) 369 (85)
------ ------ ------- ------- --- ----
Total Investment Income 443,014 5.70% 502,346 5.64% (59,332) (63,623) 4,913 (622)
Trading Account Assets
And Other Investments 7,316 6.59% 5,633 5.47% 1,683 441 1,151 90
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Total Interest Income $3,204,373 8.57% $2,865,878 9.14% $338,494 $692,604 ($266,612) $87,498
Total Interest, Servicing,
Fee, and Trading
Account Income $3,985,901 10.66% $3,971,824 12.66% $14,077 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Interest on Deposits:
Transaction Accounts $394,581 3.26% $349,211 3.38% $45,370 59,825 (12,340) (2,114)
Time and Savings
Deposits 1,023,363 5.28% 785,744 5.04% 237,620 191,285 37,263 9,071
--------- ------- ------- ------- ------ -----
Total Deposit
Interest Expense 1,417,944 4.50% 1,134,954 4.38% 282,990 243,696 32,348 6,946
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS:
Other Borrowed Funds 13,462 6.46% 12,996 5.52% $466 ($1,465)
Total Interest Expense $1,431,406 4.52% $1,147,950 4.39% $283,456 $243,095 $33,307 $7,053
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
DIFFERENTIAL $1,772,967 4.05% $1,717,928 4.75% $55,039 $449,509 ($299,919) ($94,552)
(Excludes fee income)
NET INTEREST
DIFFERENTIAL $2,554,495 6.14% $2,823,874 8.27% ($269,379) - - -
(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 Nine Months Ended September 30, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
Year-To-Date Ended: Sept. 30,1997 Rate Sept. 30, 1996 Rate Change Variance Variance Variance
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Loan Income $7,762,766 9.55% $6,407,913 9.86% $1,354,853 $1,625,538 ($197,112) ($50,186)
Loan Fees and
Servicing Income 1,980,487 3,238,745 (1,258,258) - - -
--------- --------- -----------
Total Loan, Servicing,
And Fee Income 9,743,254 11.99% 9,646,658 14.84% 96,596 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Investments:
Fed Funds and Mutual
Fund Income 327,803 5.46% 562,349 5.34% (234,546) (239,266) 11,819 (5,047)
Income from
Investment Securities 984,840 5.93% 618,412 5.54% 366,428 304,854 42,703 21,128
Interest-Bearing
Deposit Income 79,954 6.52% 82,589 6.40% (11,635) (12,692) 1,606 (248)
------ ------ -------- -------- ----- -----
Total Investment Income 1,383,597 5.83% 1,263,350 5.50% 120,247 45,357 76,735 2,765
Trading Account Assets
And Other Investments 14,248 4.47% 15,466 5.21% (1,217) 1,176 (2,171) (166)
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Total Interest Income $9,160,611 8.70% $7,671,263 8.69% $1,489,348 $1,506,637 $8,945 $1,763
Total Interest, Servicing,
Fee, and Trading
Account Income $11,155,347 10.60% $10,925,475 12.38% $229,872 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Interest on Deposits:
Transaction Accounts $1,110,665 3.27% $940,340 3.34% $170,325 198,092 (20,088) (4,247)
Time and Savings
Deposits 2,847,271 5.21% 2,327,527 5.10% 519,744 468,170 49,978 10,090
--------- --------- ------- ------- ------ -----
Total Deposit
Interest Expense 3,957,936 4.47% 3,267,867 4.43% 690,069 669,187 27,215 5,593
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS:
Other Borrowed Funds 13,748 6.70% 15,972 6.34% (2,224) ($2,909) 909 (166)
Total Interest Expense $3,971,684 4.47% $3,283,839 4.44% $687,844 $668,131 $26,322 $5,375
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
DIFFERENTIAL $5,188,928 4.23% $4,387,424 4.25% $801,504 $838,506 ($17,378) ($3,612)
(Excludes fee income)
NET INTEREST
DIFFERENTIAL $7,183,663 6.12% $7,641,636 7.94% ($457,973) - - -
(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 nine month periods ended
September 30, 1996 and 1997 shows lower yields in loan income both before fees
and when fees are included. The comparison of the three month period ended
September 30, 1996 and 1997 shows the same decrease in interest yield and in
yield when fees are factored in. The yields on investment portfolio are higher
in the nine month period ended September 30, 1997 than the same period of 1996.
For the three month period ended September 30, 1997, yields are higher in the
federal funds, mutual funds and interest bearing deposit portfolios but slightly
lower in the investment securities portfolio over the same period of 1996. The
comparison of interest sensitive liabilities in both the three and nine month
periods show an increase in rates on time and savings accounts and a decrease in
rates on transaction accounts, netting to an overall increase in rates paid on
deposit accounts.
For loan income the increase in the level of commercial loans held in portfolio
resulted in a positive volume variance and the increased pressure from the
highly liquid local institutions mentioned above resulted in a decrease in yield
and a negative rate variance. For the nine month period, the result was an
increase of $1,355,000 income, of which $1,626,000 was directly attributable to
the larger portfolio balances and ($197,000) to decreased yields. A reduction in
fee income resulted in a decrease of ($1,258,000) in income when compared to the
same nine month period of 1996 and was affected by the change in fee deferral
methods and lower loan volumes. For the three months ended September 30, 1997
compared to the same period of 1996, loan income increased $398,000 of which
$756,000 was due to larger portfolio balances and ($271,525) to decreased yields
($210,000 of this amount is from the difference in "additional interest" income
discussed above). Again, for this period, when loan fees and servicing income
are factored in, the result is a decrease of ($326,000) 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 14.84% to 11.99% in the nine month period and decreased from 15.49% to
11.98% in the three month period.
Income from Fed Funds and Mutual Funds decreased by ($235,000) in the nine month
period and by ($152,000) in the three month period ended September 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 $12,000
and $7,000 in the nine and three month periods respectively.
Higher yields on Investment Securities combined with an increase in the invested
balances netted the Company an increase of $366,000 for the nine month period
and increased invested balances resulted in a $99,000 increase in income for the
three month period ending September 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 for both the
nine and three month periods. Matured time deposits have not been replaced.
Overall, total investment income increased by 9.5% or $120,000 for the nine
months and decreased by 11.8% or ($59,000) for the three month period. The
decrease in the three month period is volume related and is the result of a
deployment of overnight fund balances into the higher yielding loan portfolios.
The cost of interest sensitive liabilities was lower on transaction accounts for
both the nine and three month periods ended September 30, 1997 over the same
periods of 1996 and was the result of an influx of deposits from the
institutions acquired by out-of-state companies. The cost of time and savings
deposits was higher for both the nine and three month periods as a result of
higher short-term interest rates resulting from the March, 1997 increase in the
Federal Funds rate by the Federal Reserve. Over the nine month period total
deposit costs increased $690,000 and over the three month period costs increased
$283,000, largely due to increased balances. Rates increased from 4.38% to 4.50%
over the three months ended September 30, 1997 and from 4.43% to 4.47% over the
nine month period of 1997 versus 1996.
In summary, on the asset side, larger loan and investment securities portfolio
levels increased income by $1,489,000 in the nine months ended September 30,
1997 over the same period of 1996 and increased income by $338,000 in the three
months ended September 30, 1997 over the same 1996 period. When fee income is
included, the increase in income for total earning assets, in the nine month and
three month periods in 1997 over 1996 is $230,000 and $14,000 respectively. When
the increased costs of deposits of $690,000 and $283,000 for the respective nine
and three month periods are taken into account, the Company's net interest
income differential, excluding servicing and fee income, increased $802,000 for
the nine month period and $55,000 for the three month period. With fee income
included, the net interest income differential fell ($458,000) for the nine
month period, and ($269,000) for the three month period ending September 30,
1997.
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.
In the matter of Comstock Bank vs. Raymond B. Graber
pertaining to the Bank's enforcement of Mr. Graber's personal
guarantee of the debt of Outdoor Posters, Inc., there has been
no material change in the status of this case since the
Company's last 10QSB report.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders. None.
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 27
27. Financial Data Schedule 29
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: November 5, 1997 /s/ Robert N. Barone
----------------- --------------------
Robert N. Barone,
Chairman, CEO and Treasurer
(Principal Accounting and
Financial Officer)
Date: November 5, 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 ends of quarter averages is considered to
be the stock price for the quarter.
Quarter High Low
Ended Bid Asked Average
-------- ---- ----- -------
06/30/97 $6.500 $7.25 $6.875
09/30/97 $7.125 $7.50 $7.313
------
Average: $7.094
06/30/96 $4.63 $4.88 $4.750
09/30/96 $4.25 $4.50 $4.375
------
Average: $4.563
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 September 30, 1997, the number of "in the money" options
was 635,732. If exercised, these would net the Company
$1,873,176. The Company would use these funds to "repurchase"
264,060 shares at an average price of $7.094. On net, the
options add 371,672 shares to the total outstanding shares in
3. below.
As of September 30, 1996, the number of "in the money" options
was 684,832. If exercised, these would net the Company
$2,134,308. The Company would use these funds to "repurchase"
467,793 shares at an average price of $4.563. On net, the
options add 217,039 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
06/30/97 4,683,319 06/30/96 4,472,106
09/30/97 4,793,340 09/30/96 4,452,306
--------- ---------
Average: 4,738,329 Average: 4,462,206
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 nine 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
06/30/97 4,647,454 $431,006 $ 0.09
09/30/97 4,738,329 $488,436 $ 0.10
06/30/96 4,438,833 $383,230 $ 0.09
09/30/96 4,462,206 $653,483 $ 0.15
9 Months Primary
Ended Shares Earnings Shares
09/30/97 4,655,468 $1,184,058 $ 0.25
09/30/96 4,339,204 $1,445,554 $ 0.33
COMSTOCK BANCORP
EXHIBIT 27
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
FINANCIAL DATA SCHEDULE
$ in
Thousands
Cash Due from Banks (Non-Interest Bearing) 10,800
Interest-bearing Deposits in Domestic Financial Institutions 1,294
Fed funds and Overnight Mutual Funds Sold 7
Trading Account Securities 13
Investment and Mortgage back Securities Held for Sale 13,736
Investment and Mortgage back Securities Held to Maturity
- Carrying Value 11,456
Investment and Mortgage back Securities Held to Maturity
- Market Value 11,417
Loans 128,719
Allowance for Credit Losses 997
Total Assets 177,981
Deposits 157,707
Short-term borrowings 1,600
Other Liabilities 766
Long-term debt 3,000
Preferred stock - mandatory redemption 0
Preferred stock - no mandatory redemption 0
Common Stock 44
Other Stockholders Equity 14,864
Total 1iabilities and Stockholders Equity 177,981
Interest and Fees on Loans 9,743
Interest and Dividends on Investments 1,070
Other Interest Income 327
Total Interest Income 11,141
Interest on Deposits 3,958
Total Interest Expense 3,972
Net Interest Income 7,170
Provision for Loan Losses 180
Investment Securities Gains/Losses (12)
Other Expense 5,642
Income/Loss Before Income Tax 1,654
Income/Loss Before Extraordinary Items 1,654
Extraordinary Items, Less Tax 0
Cumulative Change in Accounting Principles 0
Net Income or Loss 1,184
Earnings Per Share - Primary 0.25
Earnings Per Share - Fully Diluted 0.25
Net Yield - interest earning assets - actual 8.70%
Loans on Non-accrual 2,605
Accruing Loans past due 90 Days or More 353
Troubled Debt Restructuring 18
Potential Loan Problems 0
Allowance for Loan Losses - Beginning of Period 857
Total Charge-Offs 68
Total Recoveries 28
Allowance for Loan Losses - End of Period 997
Loan Loss Allowance allocated to Domestic Loans 997
Loan Loss Allowance allocated to Foreign Loans 0
Loan Loss Allowance - Unallocated 0