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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, 1998
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 July 27, 1998: Common Stock - Authorized 15,000,000 shares at $0.01 par
value; issued and outstanding - 4,475,618
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TABLE OF CONTENTS
Item
Number Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition
June 30, 1998 and December 31, 1997... ......................4
Consolidated Statements of Income
Three and six months ended June 30, 1998 and 1997............5
Consolidated Statements of Changes in Stockholders' Equity
For the periods ended June 30, 1997, December 31, 1997, and
June 30, 1998................................................6
Consolidated Statements of Cash Flows
Three months ended June 30, 1998 and 1997....................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.....................................26
Signatures ...................................................................27
Part I. Financial Information
Item I. Financial Statements
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
As of June 30, 1998 and December 31, 1997
(Dollars in Thousands)
(Unaudited) (Audited)
June 30, Dec. 31,
1998 1997
Assets:
Cash and Due from Banks (Non-Interest Bearing) $10,621 $9,464
Fed Funds and Overnight Mutual Funds Sold 7,439 9,853
Interest-bearing Deposits in Domestic
Financial Institutions 1,262 1,492
Trading Account Securities 10 12
Securities Available for Sale 17,204 14,218
Securities Held to Maturity (market value of $9,496
and $10,632 at June 30, 1998 and December 31, 1997) 9,461 10,636
Federal Home Loan Bank Stock 819 788
Loans Held for Sale 19,068 13,946
Loans (Net of Deferred Fees) 131,581 122,235
Less: Allowance for Credit Losses 1,270 1,076
----- -----
Net Loans 149,379 135,105
------- -------
Premises and Equipment 7,350 7,710
Other Real Estate Owned 5 8
Accrued Interest Receivable 1,059 989
Other Assets 4,959 4,423
----- -----
TOTAL ASSETS 209,569 194,698
======= =======
Liabilities and Stockholders' Equity:
Deposits:
Demand Deposits (Non-Interest Bearing) $31,655 $32,299
Savings, Money Market and NOW Accounts 67,316 60,917
Time Deposits Under $100,000 52,987 50,944
Time Deposits $100,000 and Over 32,741 27,642
------ ------
Total Deposits 184,699 171,802
------- -------
Line of Credit Payable 6,000 6,000
Accrued Interest Payable 316 321
Accounts Payable and Accrued Expenses 756 876
Income Taxes Payable 327 102
--- ---
TOTAL LIABILITIES 192,098 179,101
------- -------
Stockholders' Equity:
Common Stock-$0.01 par value, 15,000,000 shares
authorized; 4,475,618 and 4,421,668 shares issued
and outstanding on June 30, 1998 and December 31,
1997 (1) 45 44
Paid-in Surplus (1) 9,096 8,908
Accumulated Other Comprehensive Income:
'Unrealized Gain (Loss) on Securities Available for Sale,
Net of Applicable Deferred Income Taxes (18) 17
Retained Earnings 8,347 6,628
----- -----
TOTAL STOCKHOLDERS' EQUITY 17,471 15,597
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $209,569 $194,698
======== ========
(1) Adjusted for two for one share exchange and for change in par from
$.50 to $.01 on June 16, 1997. [See accompanying notes to financial
statements.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 1998 and 1997
(Dollars in Thousands except per share amounts)
Three Months Three Months
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
June 30, 1998 June 30, 1997 June 30, 1997 June 30, 1997
Interest Income:
Interest and Fees on Loans $9,228 $6,208 $5,087 $3,357
Interest on Investments and Trading Securities:
Taxable 561 523 272 293
Exempt from Federal Income Tax 193 121 110 67
Interest on Fed Funds Sold 241 254 116 108
Interest on Deposits with Banks 47 49 22 24
-- -- -- --
Total Interest Income 10,270 7,155 5,607 3,849
------ ----- ----- -----
Interest Expense:
Interest on Deposits 3,384 2,540 1,739 1,330
Interest on Line of Credit 185 0 93 0
--- - -- -
Total Interest Expense 3,569 2,540 1,832 1,330
----- ----- ----- -----
Net Interest Income 6,701 4,615 3,775 2,519
Provision for Credit Losses 260 120 150 60
--- --- --- --
Net Interest Income after Credit Loss Provision 6,441 4,495 3,625 2,459
----- ----- ----- -----
Non-Interest Income:
Service Charges on Deposit Accounts 157 136 80 69
Gain/(Loss) on Sale of Investment Securities (8) (3) 0 0
Gain/(Loss) on Sale of Trading Securities 18 (10) 18 (11)
Other Income 272 46 216 31
--- -- --- --
Total Non-Interest Income 439 169 314 89
--- --- --- --
Non-Interest Expense:
Salaries and Employee Benefits 2,682 2,099 1,405 1,036
Occupancy Expense 451 334 230 183
Furniture and Equipment Expense 362 261 185 141
Other Operating Expenses 1,030 1,005 560 578
----- ----- --- ---
Total Non-Interest Expense 4,526 3,699 2,380 1,938
----- ----- ----- -----
Income before Taxes 2,354 965 1,559 610
Provision for Income Taxes 635 270 440 179
--- --- --- ---
NET INCOME $1,719 $696 $1,119 $431
====== ==== ====== ====
Basic Earnings per Share (1) $0.39 $0.16 $0.25 $0.10
===== ===== ===== =====
Diluted Earnings per Share (1) $0.35 $0.15 $0.23 $0.09
===== ===== ===== =====
Other Comprehensive Income, Net of Tax:
Unrealized Gains/(Losses) on Securities:
Unrealized Holding Gains/(Losses) Arising During Period ($38) ($13) ($33) $25
Less: Reclassification for Gains/(Losses) Incl. in Income 3 11 2 9
- -- - -
Other Comprehensive Income ($35) ($2) ($31) $34
Comprehensive Income $1,684 $694 $1,088 $465
====== ==== ====== ====
Other Comprehensive Income Basic Earnings per Share (1). $0.38 $0.16 $0.24 $0.11
===== ===== ===== =====
Other Comprehensive Income Diluted Earnings per Share (1). $0.34 $0.15 $0.22 $0.10
===== ===== ===== =====
(1) Adjusted for two for one share exchange on June 16, 1997.
[See accompanying notes to financial statements and Exhibit A-
Computation of earnings per share.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY For
Periods Ended June 30, 1997, December
31, 1997, and June 30, 1998
(Dollars in Thousands)
(Unaudited)
Accumulated
Retained Other Total
Common Paid-in Earnings Comprehensive Stockholders' Comprehensive
Stock (1) Surplus (1) (Deficit) Income Equity Income
Balances, December 31, 1996 $42 $8,184 $4,792 ($9) $13,009
Net Income 696 696 $696
Sale of Common Stock 2 714 716
Other Comprehensive Income, Net of Tax
Unrealized Gains/(Losses) on Securities,
Net of Reclassification Adjustment (2) (2) (2)
------------------------------------------------------------------------------------
See Disclosure (a) Below
Balances, June 30, 1997 $44 $8,898 $5,488 ($11) $14,419 $694
Net Income 1,140 1,140 1,140
Sale of Common Stock 10 10
Other Comprehensive Income, Net of Tax
Unrealized Gains/(Losses) on Securities,
Net of Reclassification Adjustment 28 28 28
------------------------------------------------------------------------------------
See Disclosure (b) Below
Balances, December 31, 1997 $44 $8,908 $6,628 $17 $15,597 $1,862
Net Income 1,719 1,719 1,719
Sale of Common Stock 1 189 190
Other Comprehensive Income, Net of Tax
Unrealized Gains/(Losses) on Securities,
Net of Reclassification Adjustment (35) (35) (35)
------------------------------------------------------------------------------------
See Disclosure (c) Below
Balances, June 30, 1998 $45 $9,097 $8,347 ($18) $17,471 $1,684
=== ====== ====== ===== ======= ======
(1) Adjusted for two for one stock exchange and change in par from $.50 to $.01
on June 16, 1997.
(a) Disclosure of reclassification amount:
Unrealized holding gains arising during period ($13)
Less: reclassification adjustment for gains included in net income 11
Net unrealized gains on securities ($2)
(b) Disclosure of reclassification amount:
Unrealized holding gains arising during period $30
Less: reclassification adjustment for gains included in net income (2)
Net unrealized gains on securities $28
(c) Disclosure of reclassification amount:
Unrealized holding gains arising during period ($38)
Less: reclassification adjustment for gains included in net income 3
Net unrealized gains on securities ($35)
[See accompanying notes to financial statements.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 1998 and 1997
(Dollars in Thousands)
(Unaudited) (Unaudited)
June 30, 1998 June 30, 1997
Cash Flows from Operating Activities:
Net Income $1,719 $696
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Credit Losses 260 120
Depreciation and Amortization 541 311
Net (Gain) Loss on Sale of Available For Sale Securities 11 (3)
Net (Gain) Loss on Sales of Trading Securities 0 10
Purchases of Trading Securities 0 0
Proceeds from Sales of Trading Securities 2 1
Amortization of Servicing Asset 0 (13)
Increase/(Decrease) in Deferred Taxes Due to Change in
Unrealized Gain or Loss on Securities Available for Sale (18) 1
Net (Increase) Decrease in:
Accrued Interest Receivable (70) (10)
Other Assets (537) (1,568)
Loans Held For Sale (5,122) 1,070
Net Increase (Decrease) in:
Accrued Interest Payable (5) 4
Accounts Payable and Accrued Expenses (120) (165)
Income Taxes Payable 225 76
--- --
Net Cash Provided/(Used) by Operating Activities ($3,113) $530
Cash Flows from Investing Activities:
Net Change in Interest-Bearing Deposits in Domestic
Financial Institutions 230 103
Proceeds from Sales of Available for Sale Securities 1,613 676
Proceeds from Maturities of Available for Sale Securities 4,547 340
Purchases of Available for Sale Securities (9,185) (3,511)
Proceeds from Maturities of Held to Maturity Securities 1,262 1,545
Purchases of Held to Maturity Securities (68) (5,629)
Net Change in Loans Held to Maturity (9,551) (19,528)
Purchases of Premises and Equipment, Net (49) (1,272)
Purchase of FHLB Stock (31) (45)
---- ----
Net Cash Provided/(Used) by Investing Activities ($11,232) ($27,321)
Cash Flows from Financing Activities:
Net Change in Demand, Savings, NOW
and Money Market Accounts 5,755 8,924
Net Change in Time Deposits 7,143 11,359
Proceeds on Line of Credit Payable 0 15
Payments on Line of Credit Payable 0 0
Proceeds from Sale of Common Stock, Net 190 716
Cash Dividends Paid 0 0
- -
Net Cash Provided/(Used) by Financing Activities $13,088 $21,014
Increase (Decrease) in Cash and Equivalents (1,257) (5,778)
Cash and Equivalents:
Beginning of Period 19,317 20,331
------ ------
End of Period $18,060 $14,553
======= =======
[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 commercial
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 Bancorp's Annual Report
to shareholders for the fiscal year ended December 31, 1997 which is
included in the Company's Registration Statement on 10-KSB dated March 6,
1998 (Commission File No. 0-22391). The results of operations for the three
and six months ended June 30, 1998 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 three and six months ended June 30, 1998. .
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. 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 adopted SFAS 128 for financial statements issued
for periods ending after December 15, 1997. All prior period earnings per
share figures are restated. Basic and diluted earnings per share figures
are required on the face of the income statement.
SFAS 128 replaces prior 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 option or warrant contracts to issue common stock were
exercised.
All earnings per share data in this report reflect the adoption of this
statement.
4. 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 include 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
held as available for sale.
This financial statements in this report include the adoption of this
statement.
5. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and other
Postretirement Benefits" (SFAS 132). The statement is effective for fiscal
years beginning after December 15, 1997. The statement is intended to
revise current disclosure requirements. It standardized the disclosure
requirements for these plans to the extent possible, and it requires
additional information about changes in the benefit obligations and the
fair value of plan assets. It does not change the measurement or
recognition of standards for these plans.
The Company does not anticipate that adoption of SFAS 132 will have a
material effect on the Company's disclosures to the financial statements.
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June of 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities"(SFAS 133). The standard is effective for fiscal years beginning
after June 15, 1999. Earlier adoption is allowed at the beginning of any
fiscal quarter after the release of the statement. The standard establishes
accounting and reporting for derivative financial instruments and for
hedging activities. It requires that all derivatives be measured at fair
value and to be recognized as either assets or liabilities in the statement
of financial position. The standard allows for a one-time transfer of
securities (Mulligan Rule) from the Held to Maturity Portfolio to the
Available for Sale or Trading Portfolios without the penalties imposed by
FASB 115, "Accounting for Certain Investments in Debt and Equity
Securities". The transfer is allowed at the date of initial application of
the standard.
The Company does not currently engage in the hedging activities or in the
acquisition of derivative instruments as defined in SFAS 133 and therefore
does not anticipate any financial statement adjustments from this
statement. Management is in the process of evaluating the securities
portfolio and may take advantage of the one-time transfer of securities
from the Held to Maturity Portfolio to the Available for Sale or Trading
Portfolios if deemed appropriate and within the objectives of the
investment policies and strategies.
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. The Company also makes loans in
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
deteriorate, 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.
Expansion Plans. The Company has made a substantial investment in
facilities, computer hardware and computer software in anticipation that
demand for the resulting products and services will materialize. There is
no guarantee that the new products and services offered will be accepted or
that the technology purchased will not become obsolete prior to the
Company's realization of a positive return on its investment. As a result,
unanticipated changes in technology, or a misreading of customer demands
for products and services, could affect the anticipated return on
infrastructure investment.
Financial Condition
As of June 30, 1998, the Company's assets had grown from $194.7 million
(measured as of December 31, 1997) to $209.6 million, an increase of $14.9
million. Using average assets rather than end of period figures, growth was
$9.4 million, from an average of $190.2 million in December of 1997 to an
average of $199.6 million in June of 1998. 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) increased from $72.9
million of loan originations representing 493 loans in the three months
ended June 30, 1997 to $83.2 million representing 543 new loan originations
in the three months ended June 30, 1998, a 14.1% increase in dollar volume
and a 10.1% increase in number of loans. For the six month period ended
June 30, 1998, loan originations increased to $159 million representing
1,003 loans from $120.3 million representing 733 loans in the same 1997
period. Management believes that the higher number of loans and higher
dollar volume of 1998 versus the same 1997 period is partly due to the
severe weather conditions in early 1997, which included an unusually hard
winter as well as substantial flooding. (The flooding was so severe in
early January, 1997, that there was a federal disaster declaration. Such a
declaration for the area had never happened in the Company's history.)
Management also believes that the increase in the number and dollar volume
of loans in the first six months of 1998 is a result of four factors: 1)
lower interest rates on mortgage loans, 2) an enhanced consumer interest in
refinancing of mortgage loans, 3) continued growth in the area's non-gaming
economic activity and 4) the internal implementation of enhanced automated
underwriting and credit scoring programs.
Throughout 1997 and in the first six months of 1998, northern Nevada
community financial institutions experienced large liquidity increases.
Management believes that recent acquisitions of Nevada financial
institutions by large out-of-state institutions has created a significant
opportunity 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,
competition for commercial loans caused downward pressure on the Bank's
interest margins and fee structures. Furthermore, management has been
reluctant 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.
The Northern Nevada Real Estate Division originated 367 loans for a dollar
volume of $51.0 million in the three months ended June 30, 1998 compared to
241 loans for a dollar volume of $35.4 million in the same period of 1997.
For the six month period ended June 30,1998, the Northern Nevada Real
Estate Division originated 681 loans for a dollar volume of $96.4 million
compared to 426 loans at a dollar volume of $61.2 million in the same 1997
period. In April 1997, the Company closed the Las Vegas real estate office
due to high personnel turnover and low lending volumes.
According to public records, mortgage loan volume in Washoe County
increased from $42.2 million in the first six months of 1997 to $66.3
million through the first six months of 1998, the Company's market share
fell from 6.8% to 5.4% as it fell from fourth to fifth position. In Carson
City, over the same six months, volume rose by 52.7 % to $11.3 million from
$7.4 million in the first six months of 1997. The Company's market share
decreased from 11.5% to 8.6% while maintaining its second place position in
the market.
Total Residential Real Estate Lending
Three Months ---Number--- Volume (Mill $)
Ended 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
March 31 314 185 349 $ 45.4 $ 25.8 $ 44.9
June 30 367 241 327 $51.0 $ 35.4 $ 44.4
September 30 N/A 261 289 N/A $ 36.2 $ 39.4
December 31 N/A 280 281 N/A $ 42.8 $ 41.5
--- --- --- ---- ------- -------
Total 681 967 1,246 $96.4 $140.2 $170.2
The Commercial Division originated 176 loans for $32.1 million in the three
months ended June 30, 1998 versus 252 loans for $37.6 million in same 1997
period. For the six month period ended June 30, 1998 the Commercial
Division originated 322 loans for $62.6 million versus 307 loans for $59.3
million in the same 1997 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 month of June, 1998, the average balance of the Company's loan
portfolio was $151 million and represented an average loan/deposit ratio in
excess of 85.2%. The average balance for the same year earlier period was
$112 million representing an average loan/deposit ratio of 78.6%. The
increase in the level of loans in the Company's loan portfolios caused loan
interest income to increase $2.1 million (41.6%) in the six months ended
June 30, 1998 and by $1.2 million (45.0%) for the three months ended June
30, 1998 as compared to the same 1997 periods, despite falling net interest
margins.
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. Norwest Mortgage, not a significant player in northern
Nevada in 1994, is now the dominant mortgage lender with 12.4% of the
Washoe County market in the first six months of 1998, more than twice the
market share of the number two player. In Carson City, Norwest was not a
market share leader as late as early 1997. But, in the first six months of
1998, Norwest controlled 10.4% of the Carson City market, significantly
ahead of the 8.6% market share held by the Company. 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 of
1997, management began to implement technologies such as online
underwriting and credit scoring, 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. Nevertheless, because the Company must sell the
mortgages in the secondary market, it generally cannot compete on a price
basis with the large national mortgage banking enterprises that can charge
lower prices and put the mortgages into their portfolios.
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. Since the "Asian Crisis" last fall, inflation has
remained benign. While the federal funds rate, administered by the Federal
Reserve, has remained steady, rates along the remainder of the yield curve
have fallen. The major impact of this on the Company has been a refinance
boom in the mortgage markets, which began last fall and has continued
through the first six months of 1998. The Company's mortgage business
benefited from such lower rates as described above.
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. The strategy is that 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. In
the current environment since the national prime lending rate appears to be
based on the federal funds rate and the Company moves its prime rate in
response to competition, and since the Federal Reserve has not reduced the
federal funds rate despite the downward shift in the yield curve, the
Company's interest income has continued to grow. A reduction in the federal
funds in the future will negatively impact loan interest income.
Asset Quality
The Company's asset quality is often measured by its delinquencies and
non-performing assets. As of June 30, 1998 the Company had non-performing
(non-accruing) loans of approximately $2.5 million, comprised of two fully
secured construction and development loans. One of the fully secured
construction loans had been in the hands of the bankruptcy court. The
Company was permitted to complete foreclosure in July of 1998 and
transferred $1.52 million to "Other Real Estate Owned". The Company is in
the process of formulating a plan of liquidation for these thirteen
single-family homes. The Company had loans past due 90 days or more that
were still accruing of $74,000. As of June 30, 1998, the Company had an
interest in one additional property, with a current book value of $5,000,
taken as repayment on a loan. This asset is also designated as "Other Real
Estate Owned" property. In the same period of 1997, the Company carried the
same loan at a book value of $8,000.
As of June 30, 1997, the Company had non-performing (non-accruing) loans of
approximately $2.6 million, comprised of the same two fully secured
construction and development loans. At that time, the Company also had
$13,000 of loans past due 90 days or more that were still accruing.
Deposit Volumes
As of June 30, 1998, the Company's deposit base had grown from $171.8
million (measured as of December 31, 1997) to $184.7 million, an increase
of $12.9 million (7.5%). Using average balances rather than end of period
figures, deposits grew $9.0 million (5.4%), from an average of $167.0
million in December, 1997 to $176.0 million in June, 1998. 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, the continued influx of deposits transferred from the branches of
financial institutions announcing large mergers, and non-gaming economic
growth. Management believes the deposit base will continue to grow for two
reasons: 1) the continued non-gaming economic growth in the northern Nevada
region and 2) management's strategic goal of marketing to small business
clients.
Based on information available from the Nevada State Demographer and
internal Company population forecasts, the Company's Washoe County (Reno)
deposit service area is estimated to have grown by 2.2% in 1997 to 313,575
persons and is expected to continue to grow at a compounded annual rate of
2.1% through the millenium to 333,895 people. Growth rates are forecast at
1.9% for the first five years of the next decade. The Company's Carson City
deposit service area is estimated to have grown by slightly more than 3.0%
in 1997 to an estimated population of 50,387 and is forecast to grow at
just under 3% through the millenium and at a 2.3% compounded annual growth
rate for the first five years of the next decade.
Meanwhile, the state population is estimated to have grown by 3.6% in 1997
to an estimated 1.749 million people spurred by 4.1% growth in Las Vegas
(to 1.162 million). The Company forecasts state growth at 3.4% through the
millenium with Las Vegas as the catalyst with compounded annual growth of
nearly 4%. Early in the next decade, state growth is forecast to fall to a
compounded annual rate of 3% as Las Vegas' growth cools to an annual rate
of 3.4%. Based on its population forecasts, the Company believes that
Nevada will continue as one of the fastest growing states, if not the
fastest, throughout the period described above. As a locally managed
community banking organization, the Company is well positioned for such
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 22.0% as of June 30, 1998,
a decrease from 25.1% on June 30, 1997. The investment portfolio is a
principal source of secondary asset liquidity as is the ability to borrow
from the Federal Home Loan Bank of San Francisco (see Borrowing Capacity
below).
The FASB's accounting rules, beginning in 1994, required the Company to
mark to market a portfolio that 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 $3.0 million in U.S. Treasury
and Agency securities with various maturities of nine years or less, $7.5
million in mortgage-backed securities (non-derivative types), $6.7 million
in tax exempt municipal bonds and $819,000 in Federal Home Loan Bank stock.
Management estimates that the duration of the "available-for-sale"
portfolio was approximately 2.35 years on June 30, 1998. 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, 1997, the value of the
"available-for-sale" portfolio was $25,000 above its book value. As of June
30, 1998, the market value of the "available-for-sale" portfolio was
$28,000 below book value.
The Company also has a $9.5 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. Management is reviewing this portfolio under the recent release
of SFAS 133 and may transfer securities to the "available-for-sale"
portfolio under the one-time transfer option. As of June 30, 1998,
management estimates that the duration of the portfolio was approximately
2.0 years. The market value was $36,000 above book value. In contrast, at
December 31, 1997, the book value of this portfolio was $10.6 million with
an unrealized loss of $4,000.
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 June 30, 1998, the Company had collateralized this
line with loans and securities giving the Bank approximately $24 million of
borrowing capacity. As of June 30, 1998, there was an outstanding draw of
$6 million on the FHLB line, $3 million with a maturity in September of
2000 and $3 million with a maturity in January of 2000, leaving $18 million
in unused borrowing capacity. There were no outstanding draws on these
lines as of June 30, 1997. The Company also has a $2.5 million line of
credit with Union Bank of California to meet short term funding
requirements. This line has a $200,000 compensating balance. 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, there was $15,000
outstanding on the InterWest Bank on line. There were no outstanding draws
on the InterWest line as of June 30, 1998. Both the FHLB and Union Bank of
California are routinely used for the purchase or sale of overnight Federal
funds. Pacific Coast Bankers Bank has also been utilized for the sale of
Federal funds since December of 1997. 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 June 30, 1998, was 85.2%. 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.
Because management believes that it has excellent sources of liquidity, it
has been able to increase the Company's loan to deposit ratio and will
continue to try to maintain the 85% level or higher if liquidity permits
and sound loans at acceptable spreads are available.
Capital Base
The capital base for the Company increased by $1,874,000 during the six
months ended June 30, 1998 of which $1,719,000 was generated from profits,
$190,000 was the result of exercised employee stock options and $35,000 was
lost on the SFAB 115 mark to market adjustment on the "available-for-sale"
portfolio. In March 1997, 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 March 31, 1998 for
Comstock Bank and Comstock Bancorp with December 31, 1992 minimum
requirements:
Comstock Comstock 1992 Minimum
Bank Bancorp Requirements
Tier I (core capital) 11.12% 11.01% 4.0%
Total capital 11.94% 11.81% 8.0%
Leverage ratio 8.39% 8.54% 3.0%
Year 2000 Compliance
The Company has in place a major Year 2000 Compliance project, which has
adopted the FFIEC's Year 2000 Readiness Date Guidelines. The Company has
taken a proactive and aggressive stance to ensure internal Year 2000
readiness. The Company has implemented a strategic plan to assure that all
of its systems (hardware, software and networks) and their interfaces will
be Year 2000 compliant. The Company's approach has been to limit the impact
of processing date/time data, from into and between the years 1999 and 2000
upon its mission critical areas of operation, upon its customers, and to
improve the ways in which it serves them. The Company's Y2K efforts are
performing satisfactorily in all key phases of the Year 2000 project
management process as set forth in the FFIEC's Interagency Statements on
the Year 2000. The Company, having completed the Assessment Phase of its
Y2K Project Plan, is currently in the Renovation Phase, and progressing on
the Testing Phase of the required regulatory timelines. Although written
testing plans for every system due 6/30/98 are not fully completed, a
successful Y2K test simulation of the Company's primary mainframe systems
including deposit, loan and general ledger application has been performed
utilizing complete 12/31/97 year-end data as if it were 12/31/99 data
rolling to the Year 2000. As of July 15, 1998 approximately 80% of the
written testing methodologies for the Company's critical systems have been
completed. The Company should have its complete written testing
methodologies in place by August of 1998. Management is confident that Y2K
testing of all systems deemed critical will be completed by 12/31/98. The
Company's board and senior management recognize and understand Year 2000
issues, risks, and opportunities and are active in overseeing corrective
and improvement efforts.
Despite the Company's efforts, there can be no assurance that potential
systems interruptions or the cost necessary to update software will not
have a material adverse impact on the Company's business, financial
condition, results of operations and business prospects. In addition, the
Company has limited information concerning the compliance status of its
suppliers and customers. In the event that any of the Company's significant
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be adversely affected.
Management has estimated the total cost of its Y2K at $876,000 with
$282,000 remaining to be incurred on the project through March 31, 2000.
This figure does not include the purchase of hardware or software for items
identified in the testing phase as needing renovation or replacement.
COMSTOCK BANCORP AND SUBSIDIARY
RESULTS OF OPERATIONS (Three and Six Months Ended June 30, 1998 and 1997)
The Company earned $1,719,000 in the six months ended June 30,1998, an
increase in post-tax earnings of 147% when compared to the $696,000 earned
for the six months ended June 30, 1997. For the three month period ended
June 30, 1998, the Company earned $1,119,000, an increase of $688,000 or
159.6% over the same period of 1997. On a basic per share basis, earnings
were $.39 through June 30, 1998 versus $.16 for the same period of 1997
(see exhibit (a) 11 for earnings per share computations). For the second
quarter of 1998 the basic earnings per share were $.25 versus $.10 for the
second quarter of 1997. Return on average assets for the six months ended
June 30, 1998 was 1.74% versus .92% for the same 1997 period. Return on
average equity was 21.04% versus 10.36% in the 1997 comparable period.
Management believes that the following items had the largest impacts on
income for the three and six month periods ended June 30, 1998:
1. Lower interest rates on mortgage loans spurred an increase in
mortgage refinancing as well as home buying. Real estate mortgage
loan originations increased 44% to $51.0 million in the three
months ended June 30, 1998 versus $35.4 million in the same 1997
period. In the six month period ended June 30, 1998, mortgage loan
originations increased by 57.5% to $96.4 million versus $61.2
million the six month period of 1997. Assuming a continuation of
the current interest rate environment (i.e., the Federal Reserve
does not tighten monetary policy by raising interest rates)
management believes that it is possible for 1998 to be the highest
mortgage origination year in the Company's history.
2. The increase in loan originations contributed to higher average
loan balances outstanding providing an increase in both interest
and loan fee income. For the six months ended June 30,1998, the
loan portfolio balance averaged $142.5 million compared to $104.0
for the same period of 1997. For the three month periods ended
June 30, 1998, the loan portfolio balance averaged $147.6 million
versus $108.5 million for the same period of 1997.
3. The receipt of `additional' interest from a development loan in
the Company's portfolio augmented earnings. 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 first
quarter of 1997, 30 lots were sold, producing "additional
interest" income of $63,000. In the second quarter of 1997, 50
lots were sold, adding $105,000 in additional pre-tax income. In
the first three months of 1998, 59 lots were sold for pre-tax
`additional' interest income of $124,000. In April, 35 lots were
sold and closed, and the Company received `additional' interest
income of $73,500. In May, as part of a refinancing package for
the developer , the Company released its lien on more than 300
lots in exchange for $521,900 (approximately $1,700 per lot).
After the refinancing, the Company held a first lien on 121 lots,
all of which remained subject to the $2,100 "additional' interest
payment upon sale. In June, 10 lots were sold and the Company
received $21,000. The company believes it retains its liens upon
the best 111 lots remaining in the development.
Loan Interest Income ($000)
Three & Six months ended June 30
Three Months Six Months
1998 1997 1998 1997
---- ---- ---- ----
Loan Interest Income $3,390 $2,680 $6,531 $4,967
Additional Interest Income $ 616 $ 105 $ 740 $ 168
4. The Company sold a one acre parcel adjacent to its headquarters
for a pre-tax gain of approximately $164,000. In 1996, the Company
determined that expansion of its headquarters would be too costly
given its projected needs and alternative rents. The Company
leased and remodeled a warehouse space, which its uses for its
back office and computer operations at a much lower per square
foot cost than the alternative of building on the adjacent lot.
5. Other non-interest rate related events also had a significant
impact on net income. Non-interest income increased by $21,000 for
the three months ended June 30, 1998 over the same period of 1997,
and increased $62,000 for the six months ended June 30, 1998 over
the same 1997 period. The increase is the result of rising deposit
service charges generated by the addition of two branch locations
in 1997, fees earned on a new accounts receivable servicing
product and due to dividend income realized on various life
insurance policies owned by the Bank.
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 $117,000 (35.0%), and furniture and equipment expenses rose
$101,000 (38.7%) when comparing the six months ended June 30, 1998
to the same 1997 period. For the three month periods ended June
30, 1998 and 1997, the increases were $47,000 (25.7%) and $44,000
(31.2%) for occupancy and furniture and equipment expenses,
respectively. 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 investment of capital in technological
improvements targeted toward the Company's commitment to small
business customers and toward an increased competitive presence is
necessary to obtain a stable diverse customer base and to move its
deposit base further toward a core of relationship customers and
further away from dependence on a higher cost, non-core, single
relationship customer base. The Company successfully migrated from
its computer service bureau to an in-house system in October of
1997. Deployment of electronic products and services has been
scheduled for the next several quarters.
Because most of the start-up and on-going expenses for the
in-house data processing system as well as the Sparks branch began
in 1997's second half, management expects that the percentage
increases in occupancy and furniture and equipment will slow to
the general growth rate of the Company.
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.
As a precautionary measure, the Company provided $140,000 more to
its loan loss reserve (Provision for Credit Losses) in the first
six months of 1998 than it did in the same 1997 period.
Management's decision to increase the loan loss reserve is
consistent with its strategy to build a commercial loan portfolio,
which carries a higher risk profile.
Other operating expenses rose $25,000 (2.5%) in the six months
ended June 30, 1998 over the same 1997 period. For the three month
period ended June 30, 1998, other operating expenses declined
$18,000 (3.2%) over the same 1997 period. The costs in these areas
are leveling out with prior periods now that Bank's in-house data
processing functions have been operational for ten months and the
two new branch facilities have been operational for eleven to
sixteen months.
The following Interest Rate Sensitivity Analysis Table provides a
picture of income and interest sensitivity for selected categories
in a comparative format for the three and six month periods ended
June 30, 1998 and 1997. The tables show the interest sensitive
assets and liabilities, 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, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
For Quarter Ended: June 30, 1998 Rate June 30, 1997 Rate Change Variance Variance Variance
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Loan Income $3,934,978 10.65% $2,714,0619 10.00% $1,220,359 $978,505 $177,774 $64,080
Loan Fees and
Servicing Income 1,159,742 643,485 516,258 - - -
--------- ------- -------
Total Loan, Servicing,
And Fee Income $5,094,720 13.79% $3,358,104 12.37% $1,736,617 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Investments:
Fed Funds and Mutual
Fund Income $115,752 5.39% $108,126 5.53% $7,625 $10,550 ($2,695) ($260)
Income from
Investment Securities 356,201 5.55% 353,418 6.14% 2,783 40,365 (33,730) (3,852)
Interest-Bearing
Deposit Income 22,434 6.51% 23,951 6.45% (1,516) (1,728) 228 (16)
------ ------ ------- ------- --- ----
Total Investment Income $494,387 5.55% $485,495 6.00% $8,892 $49,342 ($36,719) ($3,732)
Trading Account Assets
And Other Investments 24,988 12.30% 6,127 5.70% 18,861 5,443 7,105 6,312
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Total Interest Income $4,429,365 9.62% $3,200,114 9.05% $1,229,251 $1,027,847 $141,056 $60,348
Total Interest, Servicing,
Fee, and Trading
Account Income $5,614,095 12.19% $3,849,726 10.89% $1,764,369 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Interest on Deposits:
Transaction Accounts $497,671 3.36% $373,600 3.26% $124,071 $109,697 $11,111 $3,262
Time and Savings
Deposits 1,240,927 5.38% 956,441 5.20% 284,486 242,962 33,113 8,412
--------- ------- ------- ------- ------- -----
Total Deposit
Interest Expense $1,738,598 4.59% $1,330,041 4.46% $408,557 $358,082 $39,768 $10,707
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS:
Other Borrowed Funds $92,796 6.20% $286 7.65% $92,510 $114,114 ($54) ($21,550)
------- ---- -------
Total Interest Expense $1,831,394 4.65% $1,330,327 4.46% $501,067 $424,605 $57,962 $18,500
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
DIFFERENTIAL $2,597,971 4.97% $1,869,787 4.60% $728,184 $603,242 $83,093 $41,848
(Excludes fee income)
NET INTEREST
DIFFERENTIAL $3,782,701 7.54% $2,519,399 6.44% $1,263,302 - - -
(Includes fee income)
- ------------------------------------------------------------------------------------------------------------------------------------
Notes to Interest Rate Sensitivity Analysis Table:
[1] The variance analysis above excludes non-interest rate sensitive earning
assets.
[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
CONSOLIDATED INTEREST RATE SENSITIVITY ANALYSIS
For the Six Months Ended June 30, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
For the Six Months Ended: June 30, 1998 Rate June 30, 1997 Rate Change Variance Variance Variance
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Loan Income $7,134,604 10.06% $5,001,623 9.67% $2,132,981 $1,851,240 $201,910 $74,655
Loan Fees and
Servicing Income 2,109,932 1,207,887 902,045 - - -
--------- --------- -------
Total Loan, Servicing,
And Fee Income $9,244,537 13.04% $6,209,511 12.02 $3,035,026 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Investments:
Fed Funds and Mutual
Fund Income $240,704 5.33% $254,688 5.43% ($13,984) ($9,322) ($4,839) $177
Income from
Investment Securities 720,695 5.64% 636,846 6.07% 83,848 139,043 (45,303) 9,891)
Interest-Bearing
Deposit Income 46,518 6.53% 49,048 6.54% (2,529) (2,454) (79) 4
------ ------ ------- ------- ---- -
Total Investment Income $1,007,917 5.60% $940,582 5.90% $67,335 $122,884 ($49,130) ($6,419)
Trading Account Assets
And Other Investments 33,646 8.38% 6,932 3.34% 26,714 6,488 10,447 9,778
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Total Interest Income $8,176,168 9.15% $5,942,205 8.76% $2,233,963 $1,876,181 $266,837 $84,154
Total Interest, Servicing,
Fee, and Trading
Account Income $10,319,746 11.55% $7,157,025 10.55% $3,162,721 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits:
Interest on Deposits:
Transaction Accounts $954,673 3.35% $716,084 3.27% $238,589 $215,023 $18,124 $5,442
Time and Savings
Deposits 2,429,262 5.37% 1,823,908 5.18% 605,355 517,609 68,348 19,397
--------- --------- ------- ------- ------ ------
Total Deposit
Interest Expense $3,383,935 4.59% $2,539,992 4.45% $843,943 $736,885 $82,983 $24,075
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWED FUNDS:
Other Borrowed Funds 184,745 6.21% 286 23.18% $184,460 $689,519 ($209)($504,850)
------- --- --------
Total Interest Expense $3,568,681 4.65% $2,540,278 4.45% $1,028,403 $869,194 $118,621 $40,588
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST
DIFFERENTIAL $4,607,487 4.50% $3,401,927 4.31% $1,205,561 $1,006,986 $148,216 $43,567
(Excludes fee income)
NET INTEREST
DIFFERENTIAL $6,751,066 6.90% $4,616,747 6.10% $2,134,319 - - -
(Includes fee income)
- ------------------------------------------------------------------------------------------------------------------------------------
Notes to Interest Rate Sensitivity Analysis Table:
[1] The variance analysis above excludes non-interest rate sensitive earning
assets.
[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 three and six month
periods ended June 30, 1997 and 1998 shows higher yields in loan income
both before fees and when fees are included. The yields on fed funds and
mutual funds and on the investment portfolio are lower in the 1998 periods
than the same periods of 1997. The yields on interest-bearing deposits in
other financial institutions is unchanged for the six month period ended
June 30, 1998 versus the same 1997 period. The yields on those same
deposits for the three month period ended June 30, 1998 have increased over
the same 1997 period. The comparison of interest sensitive liabilities for
the three and six month periods show an increase in rates in all deposit
accounts.
For loan income the increase in the level of both commercial loans held in
portfolio and the real estate loans held for sale continue to result in a
positive volume variances. For the three months ended June 30, 1998
compared to the same period of 1997, loan income increased $1,220,000 of
which $979,000 was due to larger portfolio balances and $178,000 to
increased yields ($616,000 of "additional interest" income discussed above
contributed to the yield increase; the yield without the "additional
interest" would have been 8.98% for the quarter ended June 30, 1998 versus
9.61% for the same 1997 quarter, the result of tightening margins). Again,
for this period, when loan fees and servicing income are factored in, the
result is an increase of $1,737,000 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. 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
increased from 12.37% to 13.79% in the three month period. In the six month
period ended June 30, 1998 compared to the same period of 1997, loan income
increased $2,133,000 of which $1,851,000 was the result increased portfolio
balances and $202,000 was the result of increased yields (without $740,000
of "additional interest" income the yield for this period would have been
9.07% and is comparable to a yield of 9.34% in the same 1997 period). When
loan fees and servicing income are included in this period, the result is
an increase of $3,035,026 in total loan, servicing and fee income. Total
loan fees for the six month period increased yields from 12.02% to 13.04%.
The Bank has historically maintained a real estate loan servicing portfolio
of approximately $40 to $50 million owned by other investors for which a
servicing fee is earned. Management has determined the fees earned on the
portfolio are not sufficient to warrant the cost involved in performing the
servicing function and has entered into an agreement to sell the portfolio.
The Company expects to realize a gain on sale of approximately $300,000
with such gain expected to occur in the third quarter of 1998.
Income from fed funds and mutual fund investments increased by $8,000 in
the three month period ended June 30, 1998 over the same 1997 period and
decreased by $14,000 in the six month period ended June 30, 1998 over 1997.
The increase was largely due to increased invested balances for the three
month period while both reduced invested balances and yields resulted in
the decrease for the six month period.
Lower yields on Investment Securities combined with an increase in the
invested balances netted the Company an increase of $3,000 for the three
month period ending June 30, 1998 over the same 1997 period and an increase
of $84,000 for the six month period.
Interest bearing deposits with other financial institutions showed level to
lower yields and lower invested balances, which netted to a decrease of
$2,000 in income for three month period and a decrease of $3,000 in income
for the six month period.
Overall, total investment income increased by 1.8% or $9,000 for the three
month period as a result of increased invested balances in Investment
Securities, Fed Funds and Mutual Funds. Total investment income increased
7.2% or $67,000 for the six month period as a result of increased invested
balances in Investment Securities.
The cost of interest sensitive liabilities was higher on all deposit
accounts for both the three and six month periods ended June 30, 1998 over
the same period of 1997 and was the result of rapid loan growth in late
1997 which was funded by the purchase of higher cost time deposits as well
as borrowings from the Federal Home Loan Bank of San Francisco. Increased
deposit balances contributed to $358,000 of increased costs, while
increased rates contributed to $40,000 of increased costs for the three
month period ended June 30, 1998 over the same period of 1997. For the six
month period, increased deposit balances contributed to $737,000 of
increased costs, with increased rates contributing $83,000.
In summary, on the asset side, larger loan and investment securities
portfolio levels increased income by $1,229,000 in the three months ended
June 30, 1998 over the same period of 1997 and increased income by
$2,234,000 in the six month period. When fee income is included, the
increase in income for total earning assets, in the three month period of
1998 over 1997 is $1,764,000 and for the six month period the increase is
$3,163,000. When the increased costs of deposits and other borrowed funds
of $501,000 for the three month period is taken into account, the Company's
net interest income differential, excluding servicing and fee income,
increased $728,000. With fee income included, the net interest income
differential increased $1,263,000. For the six month period ending June 30,
1998, increased costs of deposits and other borrowed funds of $1,028,000
resulted in a net interest income differential increase, excluding
servicing fee income, of $1,206,000. With fee income included, the net
interest income differential increased $2,134,000.
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, except
as discussed below, the disposition of these claims will not
have a material adverse affect on the financial position of
the Company.
No material events occurred regarding the case reported on
Form 10QSB on April 10, 1998.
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.
a. An annual stockholders' meeting of Comstock Bancorp
was held on April 29, 1998 for holders of record as
of March 6. There were 4,451,668 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 4,258,735 3,608 6,700
Robert Barone 4,258,503 3,840 6,700
Stephen Benna 4,258,955 3,388 6,700
John Coombs 4,258,855 3,488 6,700
Michael Dyer 4,258,955 3,388 6,700
Mervyn Matorian 4,258,955 3,388 6,700
Samuel McMullen 4,258,855 3,488 6,700
Larry Platz 4,258,855 3,488 6,700
Ronald Zideck 4,258,691 3,652 6,700
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, 1998.
Number of votes cast:
In Favor: 4,260,797
Against or Withheld: 1,788
Abstentions: 2,058
Broker Non-Votes: 4,400
Item 5. Other Information. Not applicable.
Item 6. (a) 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 28
27. Financial Data Schedule 29
(b) Form 8-K. None.
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: July 27, 1998 /s/ Robert N. Barone
------------- --------------------
Robert N. Barone,
Chairman, CEO and Treasurer
(Principal Accounting and Financial Officer)
Date: July 27, 1998 /s/ Larry A. Platz
------------- ------------------
Larry A. Platz,
President and Secretary
COMSTOCK BANCORP
EXHIBIT 11
COMPUTATION OF CONSOLIDATED NET EARNINGS PER SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
Three Months Three Months
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
Net Income: $1,719 $696 $1,119 $431
Net Income per Common Share (assuming no dilution):
Weighted Avg. Shares Outstanding: 4,441,326 4,271,201 4,450,656 4,289,168
Basic Earnings per Share: $.39 $.16 $.25 $.10
Net Income per Common and Common Equivalent Shares:
Adjusted Weighted Avg. Number of Shares Outstd. After
Giving Effect to the Conversion of Options and Warrants: 4,928,723 4,666,925 4,950,472 4,706,842
Diluted Earnings per Share: $.35 $.15 $.23 $.09
COMSTOCK BANCORP
EXHIBIT 27
FOR THE SIX MONTHS ENDED JUNE 30, 1998
FINANCIAL DATA SCHEDULE
$ in Thousands
Cash and Due from Banks (Non-Interest Bearing) $10,621
Interest-bearing Deposits in Domestic Financial Institutions 1,262
Fed Funds and Overnight Mutual Funds Sold 7,439
Trading Account Securities 10
Investment and Mortgage back Securities Held for Sale 17,204
Investment and Mortgage back Securities
Held to Maturity - Carrying Value 9,461
Investment and Mortgage back Securities
Held to Maturity - Market Value 9,496
Loans 150,649
Allowance for Credit Losses 1,270
Total Assets 209,569
Deposits 184,699
Short-term borrowings 0
Other Liabilities 1,399
Long-term debt 6,000
Preferred stock - mandatory redemption 0
Preferred stock - no mandatory redemption 0
Common Stock 45
Other Stockholders Equity 17,426
Total Liabilities and Stockholders Equity 209,569
Interest and Fees on Loans 9,228
Interest and Dividends on Investments 801
Other Interest Income 241
Total Interest Income 10,270
Interest on Deposits 3,384
Total Interest Expense 3,569
Net 1nterest Income 6,701
Provision for Loan Losses 260
Investment Securities Gains/Losses 10
Other Expense 4,526
Income/Loss Before Income Tax 2,354
Income/Loss Before Extraordinary Items 635
Extraordinary Items, Less Tax 0
Cumulative Change in Accounting Principles 0
Net Income or Loss 1,719
Earnings Per Share - Primary .39
Earnings Per Share - Fully Diluted .35
Net Yield - interest earning assets - actual 9.15%
Loans on Non-accrual 2,472
Accruing Loans past due 90 Days or More 74
Troubled Debt Restructuring 0
Potential Loan Problems 0
Allowance for Loan Losses - Beginning of Period 1,076
Total Charge-Offs 67
Total Recoveries 1
Allowance for Loan Losses - End of Period 1,270
Loan Loss Allowance allocated to Domestic Loans 1,270
Loan Loss Allowance allocated to Foreign Loans 0
Loan Loss Allowance - Unallocated 0