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, 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 October 19, 1998: Common Stock - Authorized 15,000,000 shares at $0.01 par
value; issued and outstanding - 4,482,028
TABLE OF CONTENTS
Item
Number Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition
September 30, 1998 and December 31, 1997. 4
Consolidated Statements of Income
Three and nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Changes in Stockholders' Equity
For the periods ended September 30, 1997, December 31, 1997, and
September 30, 1998. 6
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
PART II - OTHER INFORMATION
1. Legal Proceedings 26
2. Changes in Securities 26
3. Defaults Upon Senior Securities 26
4. Submission of Matters to a Vote of Securities' Holders 26
5. Other Information 26
6. Exhibits and Reports on Form 8-K 26
Signatures 27
Part I. Financial Information
Item I. Financial Statements
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
As of September 30, 1998 and December 31, 1997
(Dollars in Thousands)
(Unaudited) (Audited)
Sept. 30, Dec. 31,
1998 1997
Assets:
Cash and Due from Banks (Non-Interest $11,417 $9,464
Bearing)
Fed Funds and Overnight Mutual Funds Sold 16,816 9,853
Interest-bearing Deposits in Domestic
Financial Institutions 1,081 1,492
Trading Account Securities 9 12
Securities Available for Sale 29,160 14,218
Securities Held to Maturity (market value
of $9,153 and $10,632 at September 30, 9,028 10,636
1998 and December 31, 1997)
Federal Home Loan Bank Stock 831 788
Loans Held for Sale 15,740 13,946
Loans (Net of Deferred Fees) 128,357 122,235
Less: Allowance for Credit Losses 1,472 1,076
Net Loans 142,625 135,105
Premises and Equipment 7,342 7,710
Other Real Estate Owned 2,374 8
Accrued Interest Receivable 1,132 989
Other Assets 5,051 4,423
TOTAL ASSETS $226,862 $194,698
Liabilities and Stockholders' Equity:
Deposits:
Demand Deposits (Non-Interest Bearing) $40,070 $32,299
Savings, Money Market and NOW Accounts 71,990 60,917
Time Deposits Under $100,000 55,172 50,944
Time Deposits $100,000 and Over 33,607 27,642
Total Deposits 200,839 171,802
Line of Credit Payable 6,000 6,000
Accrued Interest Payable 269 321
Accounts Payable and Accrued Expenses 1,148 876
Income Taxes Payable 152 102
TOTAL LIABILITIES 208,408 179,101
Stockholders' Equity:
Common Stock-$0.01 par value, 15,000,000
shares authorized;
4,484,368 and 4,421,668 shares issued
and outstanding on
September 30, 1998 and December 31, 45 44
1997 (1)
Paid-in Surplus (1) 9,120 8,908
Retained Earnings 9,233 6,628
Common Stock in Treasury, at Cost,
Shares: 5,000 as of Sept. 30, 1998
And 0 as of December 31, 1997. (39)
Accumulated Other Comprehensive Income:
'Unrealized Gain (Loss) on Securities
Available for Sale,
Net of Applicable Deferred Income Taxes 95 17
TOTAL STOCKHOLDERS' EQUITY 18,454 15,597
TOTAL LIABILITIES AND STOCKHOLDERS' $226,862 $194,698
EQUITY
(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 Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands except per share amounts)
Three Three
Months Months
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1997 1997
Interest Income:
Interest and Fees on Loans $13,915 $9,743 $4,687 $3,536
Interest on Investments and
Trading Securities:
Taxable 918 803 357 280
Exempt from Federal Income 315 196 122 75
Tax
Interest on Fed Funds Sold 451 328 211 73
Interest on Deposits with Banks 66 71 19 22
Total Interest Income 15,665 11,141 5,396 3,986
Interest Expense:
Interest on Deposits 5,224 3,958 1,840 1,418
Interest on Line of Credit 279 14 94 13
Total Interest Expense 5,503 3,972 1,934 1,431
Net Interest Income 10,163 7,169 3,462 2,555
Provision for Credit Losses 470 180 210 60
Net Interest Income after 9,693 6,989 3,252 2,495
Credit Loss Provision
Non-Interest Income:
Service Charges on Deposit 251 208 94 71
Accounts
Gain/(Loss) on Sale of (1) (3) (12) 0
Investment Securities
Gain/(Loss) on Sale of Trading (1) (9) (1) 1
Securities
Other Income 340 111 68 65
Total Non-Interest Income 589 307 150 137
Non-Interest Expense:
Salaries and Employee Benefits 3,956 3,145 1,274 1,046
Occupancy Expense 656 532 205 198
Furniture and Equipment Expense 540 415 178 154
Other Operating Expenses 1,558 1,550 528 545
Total Non-Interest Expense 6,710 5,642 2,184 1,943
Income before Taxes 3,571 1,654 1,218 689
Provision for Income Taxes 966 470 332 201
NET INCOME $2,605 $1,184 $886 $488
Basic Earnings per Share (1) $0.59 $0.27 $0.20 $0.11
Diluted Earnings per Share (1) $0.53 $0.25 $0.18 $0.10
Other Comprehensive Income, Net
of Tax:
Unrealized Gains/(Losses) on
Securities:
Unrealized Holding $70 ($30) $109 ($17)
Gains/(Losses) Arising During
Period
Less: Reclassification for 8 28 4 17
Gains/(Losses) Incl. in Income
Other Comprehensive Income $78 ($2) $113 $0
Comprehensive Income $2,683 $1,182 $999 $488
Other Comprehensive Income Basic $0.60 $0.27 $0.22 $0.11
Earnings per Share (1).
Other Comprehensive Income $0.54 $0.25 $0.20 $0.10
Diluted Earnings per Share (1)
Adjusted for two for one share
exchange on June 16, 1997.
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For Periods Ended September 30, 1997, December 31, 1997, and September 30, 1998
(Dollars in Thousands)
(Unaudited)
Accumulated
Treasury Retained Other Total
Common Stock Paid-in Earnings Comprehensive Stockholders' Comprehensive
Stock(1) At Cost Surplus (1) (Deficit) Income Equity Income
Balances, December 31, 1996 $42 $0 $8,184 $4,792 ($9) $13,009
Net Income 1,184 1,184 $1,184
Sale of Common Stock 2 714 716
Other Comprehensive
Income, Net of Tax
Unrealized Gains/(Losses)
on Securities,
Net of Reclassification (2) (2) (2)
Adjustment
See Disclosure (a) Below
Balances, September 30, 1997 $44 $0 $8,898 $5,976 ($11) $14,907 $1,182
Net Income 652 652 652
Sale of Common Stock 10 10
Other Comprehensive
Income, Net of Tax
Unrealized Gains/(Losses)
on Securities,
Net of Reclassification 28 28 28
Adjustment
See Disclosure (b) Below
Balances, December 31, 1997 $44 $0 $8,908 $6,628 $17 $15,597 $1,862
Net Income 2,605 2,605 2,605
Sale of Common Stock 1 212 213
Common Stock Repurchase (39) (39)
Other Comprehensive Income,
Net of Tax
Unrealized Gains/(Losses)
on Securities,
Net of Reclassification 78 78 78
Adjustment
See Disclosure (c) Below
Balances, September 30, 1998 $45 ($39) $9,120 $9,233 $95 $18,454 $2,683
(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 11
included in net income
Net unrealized gains on securities ($2)
(b) Disclosure of reclassification amount:
Unrealized holding gains arising during period $30
Less: reclassification adjustment for gains (2)
included in net income
Net unrealized gains on securities $28
(c) Disclosure of reclassification amount:
Unrealized holding gains arising during period $70
Less: reclassification adjustment for gains 8
included in net income
Net unrealized gains on securities $78
[See accompanying notes to financial statements.]
COMSTOCK BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(Dollars in Thousands)
(Unaudited) (Unaudited)
Sept 30, 1998 Sept 30, 1997
Cash Flows from Operating Activities:
Net Income $2,605 $1,184
Adjustments to Reconcile Net Income to Net
Cash
Provided by Operating Activities:
Provision for Credit Losses 470 180
Depreciation and Amortization 613 488
Net (Gain) Loss on Sale of Available For 1 3
Sale Securities
Net (Gain) Loss on Sales of Trading 1 9
Securities
Purchases of Trading Securities 0 0
Proceeds from Sales of Trading Securities 0 0
Amortization of Servicing Asset (26) 3
Increase/(Decrease) in Deferred Taxes Due
to Change in
Unrealized Gain or Loss on Securities 40 1
Available for Sale
Net (Increase) Decrease in:
Accrued Interest Receivable (143) (155)
Other Assets (628) (1,783)
Loans Held For Sale (1,794) (2,843)
Net Increase (Decrease) in:
Accrued Interest Payable (52) (21)
Accounts Payable and Accrued Expenses 272 (10)
Income Taxes Payable 50 88
Net Cash Provided/(Used) by Operating $1,409 ($2,855)
Activities
Cash Flows from Investing Activities:
Net Change in Interest-Bearing Deposits in
Domestic
Financial Institutions 411 204
Proceeds from Sales of Available for Sale 1,612 0
Securities
Proceeds from Maturities of Available for 5,300 2,981
Sale Securities
Purchases of Available for Sale Securities (22,796) (6,410)
Proceeds from Maturities of Held to 2,621 2,358
Maturity Securities
Purchases of Held to Maturity Securities (68) (6,657)
Net Change in Loans Held to Maturity (8,496) (29,210)
Purchases of Premises and Equipment, Net (245) (1,610)
Purchase of FHLB Stock (43) (52)
Net Cash Provided/(Used) by Investing ($21,704) ($38,396)
Activities
Cash Flows from Financing Activities:
Net Change in Demand, Savings, NOW
and Money Market Accounts 18,844 10,943
Net Change in Time Deposits 10,193 15,461
Proceeds on Line of Credit Payable 0 4,600
Payments on Line of Credit Payable 0 0
Proceeds from Sale of Common Stock, Net 213 716
Purchase of Treasury Stock (39) 0
Net Cash Provided/(Used) by Financing $29,211 $31,720
Activities
Increase (Decrease) in Cash and Equivalents 8,916 (9,531)
Cash and Equivalents:
Beginning of Period 19,317 20,331
End of Period $28,233 $10,800
[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 nine months
ended September 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 nine months ended September 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 SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities". The transfer is
allowed at the date of initial application of the standard.
Management has elected to adopt SFAS 133 as of October 1, 1998 and will
transfer all securities currently held in the "held-to-maturity" portfolio to
the "available for sale" portfolio. The Company holds only minimal balances
in derivatives that are not designated as hedges and does not anticipate the
adoption of SFAS 133 will have a material effect on the financial statements.
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 September 30, 1998, the Company's assets had grown from $194.7 million
(measured as of December 31, 1997) to $226.9 million, an increase of $32.2
million. Using average assets rather than end of period figures, growth was
$14.5 million, from an average of $190.2 million in December of 1997 to an
average of $204.7 million in September 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 long term fixed rate residential
mortgage 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 to be an appropriate asset for
the Company's loan portfolio and an appropriate match for the Company's
liability structures.
Overall, loan volume (both real estate and commercial) increased from $73.0
million of loan originations representing 443 loans in the three months ended
September 30, 1997 to $78.0 million representing 450 new loan originations in
the three months ended September 30, 1998, a 6.8% increase in dollar volume
and a 1.6% increase in number of loans. For the nine month period ended
September 30, 1998, loan originations increased to $237 million representing
1,453 loans from $193.3 million representing 1,176 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 due to five factors: 1)
severe weather conditions in early 1997, 2) lower interest rates on mortgage
loans, 3) an enhanced consumer interest in refinancing of mortgage loans, 4)
continued growth in the area's non-gaming economic activity, and 5) the
internal implementation of automated underwriting and credit scoring
programs.
Throughout 1997 and in the first nine 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. As a result, loan portfolio growth has
slowed. Management believes that its posture on this issue will pay off in
the long-term.
The Northern Nevada Real Estate Division originated 336 loans for a dollar
volume of $48.1 million in the three months ended September 30, 1998 compared
to 261 loans for a dollar volume of $36.2 million in the same period of 1997.
For the nine month period ended September 30,1998, the Northern Nevada Real
Estate Division originated 1,017 loans for a dollar volume of $144.5 million
compared to 667 loans at a dollar volume of $94.8 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. Before the closing,
the Las Vegas office originated 20 loans at a dollar volume of $2.5 million.
According to public records, mortgage loan volume in Washoe County increased
from $138.4 million in September of 1997 to $204.0 million in September of
1998; the Company's market share increased from 5.6% to 5.7%. In Carson
City, for the same period, volume rose by 57.8 % to $26.0 million from $16.5
in September of 1997. While volume rose, the Company's market share
decreased from 11.5% to 3.5% due mainly to the volatility in loan volume
generated in this relatively small market.
Total Residential Real Estate Lending
Three ---Number--- Volume (Mill $)
Months
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 30 336 261 289 $48.1 $36.2 $39.4
December 31 N/A 280 281 N/A $42.8 $41.5
Total 1017 967 1246 $144.5 $140.2 $170.2
The Commercial Division originated 114 loans for $29.9 million in the three
months ended September 30, 1998 versus 182 loans for $36.7 million in same
1997 period. For the nine month period ended September 30, 1998 the
Commercial Division originated 436 loans for $92.5 million versus 489 loans
for $96.1 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 September, 1998, the average balance of the Company's loan
portfolio was $140.1 million and the average total deposit balance was $186.9
million for an average loan/deposit ratio in excess of 74.9%. The average
balance for the same year earlier period was $124.2 million and the average
total deposit balance was $150.1 million for an average loan/deposit ratio of
82.7%. The increase in the level of loans in the Company's loan portfolios
caused loan interest income to increase $2.9 million (37%) in the nine
months ended September 30, 1998 and by $.8 million (28.8%) for the three
months ended September 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 14.1% of the Washoe
County market in the first nine 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 nine months of 1998,
Norwest controlled 8.4% of the Carson City market, ahead of the 7.3% 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 the Company's 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 or with
players that can charge lower prices and put the mortgages into their
portfolios.
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 remained benign, market interest rates, especially at the long end
of the maturity spectrum of the yield curve, fell throughout the summer
months of 1997, increasing demand for mortgage loans on the national level.
While the federal funds rate, administered by the Federal Reserve, remained
steady for the first nine months of 1998, rates along the remainder of the
yield curve fell. The major impact of this on the Company has been a
refinance boom in the mortgage markets and the stimulation of new housing
purchases, which began last fall and has continued through the first nine
months of 1998. Recent reductions in the federal funds rate indicate this
trend will continue and the Company's mortgage business will benefit from the
lower rates.
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 had not reduced the
federal funds rate prior to the fourth quarter of 1998, the Company's
interest income has continued to grow. The recent reduction in the federal
funds may negatively impact loan interest income.
Asset Quality
The Company's asset quality is often measured by its delinquencies and non-
performing assets. As of September 30, 1998 the Company had non-performing
(non-accruing) loans of approximately $633,000, comprised of five commercial
loans. The Company had loans past due 90 days or more that were still
accruing of $61,000. As of September 30, 1997, the Company had non-
performing (non-accruing) loans of approximately $2.6 million, comprised of
the two fully secured construction and development loans discussed below. At
that time, the Company also had $353,000 of loans past due 90 days or more
that were still accruing. The company currently has $2.37 million in "Other
Real Estate Owned" consisting of the two projects reported above as non-
accruing. In July, the Company completed the foreclosure on a project in
Reno for $1.59 million which contained 13 partially completed homes. Of the
13, two are complete with Certificates of Occupancy, one of the two has an
offer and acceptance and is in escrow, and the other 11 are in various stages
of completion with completion of construction anticipated by the spring,
1999. In September, the Company foreclosed on a project for $784,000
containing 2 condominiums and 11 finished lots in Boulder, NV, in the Las
Vegas Area. The Company is developing a marketing plan for this project and
does not expect significant losses of principle on either of its OREO
properties. In the same period of 1997, the Company carried one property in
"Other Real Estate Owned" at a book value of $8,000. Both of these projects
had been carried on the Company's financial statements as non-performing for
over a year. Management believes that the acquisition of title to these
projects and their placement into OREO is a positive step in the resolution
of these problem assets.
Deposit Volumes
As of September 30, 1998, the Company's deposit base had grown from $171.8
million (measured as of December 31, 1997) to $200.8 million, an increase of
$29 million (16.9%). Using average balances rather than end of period
figures, deposits grew $13.4 million (8.0%), from an average of $167.0
million in December, 1997 to $180.4 million in September, 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 30.95% as of September 30, 1998, an increase
from 21.89% on September 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. This accounting
policy is known as SFAS 115. The Company's "available-for-sale" portfolio
consists of $2.8 million in U.S. Treasury and Agency securities, $6.2 million
in FNMA and FHLMC mortgage-backed pass through securities (non-derivative
types), $10.4 million in GNMA pass through securities, $9.8 million in tax
exempt municipal bonds and $831,000 in Federal Home Loan Bank stock.
Management estimates that the duration of the "available-for-sale" portfolio
was approximately 3.09 years on September 30, 1998. As of December 31, 1997,
the value of the "available-for-sale" portfolio was $25,000 above its book
value. As of September 30, 1998, the market value of the "available-for-
sale" portfolio was $144,000 above book value.
The Company also has a $9 million book value portfolio of "held-to-maturity"
securities as defined by SFAS 115. As of September 30, 1998, management
estimates that the duration of the portfolio was approximately 1.9 years.
The market value was $128,000 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. The Company will be adopting SFAS 133 as of October 1, 1998
and will be transferring all $9 million of the securities from the "held-to-
maturity" to the "available-for-sale" portfolio under the one-time transfer
option. The duration of the combined portfolio is 2.8 years.
Borrowing Capacity
The Company maintains a secured line of credit at the Federal Home Loan Bank
of San Francisco (FHLB) which is available for up to 30% of the Company's
assets. As of September 30, 1998, the Company had collateralized this line
with loans and securities giving the Bank approximately $24 million of
borrowing capacity. As of September 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 was an outstanding draw of $4.6 million
on these lines as of September 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. FHLB, Union
Bank of California, Pacific Coast Bankers Bank and First USA are routinely
used for the purchase or sale of overnight Federal funds. In addition, the
Company invests some of its overnight liquidity in Federated Investors'
Liquid Cash Trust, a highly collateralized mutual fund of short-term bank
qualified investments. 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, 1998, was 74.95%. 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 $2,857,000 during the nine
months ended September 30, 1998 of which $2,605,000 was generated from
profits, $213,000 was the result of exercised employee stock options, and
$78,000 was gained on the SFAS 115 mark to market adjustment on the
"available-for-sale" portfolio with an offset to capital of $39,000 from the
purchase by the Company of 5,000 shares of its own stock at an average price
of $7.80 per share. 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 September 30, 1998 for
Comstock Bank and Comstock Bancorp with December 31, 1992 minimum
requirements:
1992
Comstock Comstock Minimum
Bank Bancorp Requirements
Tier I (core capital) 11.77% 11.66% 4.0%
Total capital 12.73% 12.60% 8.0%
Leverage ratio 8.40% 8.52% 3.0%
Year 2000 Compliance
The Company is aware of the enterprise-wide challenges that the millennium
change poses to its business operations in making information processing and
other service-related systems Year 2000 compliant. The Company has made an
assessment of its Year 2000 issues and has formally initiated a significant
project plan to address those issues. It is the policy of the Company that all
of its business operations shall be prepared to manage the change of the year
from 1999 to 2000 without significant disruption or risk to the Company.
The Company's Year 2000 Project Plan incorporates the elements recommended by
the Federal Financial Institutions Examination Council (FFIEC) of which the
Company's primary regulatory agency, the Federal Deposit Insurance Corporation
(FDIC), is a member. The FFIEC Interagency Statement on the Year 2000 outlines
five management phases necessary to facilitate transition to the new century:
awareness, assessment, renovation, validation, and implementation.
Statement of Readiness
A summary of the Company's status in each of the Year 2000 management phases
and their associated tasks follows:
Awareness
The Board of Directors and executive management are cognizant of the
Year 2000 challenge and have made a supportive commitment of
resources to address the matter with adoption of a Year 2000 Policy.
A Year 2000 Project Committee has been established and a strategy to
address all internal and external systems and services formulated.
Vendors and servicers have been contacted to determine their Year
2000 plans and gain their commitment to be ready.
Ongoing progress reports are being made by the Year 2000 Project
Committee to the Company's Board of Directors. In addition, the
Compliance Manager for the Company performs ongoing reviews of the
adequacy of Year 2000 Project assessments and plans, and reports the
results of such monitoring to the Audit & Compliance Committee of the
Board of Directors.
Assessment
The Company has completed its assessment of its Year 2000 issues. The
Company has identified critical business processes and automation
platforms, as well as examined how data transfers will be affected
internally and with outside organizations. This assessment includes
both information technology "IT" systems, as well as non-IT systems
and services such as security systems, HVAC, elevators, etc .
Resource needs have been identified, including appropriately skilled
personnel, contractors, vendor support, budgets, and hardware
capacity.
Time frames and sequencing of Year 2000 efforts have been
established.
Vendors have been contacted to obtain appropriate assurances of Year
2000 compliance. Failing such assurances, decisions will be or have
been made to obtain alternate hardware, software or services, as
appropriate. Given such assurances, validation of compliance by
Company testing will be well underway by December 31, l998.
Existing contingency plans are being evaluated, and will be expanded
and/or modified as needed in conjunction with the results of the
Renovation and Validation phases of the project.
An assessment of credit risk from lending customers has also been
completed as a strategic part of this project phase. High-risk,
technology dependent borrowers are being diligently worked with and
monitored to mitigate any adverse impacts to the business borrower or
the Company.
Renovation
According to the risk-based priorities established during the
Assessment Phase, hardware, software, databases and non-IT systems or
services will be converted, replaced or eliminated as necessary.
Renovation work for critical applications will be substantially
completed by December 31, 1998.
The Company's largest automation processing platform has already been
brought into Year 2000 compliance; as of Fall 1997, a conversion of
mainframe application systems to in-house hardware and Year 2000
compliant software was completed.
Vendors and servicers renovation activities are being diligently
monitored to ensure timely fulfillment of Year 2000 assurances.
Validation
Testing and verification of network and PC systems, databases and
utilities by simulating data conditions for the Year 2000 (including
2/29/2000 leap year), began in September 1998. Testing plans for
mission critical systems are complete, and testing is proceeding with
completion scheduled within regulator stipulated timeframes of
12/31/98 internally and 3/31/99 for vendor supplied systems.
A successful Y2K test simulation of the Company's primary mainframe
systems including deposit, loan and general ledger applications was
completed in April 1998.
Data exchanges with counterparties outside the Company, including the
Federal Reserve, will be tested towards the end of 1st Quarter 1999.
Contingency plans for critical systems will be finalized by June 30,
1999 based upon Renovation and Validation phase results.
Implementation
Renovated systems, data bases and utilities will be put into
production as soon as possible following their validation, but not
later than mid-1999.
Implementation with servicers of critical systems will be monitored
to ensure timely completion.
Contingency plans for critical systems finalized based upon
Renovation and Validation phase results, will be simulated and
tested.
Costs to Address the Company's Year 2000 Issues
Management has estimated the total cost of its Year 2000 compliance effort at
$720,189 of which $439,350 is renovation cost of hardware and software and the
remainder of which is $280,839 in resource costs to manage and implement the
Company's Y2K project plan. $625,635 of the total cost have been invested to
date with $94,553 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.
Risks of the Company's Year 2000 Issues
Notwithstanding the Company's efforts, there can be no assurance that
potential systems interruptions or the cost necessary to update hardware,
software and non- IT systems 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 (such as power, telecommunications, etc.) do
not successfully and timely achieve Year 2000 compliance, the Company's
business or operations could be adversely affected.
The Company believes that having completed a diligent assessment of its
commercial loan portfolio, that at this time its loan risks are limited to a
few borrowers that the Company has assessed as being medium to high risk
(technology dependent companies) for a total of $2.05 million out of a
portfolio of more than $143 million. It is notable that each of these loans is
well collateralized, thereby mitigating the potential of loan losses. The
medium to high-risk borrowers are being worked with in an ongoing manner to
minimize any adverse impacts to the business borrower or the Company.
Company's Contingency Plans
The Company maintains standard disaster recovery and business resumption
plans. The Company's contingency plans specific to the Year 2000 will be
formulated in conjunction with system renovation and testing results by the
2nd Quarter 1999.
The Company is confident that its Year 2000 Plan to address the issues
associated with the proper functioning of the Company's computer systems
before, at and after the turn of the century will meet the business challenges
of entering the new millennium.
COMSTOCK BANCORP AND SUBSIDIARY
RESULTS OF OPERATIONS (Three and Nine Months Ended September 30, 1998 and
1997)
The Company earned $2,605,000 in the nine months ended September 30,1998, an
increase in post-tax earnings of 120% when compared to the $1,184,000 earned
for the nine months ended September 30, 1997. For the three month period
ended September 30, 1998, the Company earned $886,000, an increase of
$398,000 or 81.6% over the same period of 1997. On a basic per share basis,
earnings were $.59 through September 30, 1998 versus $.27 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 $.20 versus $.11 for
the second quarter of 1997. Return on average assets for the nine months
ended September 30, 1998 was 1.70% versus 1.01% for the same 1997 period.
Return on average equity was 20.49% versus 11.39% in the 1997 comparable
period.
Management believes that the following items had the largest impacts on
income for the three and nine month periods ended September 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 32.9% to $48.1 million in the three months ended
September 30, 1998 versus $36.2 million in the same 1997 period. In the
nine month period ended September 30, 1998, mortgage loan originations
increased by 48.5% to $144.5 million versus $97.3 million in the six
month period of 1997. Assuming a continuation of the current interest
rate environment, 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 nine months ended September 30,1998, the loan portfolio
balance averaged $142.8 million compared to $108.3 for the same period of
1997. For the three month periods ended September 30, 1998, the loan
portfolio balance averaged $143.6 million versus $116.7 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 and in the third quarter 28 lots were sold, adding $58,800 to
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
the right to receive the 'additional' interest income of $2,100 on 148
lots. In June, 10 lots were sold and the Company received $21,000. In
September, 31 lots were sold and Company received $65,100. As of
September 30, 1998, the Company retained the right to receive
'additional' interest income on 107 lots. In October, 1998, the Company
collected $10,500 as five lots were sold.
Loan Interest Income ($000)
Three & Nine months ended Sept. 30
Three Months Nine Months
1998 1997 1998 1997
Loan Interest Income $3,580 $2,772 $10,111 $7,685
Additional Interest Income $ 65 $ 59 $ 805 $ 281
4.The Company sold a one acre parcel adjacent to its headquarters for a
pre- tax gain of approximately $164,000. 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.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 sold the portfolio in August. A
pre-tax gain of $326,000 was realized on the sale.
6.Other non-interest rate related events also had a significant impact on
net income. Non-interest income increased by $13,000 for the three months
ended September 30, 1998 over the same period of 1997, and increased
$282,000 for the nine months ended September 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 $124,000 (23.3%), and
furniture and equipment expenses rose $125,000 (30.1%) when comparing
the nine months ended September 30, 1998 to the same 1997 period. For
the three month periods ended September 30, 1998 and 1997, the increases
were $7,000 (3.5%) and $24,000 (15.6%) 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 with personal
computer banking for small business customers being the product most
recently introduced.
Other operating expenses rose $8,000 (.5%) in the nine months ended
September 30, 1998 over the same 1997 period. For the three month
period ended September 30, 1998, other operating expenses declined
$17,000 (3.2%) over the same 1997 period. The costs in these areas are
leveling out with prior periods now that the Company's in-house data
processing functions have been operational for ten months and the two
new branch facilities have been operational for fourteen to nineteen
months. The Company's efficiency ratio improved to 64.0% for the
third quarter of 1998 compared to 73.8% for same quarter of 1997.
Management believes that, in order to effectively compete in the rapidly
changing technological world, the Company must be able to deliver its
products and services in an electronic format. Management believes that
the pace of change is so rapid that delays in modernizing its systems
could significantly threaten the Company's core deposits. Furthermore,
it is management's view that many northern Nevadans would prefer to bank
with a community bank if it offered products and services similar to
those offered by large financial institutions. The Company has targeted
small business and individual relationship banking as a strategic goal.
Thus, management considers the rapid deployment of capital for
technological modernization as both a defensive move and a strategic
opportunity.
The Company provided $290,000 more to its loan loss reserve (Provision
for Credit Losses) in the first nine months of 1998 and $150,000 more in
the third quarter of 1998 than it did in the same 1997 periods.
Management's decision to increase the loan loss reserve came after a
thorough review of the loan portfolio by management and the Loan
Committee and an assessment of the risks in the portfolio and in the
general economy. Such contributions are consistent with the Company's
strategy to build a commercial loan portfolio, which carries a higher
risk profile.
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 nine month periods ended September
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 September 30, 1998 and 1997
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
For Quarter Ended Sept. 30, 1998 Rate Sept. 30, 1998 Rate Change Variance Variance Variance
Loans:
Loan Income $3,285,616 9.05% $2,761,361 9.36% $524,255 $637,585 ($92,072) ($21,259)
Loan Fees and
Servicing Income 1,413,767 793,382 620,385 - - -
Total Loan, Servicing,
And Fee Income $4,699,383 12.94% $3,554,743 12.05% $1,144,640 - - -
Investments:
Fed Funds and
Mutual Fund Income $210,663 5.50% $73,114 5.59% 137,549 141,026 (1,187) ($2.290)
Income from
Investment Securities 465,034 5.81% 347,994 5.68% 117,040 106,703 7,911 2,426
Interest-Bearing
Deposit Income 19,001 6.68% 21,906 6.48% (2,906) (3,455) 652 (103)
Total Investment Income $694,698 5.73% $443,014 5.70% 251,684 $247,807 $2,486 $1,391
Trading Account Assets
And Other Investments 14,123 6.70% 7,316 6.59% 6,807 6,572 124 111
EARNING ASSETS:
Total Interest Income $3,980,313 8.18% $3,204,375 8.57% $775,939 $885,392 ($89,585) ($19,868)
Total Interest, Servicing,
Fee, and Trading
Account Income $5,408,203 11.11% $4,005,073 10.71% $1,403,130 - - -
Deposits:
Interest on Deposits:
Transaction Accounts $534,127 3.35% $394,581 3.26% $139,547 $125,815 $10,412 $3,320
Time and Savings
Deposits 1,305,889 5.37% 1,023,363 5.28% 282,525 259,806 18,119 4,600
Total Deposit
Interest Expense $1,840,016 4.57% $1,417,944 4.50% $422,072 $395,364 $20,885 $5,823
BORROWED FUNDS:
Other Borrowed Funds $93,993 6.22% $13,462 6.46% $80,531 $84,176 ($503) ($3,143)
Total Interest Expense $1,934,009 4.63% $1,431,406 4.52% $502,603 $455,383 $35,823 $11,397
NET INTEREST DIFFERENTIAL $2,046,305 3.55% $1,772,969 4.05% $273,336 $403,009 ($125,408) ($31,265)
(Excludes fee income)
NET INTEREST DIFFERENTIAL $3,474,195 6.48% $2,573,667 6.19% $900,528 - - -
(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 Nine Months Ended September 30, 1998 and 1997
COMSTOCK BANCORP
CONSOLIDATED INTEREST RATE SENSITIVITY ANALYSIS
For the Nine Months Ended September 30, 1998 and 1997
Rate/
(Unaudited) Yield/ (Unaudited) Yield/ Total Volume Rate Volume
For the Nine Months Ended: Sept. 30, 1998 Rate Sept. 30, 1997 Rate Change Variance Variance Variance
Loans:
Loan Income $10,420,220 9.72% $7,762,984 9.56% $2,657,236 $2,485,766 $123,758 $39,587
Loan Fees and
Servicing Income 3,523,702 2,001,269 1,522,433 - - -
Total Loan, Servicing,
And Fee Income $13,943,922 13.00% $9,764,253 12.04% $4,179,669 - - -
Investments:
Fed Funds and Mutual
Fund Income $451,367 5.41% $327,803 5.46% $123,564 $127,664 ($2,950) ($1,149)
Income from
Investment Securities 1,185,729 5.71% 984,840 5.93% 200,889 246,657 (36,601) (9,167)
Interest-Bearing
Deposit Income 65,519 6.57% 70,954 6.52% (5,435) (5,907) 515 (43)
Total Investment Income $1,702,615 5.65% $1,383,597 5.83% $319,018 $374,071 ($43,336) ($11,716)
Trading Account Assets
And Other Investments 47,769 7.80% 14,248 4.47% 33,521 13,148 10,595 9,777
EARNING ASSETS:
Total Interest Income $12,170,604 8.82% $9,146,581 8.70% $3,024,023 $2,843,692 $129,567 $40,236
Total Interest, Servicing,
Fee, and Trading
Account Income $15,742,075 11.41% $11,162,099 10.61% $4,579,976 - - -
Deposits:
Interest on Deposits:
Transaction Accounts $1,488,800 3.35% $1,110,665 3.27% $378,135 $340,992 $28,418 $8,725
Time and Savings
Deposits 3,735,151 5.37% 2,847,271 5.21% 887,880 777,883 86,394 23,603
Total Deposit
Interest Expense $5,223,951 4.58% $3,957,936 4.47% $1,266,015 $1,132,667 $103,678 $29,670
BORROWED FUNDS:
Other Borrowed Funds 278,738 6.21% 13,748 6.70% 264,990 $286,866 (1,000) (20,875)
Total Interest Expense $5,502,689 4.65% $3,971,684 4.47% $1,531,006 $1,325,491 $154,090 $51,425
NET INTEREST
DIFFERENTIAL $6,667,915 4.17% $5,174,896 4.23% $1,493,019 $1,518,201 ($24,523) ($11,189)
(Excludes fee income)
NET INTEREST
DIFFERENTIAL $10,239,386 6.76% $7,190,414 6.14% $3,048,971 - - -
(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.
For the three month periods ended September 30, 1997 and 1998, the yield on
loan income before fees is lower in 1998 than the same period of 1997. Once
fees are included the yield is higher 1998 than in the same period of 1997.
The yields on the fed funds and mutual funds are lower while yields on the
investment securities and interest-bearing deposits in other financial
institutions is higher in the three month period ended September 30,1998
period than in the same period of 1997. The rates on deposits for the three
month period ended September 30, 1998 are again higher than the same period
of 1997, while the rate on other borrowed funds is lower for the period. The
comparison of interest sensitive assets between the nine month periods ended
September 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 nine month 1998 period than
the same period of 1997. The yields on interest-bearing deposits in other
financial institutions is slightly higher for the nine month period ended
September 30, 1998 versus the same 1997 period. The comparison of interest
sensitive liabilities for the nine month period show an increase in rates in
all deposit accounts and a decrease in rates on other borrowed funds.
In the three month period ended September 30, 1998 compared to the same
period of 1997, loan income increased $524,000 of which $638,000 was the
result of increased portfolio balances and ($92,000) was the result of
decreased yields (without $65,000 of "additional interest" income the yield
for this period would have been 8.87% and is comparable to a yield of 9.36%
in the same 1997 period). 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 nine months ended
September 30, 1998 compared to the same period of 1997, loan income increased
$2,657,000 of which $2,485,766 was due to larger portfolio balances and
$124,000 to increased yields ($805,000 of "additional interest" income
discussed previously contributed to the yield increase; the yield without the
"additional interest" would have been 8.97% for the nine months ended
September 30, 1998 versus 9.72% for the same 1997 period, the result of
tightening margins). Fierce competition for loans has resulted in reduced
margins. Again, for this period, when loan fees and servicing income are
factored in, the result is an increase of $4,180,000 in total loan, servicing
and fee income (including the gain on the sale of the servicing portfolio
discussed previously). 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 12.04% to 13.00% in the nine month period. When loan fees and servicing
income are included in this period, the result is an increase of $1,144,640
in total loan, servicing and fee income. Total loan fees for the three month
period increased yields from 12.05% to 12.94%.
Income from fed funds and mutual fund investments increased by $138,000 in
the three month period ended September 30, 1998 over the same 1997 period and
by $124,000 in the nine month period ended September 30, 1998 over 1997. The
increases were due to larger invested balances for both the three and nine
month periods.
Higher yields on Investment Securities combined with an increase in the
invested balances netted the Company an increase of $117,000 for the three
month period ending September 30, 1998 over the same 1997 period. Lower
yields offset by higher balances netted an increase of 201,000 for the nine
month period ended September 30, 1998 over the same 1997 period.
Interest bearing deposits with other financial institutions showed higher
yields and lower invested balances, which netted to a decrease of $3,000 in
income for three month period and a decrease of $5,000 in income for the nine
month period.
Total investment income increased 56.8% or $252,000 for the three month
period as a result of increased invested balances in investment securities,
fed funds and mutual funds. Overall, total investment income increased by
23.1% or $319,000 for the nine month period as a result of increased invested
balances in investment securities, fed funds and mutual funds.
The cost of interest sensitive liabilities was higher on all deposit accounts
for both the three and nine month periods ended September 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. For the three
month period, increased deposit balances contributed to $395,000 of increased
costs, with increased rates contributing $21,000. Increased deposit balances
contributed to $1,132,000 of increased costs, while increased rates
contributed to $104,000 of increased costs for the nine month period ended
September 30, 1998 over the same period of 1997.
In summary, on the asset side, larger loan, investment securities portfolio
and fed funds levels increased income by $776,000 in the three months ended
September 30, 1998 over the same period of 1997 and increased income by
$3,024,000 in the nine 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 $1,403,000 and for the nine month period the increase is
$4,580,000. For the three month period ending September 30, 1998, increased
costs of deposits and other borrowed funds of $503,000 resulted in a net
interest income differential increase, excluding servicing fee income, of
$273,000. With fee income included, the net interest income differential
increased $901,000. When the increased costs of deposits and other borrowed
funds of $1,531,000 for the nine month period is taken into account, the
Company's net interest income differential, excluding servicing and fee
income, increased $1,493,000. With fee income included, the net interest
income differential increased $3,049,000.
Part II.
Item 1. Legal Proceedings.
The Company has been in litigation with Raymond B. Graber, II
("Graber"), since 1991 as discussed the the Company's Form 10-KSB
filed March 20, 1998. In February, 1998, the District Court entered
an order confirming in part, and vacating, in part, the award of the
arbitrator. In September, 1998, the Court entered a judgment
directing the Company to pay $272,949.23 in "restitution" and accrued
interest to Graber and $75,000 in attorneys' fees, for a total
judgment of $347,949.23. The Company has appealed the judgment to the
Supreme Court of Nevada, and enforcement of the judgment has been
stayed pending resolution of the appeal. Regardless of the outcome of
the appeal, the Company's counsel believes that the amount of
judgment, with the additional interest that will accrue thereon during
the appeal, plus the active loan balance of $142,222.95 (a total of
$490,172.18) is the maximum exposure to the Company.
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: The Securities and Exchange Commission has
recently amended Rule 14a-4 to provide that with respect to a
shareholder proposal to be presented at an annual shareholders'
meeting other than pursuant to Rule 14a-8 (i.e., which is not to be
included in the registrant's proxy statement), the registrant's
management may exercise discretionary voting authority under proxies
solicited by it for the meeting, without mention of the proposal in
the proxy material, if it receives notice of the proposed non-Rule
14a- 8 shareholder action less than 45 days prior to the calendar
date its proxy materials were mailed for the prior year's annual
meeting. As this new provision applies to the Company, in the event
notice of a non-Rule 14a-8 shareholder proposal to be presented at
the Company's 1999 Annual Meeting of Shareholders is received by the
Company after March 12, 1999, the Company will be permitted to
exercise discretionary voting authority under proxies solicited by it
with respect to the 1999 Annual Meeting.
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 26
27. Financial Data Schedule 27
(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: October 29, 1998 /s/ Robert N. Barone
Robert N. Barone,
Chairman, CEO and Treasurer
(Principal Accounting and Financial
Officer)
Date: October 29, 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 Nine Months Ended September 30, 1998 and 1997
Three Months Three Months
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sept 30, 1998 Sept 30, 1997 Sept 30, 1998 Sept 30, 1998
Net Income: $2,605 $1,184 $886 $488
Net Income per Common Share
(assuming no dilution):
Weighted Avg. Shares 4,450,993 4,308,818 4,471,818 4,378,718
Outstanding:
Basic Earnings per Share: $.59 $.27 $.20 $.11
Net Income per Common and Common
Equivalent Shares:
Adjusted Weighted Avg. Number of
Shares Outstd. After Giving 4,934,335 4,714,198 4,958,068 4,800,101
Effect to the Conversion of
Options and Warrants:
Diluted Earnings per Share: $.53 $.25 $.18 $.10
COMSTOCK BANCORP
EXHIBIT 27
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
FINANCIAL DATA SCHEDULE
$ in
Thousands
Cash and Due from Banks (Non-Interest Bearing) $11,417
Interest-bearing Deposits in Domestic Financial 1,081
Institutions
Fed funds and Overnight Mutual Funds Sold 16,816
Trading Account Securities 9
Investment and Mortgage back Securities Held for Sale 29,160
Investment and Mortgage back Securities Held to Maturity - 9,025
Carrying Value
Investment and Mortgage back Securities Held to Maturity - 9,153
Market Value
Loans 144,097
Allowance for Credit Losses 1,472
Total Assets 226,862
Deposits 200,839
Short-term borrowings 0
Other Liabilities 1,569
Long-term debt 6,000
Preferred stock - mandatory redemption 0
Preferred stock - no mandatory redemption 0
Common Stock 45
Other Stockholders Equity 18,409
Total Liabilities and Stockholders Equity 226,862
Interest and Fees on Loans 13,915
Interest and Dividends on Investments 1,233
Other Interest Income 518
Total Interest Income 15,666
Interest on Deposits 5,224
Total Interest Expense 5,503
Net Interest Income 10,164
Provision for Loan Losses 470
Investment Securities Gains/Losses (1)
Other Expense 6,710
Income/Loss Before Income Tax 3,571
Income/Loss Before Extraordinary Items 3,571
Extraordinary Items , Less Tax 0
Cumulative Change in Accounting Principles 0
Net Income or Loss 2,605
Earnings Per Share - Primary 0.59
Earnings Per Share - Fully Diluted 0.53
Net Yield - interest earning assets - actual 9.72%
Loans on Non-accrual 633
Accruing Loans past due 90 Days or More 61
Troubled Debt Restructuring 0
Potential Loan Problems 0
Allowance for Loan Losses - Beginning of Period 1,076
Total Charge-Offs 75
Total Recoveries 1
Allowance for Loan Losses - End of Period 1,472
Loan Loss Allowance allocated to Domestic Loans 1,472
Loan Loss Allowance allocated to Foreign Loans 0
Loan Loss Allowance - Unallocated 0