UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number: 0-22391
COMSTOCK BANCORP
(Name of small business issuer in its charter)
Nevada 86-0856406
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6275 Neil Road 89511
Reno, Nevada (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (702) 824-7100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $0.01
per share
------------------
Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained herein, and no disclosure will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues for the most recent fiscal year:
$16,058,000.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the bid and asked
prices of such stock on the NASDAQ System as of February 23, 1998, was
$37,908,000. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant).
As of March 6, 1998, there were issued and outstanding 4,451,668 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II AND IV of Form 10-KSB - Portions of Annual Report to Shareholders
for the Fiscal Year Ended December 31, 1997
PART III of Form 10-KSB - Proxy Statement for the 1998 Annual Meeting
of Shareholders
<PAGE>
PART I
Item 1 -- Business
Certain statements in this Annual Report on Form 10-KSB include
forward-looking information within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the "safe harbor" created by those sections.
These forward-looking statements involve certain risks and uncertainties that
could cause actual results to differ materially from those in the
forward-looking statements. Such risks and uncertainties include, but are not
limited to, the following factors: significant increases in competition within
the banking industry; reduced margins as a result of changes in interest rates;
unexpected changes in national, regional or local economic conditions which may
result in, among other things, a deterioration in credit quality and an increase
in loan losses and/or loan loss provisions; changes in the regulatory
environment; changes in business conditions, particularly in Washoe County, NV
and in the housing industry; certain operational risks involving data processing
systems or fraud; volatility of certain rate sensitive deposits; interest rate
risks in the matching of assets and liabilities; liquidity risks; and changes in
the securities markets. See also the section included herein "Certain Additional
Business Risks" and other risk factors discussed elsewhere in this report.
Comstock Bancorp (the "Company") does not undertake -- and specifically declines
any obligation -- to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
General
The Company, a Nevada bank holding company organized in 1997, operates
Comstock Bank (the "Bank") as its only operating subsidiary. The Company
conducts a general banking business, including the acceptance of demand,
savings, and time deposits and the making of commercial, real estate,
installment and other term loans. The Company's deposit accounts are insured up
to the maximum legal limits by the FDIC. The Company offers checking and savings
accounts, certificates of deposit, money market and NOW accounts and commercial
real estate, residential real estate, residential construction, commercial
loans, and installment loans. The Company operates five ATM machines, one at
each of its full-service branches, offers its customers night depository
services, bank-by-mail, and Visa cards.
The Company provides its range of services primarily to businesses and
individuals in the northern Nevada area. Deposits are gathered primarily from
the Reno and Carson City areas. However, the Company's lending area extends
throughout all parts of northern Nevada, including Reno, Sparks, Carson City,
Minden/Gardnerville, Dayton, Incline Village and other communities at Lake
Tahoe. In 1997, the Company, whose assets averaged $164 million for the year,
originated $269 million of loans consisting mainly of residential, commercial,
and development loans, of which $114 million (42%) were sold in the secondary
market.
<PAGE>
The Company's primary lending business is real estate construction and
development loans, and first mortgages on existing single family homes. The
majority of the Company's lending is to the real estate industry (both
individual homeowners and developers), primarily in northern Nevada. In April,
1997, due to heavy competition and the inability to attract quality personnel,
the lending office that had been opened in Las Vegas in August, 1993, was
closed. Because a large part of the Company's lending is to the real estate
industry, a decline in the real estate market could have a material adverse
effect on the financial condition and earnings of the Company.
In addition to loans on existing dwellings, the Company also makes
construction loans. These loans remain on the Company's books until either paid
off at maturity, or until occupancy occurs and a permanent loan is placed on the
dwelling. At that point, such loans are sold in the secondary market. Most
construction loans are made for pre-sold or custom homes. While there are some
speculative loans to builders/developers, the Company closely monitors its
portfolio volumes and economic conditions in the lending areas. Construction
lending involves additional risk due to reliance upon projected rather than
historical data during the loan underwriting process, as well as the inherent
risk that repayment of the loan is often dependent upon the full and
satisfactory completion of the project. Corresponding to the greater lending
risk is a generally higher interest rate, with a shorter maturity, compared to
residential mortgage lending.
Northern Nevada is generally considered to be "high desert" in terms of
rainfall, natural vegetation, and climate. As a result of unusually dry weather
conditions during the late 1980s and early 1990s and continued population
growth, northern Nevada experienced a severe drought. Since the winter of
1994-95, however, the area has experienced above normal precipitation
culminating in what experts believe to have been at least a 50 year flood in the
first few days of 1997. Precipitation in the 97-98 water year appears to be near
"normal". Should drought conditions return, as is possible in the high desert
environment, governmental authorities may take actions intended to alleviate the
drought including, without limitation, restrictions on the issuance of building
permits. Because the majority of the Company's lending is to the real estate
industry, such governmental actions, if taken, could have a material adverse
effect on the financial condition and earnings of the Company. Because of recent
precipitation levels, management does not expect governmental authorities to
take actions which would impact the Company's business in 1998.
<PAGE>
Competition and Market Area
The Company's deposit service area, Carson City, Reno and Sparks
(Washoe County) contains approximately 77 deposit taking offices of other banks
and savings institutions. In addition, there are approximately 130 mortgage
lenders in the Company's primary lending area in Washoe County, and 38 in Carson
City. The financial institution business in the Company's primary service areas
is highly competitive with respect to both loans and deposits. In the last
quarter of 1995, Norwest Bank purchased two local institutions, American Federal
Savings Bank and Primerit Savings Bank. Norwest had already been a competitor in
the local area with real estate lending offices. Since these acquisitions,
Norwest has become Washoe County's leading first mortgage lending institution.
In December, 1997, Norwest Mortgage had a 13.0% share of the residential real
estate market in Washoe County and was the leading residential real estate
lender, while the Company had 7.1% share and was second. In early 1996, Wells
Fargo became the successful bidder for First Interstate Bank. Recent activity
indicates that Wells Fargo will have an increased focus on commercial and SBA
lending.
Management believes that competition has increased significantly as a
result of the bank merger activity discussed above. The resulting larger banks
have services which the Company does not offer, including international banking,
trust services and cash and vault services. In addition, the large banks have
significantly higher dollar capitalizations and, thus, significantly higher
lending limits than the Company's bank subsidiary. Generally, larger financial
institutions are able to operate with lower non-interest expenses as a
percentage of earning assets than the Company, enabling them to operate
profitably at lower net interest margins. Finally, the larger institutions are
often able to portfolio loans and may offer "below market" rates to attract
volume as well as offering low or no fee loan options. As 1997 progressed,
management noted that its lending net interest margins were shrinking. The
commercial lending department reports that, due to competition in the local
market, up front fees on loans have declined, the rates offered by the
competition have declined, and other terms have become more liberal. At the same
time, data collected by mortgage banker groups indicate that profit margins on
residential mortgages have shrunk by more than 50% over the past two years.
In operating its business, the Company relies upon personal contacts by
its lending officers, directors, and its employees to establish and maintain
relationships with customers. The Company also uses various advertising media to
promote its lending business since, for the most part, the Company's lending
customers are different from its deposit customers.
<PAGE>
The Company's lending customers are generally individual homeowners,
building contractors and developers, while the Company's deposit customers are
generally local businesses and individual consumers.
In the past, the principal competition for deposits and loans were
banks, savings and loan associations, and credit unions. To a lesser extent,
thrift and loan companies, mortgage brokerage companies and insurance companies
also have provided competition. In the 1980s, both federal and state legislation
increased competition by expanding the authority of savings and loan
associations to make consumer and commercial loans. Of more concern is the fact
that other institutions have been permitted to offer products and services that
traditionally had been offered by banks. Institutions such as credit unions,
brokerage houses, mutual funds, and insurance companies now offer checking
accounts, money market funds and various consumer loans. Other entities, both
public and private, seeking to raise capital through the issuance and sale of
debt or equity securities are also competitors with banks in the acquisition of
deposits. For the past several years, but especially since 1995, with the
spectacular increases in stock prices in the U.S., consumers have increasingly
put their savings into mutual funds rather than in more traditional interest
bearing bank deposits.
It is management's opinion that future competition for deposits will
come primarily from credit unions, brokerage houses, mutual funds, and insurance
companies and to a lesser extent from its traditional competitors, large banks
and savings and loan associations. In addition, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994, which permits interstate branch
banking, may disrupt the deposit market and/or significantly increase deposit
costs.
Significant technological developments continue in the realm of
electronic banking (bank from home or office). The increasing trend toward
electronic customer services has required banks to change the way both deposit
and consumer lending products are offered and serviced. An increased investment
in data processing assets and personnel will result in changes in delivery
costs. The Company had a very large capital budget in 1997 and opened two new
branches, an operations center, expanded the office space available for its
commercial and real estate departments, and purchased and installed an in-house
mainframe computer system. Because returns on capital projects may be low or
negative during the implementation and start-up phases, the Company realized
lower returns on assets and equity in 1997.
Lending Activities
Commercial Loans. Commercial loans are made for shorter terms, and
often at higher interest rates but with less fee income, than are conventional
real estate loans, but at lower rates than many consumer loans. However, because
of the larger average size of commercial loans, the non-interest cost of
originating and servicing such loans per dollar of loan balance is often lower
than for consumer loans. Management believes that the shorter maturities of
commercial loans provide greater liquidity and protection to the Company against
increases in market interest rates. However, in many cases, the Company and/or
the borrower anticipate that the loan will be renewed at maturity if the
borrower's condition has not deteriorated and a suitable principal reduction is
made. Often, such loans have variable rates which are tied to an appropriate
rate index.
<PAGE>
The Company's commercial loans are generally secured, usually by real
property. Infrequently, the Company will collateralize the loan with equipment,
inventory or marketable securities. Many of the Company's commercial loans are
amortizing with monthly payments. The notes on the loans usually are for a term
of one to five years. Often, the amortization schedule is for a term longer than
the note, thus giving rise to a balloon payment when the note matures.
Real Estate Loans. The Company's portfolio of real estate loans consist
primarily of loans for construction and land development. The Company has
established relationships with a number of Nevada developers and builders,
primarily developers of residential properties. Real estate development loans
are made for a much shorter term, and often at higher interest rates, than other
longer-term (i.e., Apermanent") real estate loans. The cost of administering
such loans is often higher than for other real estate loans, as principal is
drawn periodically as development progresses. The Company's builders' control
unit provides inspection, voucher, check writing, and accounting services both
to the Company and to the contractor/builder/developer. In the table below,
these loans are identified as AConstruction and Development" loans. The
reduction in the loan balance in 1997 and 1996 over 1995 is a result of several
factors including (i) increased market competition in both northern and southern
Nevada, (ii) more conservative underwriting standards, and (iii) changes in
programs as a result of compliance issues. Because the Company's mortgage
lending activities are conducted through a community bank charter as opposed to
a mortgage company, management believes that the Company is subject to a higher
standard of regulatory enforcement on consumer compliance than its competition
whose business is not closely scrutinized by the regulatory authorities.
The Company also makes real estate loans secured by first deeds of
trust on single family residential properties. Most of the loans the Company
originates on such properties (approximately 82% in 1996 and 81% in 1997) are
sold in the secondary market, all on a non-recourse basis. The Company may or
may not retain the servicing rights on the loans it sells. As a general rule,
the Company has a Atake out source", a secondary market purchaser (usually a
large purchaser of mortgage paper such as Countrywide Mortgage or Norwest
Mortgage), for all of the residential loans that it originates. In the table
below, the category entitled ALoans Held for Sale" consists of loans that the
Company has funded which are in various stages of document shipping and approval
awaiting monies from the final secondary market purchasers.
<PAGE>
In the table, the AOther Mortgages" line consists of conventional real
estate (1-4 family) and multi-family home loans held for one year or longer. The
increase in 1996 is largely due to an increase in multi-family lending generated
by both the addition of a lending officer specializing in this area and by the
increased demand for multi-family housing in the northern Nevada area. In 1997,
the Company sold loans from this portfolio.
Consumer Loans. The Company has never had a large portfolio of consumer
loans. Of the Consumer Loan balance as of December 31, 1997, the Company has
less than $200,000 outstanding in its Visa credit card program.
The following table shows the composition of the Company's loan
portfolio as of December 31, 1997, 1996 and 1995:
LOAN PORTFOLIO MIX
As of December 31,_________
1997 1996 1995
------ ------ ------
(In thousands of dollars)
Commercial & Industrial $101,812 $69,334 $54,970
Real Estate:
Construction & Development 15,218 13,390 18,925
Loans Held for Sale 13,946 7,806 9,088
Other Mortgages 2,326 3,934 1,912
Consumer 3,411 2,060 1,848
------ ------ -------
Gross Loans(1) 136,713 96,524 86,743
Allowance for credit losses (1,076) (857) (665)
--------- ------- -------
Net Loans $135,637 $95,667 $86,078
======= ====== ======
(1) Excludes deferred fees of $532,000, $306,000 and $261,000 in 1997, 1996, and
1995, respectively.
Consistent with the Company's philosophy, there are no foreign loans or
energy related loans.
<PAGE>
The following table shows the amounts of certain loans outstanding as
of December 31, 1997 which, based on remaining scheduled repayments of
principal, are due in the periods indicated. Demand and other loans having no
stated maturity and no stated schedule of repayments are reported as due in one
year or less.
LOAN PORTFOLIO MATURITY
Commercial Real
& Industrial Estate Consumer
Total(1)
(In thousands of dollars)
- --------------------------------------------------------------------------------
In 1 year or less $90,574 $12,333 $2,833
$105,740
Over 1 year -- 5 years 9,446 5,663 447
15,556
Over 5 years 1,792 13,494(2) 131
15,417
(1) Totals exclude deferred fees of $532,000.
(2) $9 million are construction loans that will roll to permanent loans
when construction is completed and will be sold in the secondary
market.
At December 31, 1997, of the approximately $30,973,000 of loans due
after one year, approximately $18,369,000 had fixed interest rates and
approximately $12,604,000 had floating or adjustable interest rates.
Commitments and Lines of Credit. In the normal course of business, the
Company makes commitments (including lines of credit and standby letters of
credit) to extend credit to be called upon at the option of the borrower. As of
December 31, 1997, the Company had $58,162,000 of such commitments outstanding.
As of December 31, 1996, the Company had $60,445,000 of such commitments
outstanding. In addition, as of December 31, 1997, the Company had issued
commitments of approximately $7.4 million to individuals to purchase single
family residential properties which the Company, in turn, had committed to sell
in the secondary market. The Company expects that substantially all of such
commitments will be drawn upon in the ordinary course of business. Many of the
commitments are the unfunded portion of construction loans. The evaluation of a
commitment that is not a construction loan is made on an individual basis
similar to that required for a loan. It is standard practice to require the
potential borrower to pay a fee and/or maintain a depository or borrowing
relationship regardless of whether or not the commitment is used by the
borrower.
<PAGE>
Seasonality
The Company experiences seasonality in its lending business, especially
in the first quarter and throughout much of the second quarter, due to the fact
that construction lending is usually at its low point and mortgage lending is
seasonally slower. The extent of the seasonal impact usually depends on the
severity of the winter. In some years, when the Reno/Sparks and Carson City
areas have little snowfall, the seasonal impact is mild. In years when snow
remains on the valley floors for significant periods and temperatures remain
below freezing, the seasonal impact is more significant. Because of the "Flood
of 97" in Reno in early January, there were large impacts on real estate lending
in the first and second quarters. For Washoe County, total mortgage lending in
the first quarter of 1997 was 14% lower than in the first quarter of 1996. In
the second quarter, mortgage lending in 1997 was equivalent to that of 1996.
However, in the second half of 1997 in Washoe County, mortgage lending was 46%
higher than in the same year earlier period. The Company experienced a similar
cycle in 1997. In the first quarter of 1997, real estate lending volume in
Northern Nevada was off 29% compared to the year earlier period. In the second
quarter, it was down 11%. But in the second half, it was up 16%.
Non-Performing and Non-Accrual Loans. The Company generally determines
a loan to be Anon-performing" when interest or principal is past due 90 days or
more. If it appears doubtful that the loan will be repaid, management may
consider the loan to be Anon-performing" before the lapse of 90 days. If,
however, a workable program for the return of the loan to a current condition
has been established with the borrower, this period may exceed 90 days.
Classification of a loan as Anon-performing" does not necessarily indicate a
future charge-off, although the Company generally charges off all past due
unsecured loans after 90 days.
It is current Company policy to cease accruing interest on loans which
are past due as to principal or interest 90 days or more, except for loans which
are well secured and in the process of collection. When a loan is placed on
Anon-accrual", previously accrued and unpaid interest is generally reversed out
of income unless adequate collateral from which to collect the principal and
interest on the loan appears to be available.
<PAGE>
The following table presents information with respect to loans which,
as of the dates indicated, were Anon-performing" and were on Anon-accrual"
status:
NON-PERFORMING &
NON-ACCRUING LOANS
As of December 31,
1997 1996 1995
(In thousands of dollars)
Past Due:
Still Accruing:
90 days or more..... : $ 103 $ 420 $ 0
Not Accruing........ : $2,573 $3,184 $142
For the fiscal year ended December 31, 1997, gross interest income
which would have been recorded had the non-accruing loans been current amounted
to $373,495. The amount that was included in interest income on such loans was
$69,822 for the fiscal year ended December 31, 1997.
As of December 31, 1997 the non-accrual loans consisted of three
development projects, two construction loans, two commercial loans and a
government-guaranteed second mortgage. Most of the non-accruing assets are in
two development projects. One such project is in northern Nevada, with an
outstanding balance of $1,484,000, for which the principals filed bankruptcy
(Chapter 11) subsequent to the Company filing notice of default. Another
development project is in southern Nevada, with an outstanding principal balance
of $762,800, for which the principals, under bankruptcy protection, are
attempting to sell three condo units. The Company believes its collateral
position to be secure on the non-accruing loans.
Other Loans of Concern. In addition to the non-performing loans set forth in the
preceding table, as of December 31, 1997, there was also an aggregate of
$903,000 in net book value of loans classified by the Company of which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have some concerns
regarding of the ability of the borrowers to meet all of the terms and
conditions of the notes on a timely basis and which may result in the future
inclusion of such items in the non-performing asset categories. The principal
components of loans of concern are one mortgage (1-4 family) loan in the amount
of $671,000 and five commercial loans totaling $232,000.
As of December 31, 1997, there were no other loans not included on the
foregoing table or discussed above where known information about the possible
credit problems of borrowers caused management to have doubts as to the ability
of the borrower to comply with present loan repayment terms and which may result
in disclosure of such loans in the future.
<PAGE>
Summary of Loan Loss Experience. The following chart is an analysis of the
Company's loan loss experience for the years ended December 31, 1997, 1996, and
1995:
LOAN LOSS EXPERIENCE
Years ended December 31,
1997 1996 1995
(In thousands of dollars except ratios)
Average Loans Outstanding $113,663 $88,646 $79,621
======= ====== ======
Allowance, beginning of period 857 665 428
Charge-Offs:
Commercial & Industrial 31 50 28
Real Estate -- Construction and
Development -- -- --
Real Estate -- Mortgages Held For Sale -- -- --
Real Estate -- Other Mortgages 32 -- --
Installment 16 11 7
Cash Reserve -- -- --
-------- ------- --------
Total Charge-Offs 79 61 35
Recoveries:
Commercial & Industrial 26 2 2
Real Estate -- Construction and
Development -- -- --
Real Estate -- Mortgages Held For Sale -- -- --
Real Estate -- Other Mortgages -- -- --
Installment 2 1 --
Cash Reserve -- -- --
------- ------- -------
Total Recoveries $ 28 $ 3 $ 2
======= ======= =======
Net Charge-Offs 51 59 33
Additions to Allowance 270 250 270
Allowance, end of period $ 1,076 $ 857 $ 665
======= ======= =======
Ratio of Net Charge-Offs
To Average Loans Outstanding 0.04% 0.07% 0.04%
===== ===== =====
Ratio of Allowance to Total
Loans at end of period 0.79% 0.89% 0.76%
===== ===== =====
<PAGE>
Management and the Loan Committee of the Board of Directors use both a
numeric rule and judgment in formulating the allowance for loan losses. In 1995
additions to the allowance were $270,000. In 1996 and 1997 additions to the
allowance were $250,000 and $270,000, respectively.
The following table sets forth a breakdown of the allowance for loan
losses for the year ended December 31, 1997 and 1996:
ALLOWANCE FOR LOAN LOSSES
(In thousands of dollars except percentages)
<TABLE>
<S> <C> <C> <C> <C>
Percent of loans Percent of loans
Amount of Charge- in Amount of Charge- in
Offs for the year ended each category to Offs for the year ended each category to
December 31, 1997 Total Loans December 31, 1996 Total Loans
--------------------------------------------------------------------------------------------
Commercial & Industrial $31 74.47% $50 67.59%
Real Estate - Construction
and Development $0 11.13% $0 13.89%
Real Estate - Mortgages
Held for Sale $0 10.20% $0 7.57%
Real Estate - Other
Mortgages $32 1.70% $0 8.82%
Installment $16 2.50% $11 2.13%
--------------------------------------------------------------------------------------------
Total $79 100.00% $61 100.00%
</TABLE>
As of January 1, 1996, the Company adopted Statement of Accounting
Standards (ASFAS@) No. 114, AAccounting By Creditor For Impairment Of A Loan".
This change in accounting practice requires the Company to mark Aimpaired" loans
to the lower of book value, or (i) the discounted value of the estimated cash
flow, (ii) the value of the collateral, or (iii) an observable market price. A
loan is considered by the Company to be Aimpaired" if (i) it has been placed in
a non-accrual status, (ii) it is unlikely that the Company will collect all
amounts due under the loan contract, and (iii) it remains in impaired status if
it is currently performing but is not showing a consistent payment practice. At
December 31, 1997 impaired loans had a carrying value of $2,541,000 with an
allowance for losses of $66,000. At December 31, 1996 impaired loans had a
carrying value of $3,184,000 with an allowance for losses of $75,000.
<PAGE>
Investment Activities
The Company uses the investment portfolio as a secondary source of
liquidity and for income. The Company's liquidity ratio, defined as the value of
marketable assets divided by volatile liabilities, stood at 26% as of December
31, 1997 as compared to 28% as of December 31, 1996 and 24% as of December 31,
1995. As of December 31, 1997, the Company had $9.9 million in overnight funds
and $26.3 million in marketable securities and time deposits. In contrast, as of
December 31, 1996, the Company had $13.6 million in overnight funds and $18.7
million in marketable securities and time deposits. Also as of December 31,
1997, the Company had borrowing capacity at the Federal Home Loan Bank of San
Francisco ("FHLBSF") in excess of $58 million (30% of its assets). Such
borrowing capacity is subject to quarterly review and must be collateralized. As
of December 31, 1997 the Company had borrowed $6,000,000 from FHLBSF and had
pledged approximately $25 million in loans and securities as collateral for the
borrowing line. In contrast, as of December 31, 1996, the Company had no
borrowed funds outstanding and had pledged approximately $21 million in loans
and securities.
On January 1, 1994, the Company officially adopted SFAS 115, an
accounting rule which requires the Company to segregate its investment portfolio
into accounts of AHeld to Maturity", ATrading", and AAvailable for Sale"
(AAFS@). The accounting treatment of each such class is different. In
anticipation of SFAS 115, in 1992 the Company established an AAvailable for
Sale" portfolio consisting of items which the Bank did not intend to hold to
maturity, and a ATrading" portfolio. The ATrading" portfolio includes
investments which are intended to be held for speculative purposes and FNMA or
FHLMC mortgage-backed securities which the Company may originate. These FNMA or
FHLMC pools would reside in the ATrading" account until sold. The AFS portfolio
is carried on the Company's books at market value. The securities in the
ATrading" portfolio are carried at market value. The Company's investment
portfolio has no AJunk Bonds" During 1995, the Financial Accounting Standards
Board (AFASB@) offered a one-time opportunity to reclassify securities among the
held-to-maturity, available-for-sale, and trading categories in conjunction with
adopting a new implementation guide. Following the FASB's announcement, the
Company reclassified securities with a book value of approximately $1,691,000
from its Held-To-Maturity portfolio to its AFS portfolio.
As of December 31, 1997, the ATrading" portfolio consisted of one pool
of Interest Only (AIO@) securities with a market value of $12,000. As of
December 31, 1996, the "Trading" portfolio consisted of two such pools with a
market value of $28,000. IOs represent the interest portion of a mortgage pool
and give the holder the interest payment (but not the principal payment) stream.
The faster the pools pay off, the less the value of the interest stream to the
IO holders. The IO pool has a final maturity date of 2019, but has been paying
off rapidly. As of December 31, 1997, the mortgage pool contained less than 8.2%
of its original face value. The Company is carrying the IO pool at market value.
<PAGE>
The following table sets forth the book and market values of the
Company's investment portfolio as of December 31st of each of the designated
years:
INVESTMENT PORTFOLIO MIX INCLUDING DOMESTIC BANK DEPOSITS
As of December 31,
1997 1996 1995
------ ------ ------
(In thousands of dollars)
Amort Market Amort Market Amort Market
Cost Value Cost Value Cost Value
Deposits in domestic $1,491 $1,518 $1,497 $1,513 $1,785 $1,815
Banks
U.S. Treasury and Agency 9,575 9,535 8,733 8,645 9,837 9,779
Notes and bonds
U.S. government mortgage 10,606 10,623 5,201 5,200 2,187 2,154
Backed
Corporate and other 4,647 4,694 3,303 3,299 2,491 2,472
Securities
Total $26,319 $26,370 $18,734 $18,657 $16,300 $16,220
======= ======= ======= ======= ======= =======
<PAGE>
The following table summarizes the maturity of the Company's investment
securities and their estimated weighted average yield at December 31, 1997:
INVESTMENT PORTFOLIO MATURITY INCLUDING DOMESTIC BANK DEPOSITS
<TABLE>
<S> <C> <C> <C> <C> <C>
U.S. Treasury &
Deposits in Agency U.S. Govt. Corporate and
Domestic Banks Notes and Bonds Mortgage Backed Other Securities Total
(In thousands of dollars except percentages)
- ------------------------------------------------------------------------------------------------------
In 1 year or less $ 695 $3,299 $ 89 $ 227 $4,310
Yield 6.39% 5.48% 8.00% 4.70% 5.64%
Over 1 year to 5 yrs $ 596 $4,792 $ 4,763 $1,188 $11,340
Yield 8.40% 4.67% 6.71% 4.90% 5.75%
Over 5 yrs to 10 yrs $ 200 $1,484 $ 5,650 $2,856 $10,190
Yield 6.00% 6.64% 6.90% 5.29% 6.39%
Over 10 years $ 0 $ 0 $ 104 $ 376 $ 480
Yield 0.00% 0.00% 6.80% 6.19% 6.32%
Total Amort Cost $1,491 $9,575 $10,607 $4,647 $26,320
Weighted Avg Yield 7.14% 5.26% 6.82% 5.23% 5.99%
</TABLE>
Note: Excludes funds held in overnight accounts and trading accounts. The
"Available for Sale" securities are represented in this table at their amortized
cost. In the financial statements, they are reflected at their market value.
Except for obligations of state and local governments, the Company's
securities portfolios at December 31, 1997 contained no securities of any issuer
with an aggregate book value in excess of 10% of the Company's shareholders'
equity, excluding those issued by the United States Government, or its agencies.
<PAGE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from principal repayments and interest payments on loans and
investments as well as other sources arising from operations in the production
of net earnings. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of funds
from other sources, or on a longer term basis for general business purposes or
when they are cheaper than deposit sources.
Deposits. Deposits are attracted principally from within the Company's
primary market area through the offering of a broad selection of deposit
instruments, including demand deposits, money market accounts, NOW accounts,
savings accounts, and certificates of deposits. Deposit account terms vary, with
the principal differences being the minimum balance required, the time periods
the funds must remain on deposit and the interest rate.
The Company's policies are designed primarily to attract deposits from
local residents and businesses rather than to solicit deposits from areas
outside its primary market. The Company does not accept deposits from brokers
due to the volatility and rate sensitivity of such deposits. Interest rates
paid, maturity terms, service fees and withdrawal penalties are established by
the Company on a periodic basis. Determination of rates and terms are predicated
upon funds acquisition and liquidity requirements, rates paid by competitors,
growth goals and federal regulations.
The following table sets forth the Company's average balances of
deposits and the average rate paid on each for the years ended December 31,
1997, 1996 and 1995:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEPOSITS
(In thousands of dollars except percentages)
Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Average Avg Percent Average Avg Percent Average Avg Percent
Balance Rate of Total Balance Rate of Total Balance Rate of Total
Non-interest
bearing demand
deposits (IPC) $21,577 __ 14.6% $18,089 __ 15.0% $16,518 __ 16.1%
Official checks, $ 3,098 __ 2.1% $ 3,028 __ 2.5% $ 3,025 __ 2.9%
etc.
Interest bearing
demand deposits $47,022 3.3% 31.9% $38,678 3.4% 32.0% $31,078 3.4% 30.2%
Savings deposits $ 9,844 2.7% 6.7% $ 9,983 2.7% 8.2% $12,814 3.2% 12.5%
Time deposits $65,994 5.3% 44.7% $51,154 5.4% 42.3% $39,461 5.7% 38.3%
======================================================================================================================
Total $147,535 4.5% 100.0% $120,932 4.4% 100.0% $102,896 3.6% 100.0%
</TABLE>
<PAGE>
Based on the Company's experience, management believes that the
Company's passbook savings, money market savings accounts and checking accounts
are relatively stable sources of deposits. However, the ability of the Company
to attract and maintain certificates of deposit and passbook accounts and the
rates paid on these deposits has been and will continue to be significantly
affected by market conditions.
Year Ended December 31
1997 1996 1995
(Dollars in Thousands)
Opening balance $131,304 $111,169 $93,004
Net deposits $ 34,973 $ 15,717 $14,468
Interest credited $ 5,525 $ 4,418 $ 3,697
Ending balance $171,802 $131,304 $111,169
==============================================
Net increase $ $ 20,135 $ 40,498
==============================================
Percent increase 30.8% 18.1% 19.5%
The following table summarizes the maturity of the Company's time
deposits of $100,000 or more as of December 31, 1997:
DEPOSIT MATURITIES
Time Deposits
$100,000 or more
($000s)
3 months or less $ 8,717
Over 3 months through 12 months 12,510
Over 12 months 6,415
---------
Total $27,642
=========
<PAGE>
Patents
The Company holds no patents, trademarks, licenses, franchises or
concessions material to its operation.
Employees
As of December 31, 1997, the Company employed one hundred twenty-eight
(128) persons, one hundred fourteen (114) on a full-time basis and fourteen (14)
on a part-time basis, or the full-time equivalent of one hundred twenty-one
(121) employees. In contrast, as of December 31, 1996, the Company employed the
full-time equivalent of one hundred eighteen (118) employees. The Company's
employees are not represented by any collective bargaining group. Management
considers its employee relations to be good.
Compliance with Environmental Regulations
Compliance with Federal, State or local provisions regulating the
discharge of materials into the environment has not had, nor is it expected in
the future to have, a material effect upon the Company's capital expenditures,
earnings or competitive position.
Compliance with Bank Secrecy Act and Consumer Compliance Regulations
On January 20, 1994, the Bank and the Federal Deposit Insurance
Corporation (the "FDIC") reached an agreement (a "Memorandum of Understanding")
regarding compliance deficiencies found in the Company's Bank Secrecy Act and
consumer compliance programs. In the fall of 1996, the FDIC once again examined
the Company for compliance. As a result of that examination, the Memorandum of
Understanding was lifted in the first quarter of 1997.
Additional Lines of Business
The Company has conducted research into the setting up of an insurance
sales subsidiary and is in negotiations with a local independent insurance
agency for a joint venture. The Company is also considering the sales of mutual
funds and annuities through it branches, but has not entered into serious
negotiations with any vendor. Other than described above, the Company has no
pending new lines of business which would require a substantial investment.
<PAGE>
Regulation and Supervision
General
As a state chartered bank in Nevada whose deposits are insured by the
Bank Insurance Fund (the "BIF") of the FDIC, the Company's bank subsidiary (the
"Bank") is subject to regulation under state law which is administered by the
Nevada Division of Financial Institutions (the "Nevada Division"). In addition,
the FDIC levies deposit insurance premiums and is vested with authority to
supervise the Bank and to exercise a broad range of enforcement powers. Finally,
the Bank is required to maintain reserves against deposits according to a
schedule established by the Federal Reserve Bank (the "FRB"). As a general rule,
the federal regulation is much more extensive and onerous than that of the
state.
The following references to the laws and regulations under which the
Company and the Bank are regulated are brief summaries thereof, and do not
purport to be complete and are qualified in their entirety by reference to such
laws and regulations.
Federal Banking Regulations
Capital Requirements. Under FDIC regulations, insured state-chartered
banks that are not members of the Federal Reserve System (Astate non-member
banks") are required to maintain minimum levels of capital. State non-member
banks must satisfy a leverage capital ratio of Tier 1 capital to total assets of
at least 3% if the FDIC determines that the institution is not anticipating or
experiencing significant growth and has well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and is in general a strong banking organization, rated composite 1
under the Uniform Financial Institutions Ranking System (the ACAMELS@ rating
system) established by the Federal Financial Institutions Examination Council.
For all but the most highly rated institutions meeting the conditions set forth
above, the minimum leverage capital ratio is 3% plus an additional Acushion"
amount of at least 100 to 200 basis points. Tier 1 capital is the sum of common
stockholders' equity, noncumulative perpetual preferred stock (including any
related surplus) and minority investments in certain subsidiaries, less most
intangible assets.
In addition to the leverage ratio, state non-member banks must maintain
a minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0%, of which at least 50% must be Tier 1 capital. Qualifying total capital
consists of Tier 1 capital plus Tier 2 or supplementary capital items, which
includes allowances for loan losses in an amount of up to 1.25% of risk-weighted
assets, cumulative perpetual preferred stock and long-term preferred stock
(original maturity of over 20 years) and certain other capital instruments. The
includable amount of Tier 2 capital cannot exceed the amount of a bank's Tier 1
capital. Qualifying total capital is reduced by the amount of a bank's
investments in banking and finance subsidiaries that are not consolidated for
regulatory capital purposes, reciprocal cross-holdings of capital securities
issued by other banks and certain other deductions.
<PAGE>
The risk-based minimum capital requirement is measured against total
risk-weighted assets, which equals the sum of each on-balance-sheet asset and
the credit-equivalent amount of each off-balance-sheet item after being
multiplied by an assigned risk weight. Under the FDIC's risk-weighting system,
cash and securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight. Mortgage-backed securities that are issued, or fully
guaranteed as to principal and interest, by the FNMA or FHLMC and certain
municipal securities, are assigned a 20% risk weight. Single-family first
mortgages not more than 90 days past due with loan-to-value ratios under 80%,
multi-family mortgages (maximum 36 dwelling units) with loan-to-value ratios
under 80% and average annual occupancy rates over 80%, and certain qualifying
loans for the construction of one-to-four-family residences pre-sold to home
purchasers, are assigned a risk weight of 50%. Consumer loans and commercial
real estate loans, repossessed assets and assets more than 90 days past due, as
well as all other assets not specifically categorized, are assigned a risk
weight of 100%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(AFDICIA@) required each federal banking agency to revise its risk-based capital
standards for insured institutions to ensure that those standards take adequate
account of interest-rate risk (AIRR@), concentration of credit risk, and the
risk of nontraditional activities, as well as to reflect the actual performance
and expected risk of loss on multi-family residential loans. Effective September
1, 1995, the FDIC, together with the other federal banking agencies, amended
their capital standards to require consideration of IRR and other financial and
operational risks (in addition to credit risk) as factors to be considered in
evaluating capital adequacy. The new standards require consideration of the
quality of a bank's process of managing its IRR, the overall condition of the
bank and the level of the bank's other risks for which capital is needed.
Institutions with significant IRR may be required to hold additional capital.
The FDIC, together with the other federal banking agencies, issued a joint
policy statement, effective June 26, 1996, providing guidance on management of
IRR, including a discussion of the critical factors affecting the agencies'
evaluation of IRR in connection with capital adequacy. The agencies also
determined not to proceed with a previously issued proposal to develop a
supervisory framework for measuring IRR and to impose an explicit capital
component for IRR.
The following table shows the Bank's leverage capital ratio, its Tier 1
risk-based capital ratio, and its total risk-based capital ratio, at December
31, 1997 along with the minimum requirements:
Minimum Bank Requirements
------- -----------------
Tier I (core capital) 10.89% 4.0%
Total capital 11.65% 8.0%
Leverage ratio 8.32% 3.0%
<PAGE>
Enforcement. Under the FDIA, the FDIC has enforcement responsibility
over state non-member banks, such as Comstock Bank, the Company's banking
subsidiary, and has the authority to bring enforcement action against all
Ainstitution-related parties", including controlling stockholders, officers,
directors and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on a
bank. Civil penalties cover a wide range of violations and actions and range
from up to $5,000 per day at the First Tier, $25,000 per day at the Second Tier,
and when a finding of the greatest culpability is made, up to $1 million per day
at the Third Tier. Criminal penalties for most financial institution crimes
include fines of up to $1 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance.
The Company is charged an annual assessment by the FDIC for insurance
of deposit accounts up to applicable statutory limits. Under the risk-based
system for deposit insurance premiums that has been in effect since 1994, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the Bank's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups, well capitalized, adequately
capitalized, or undercapitalized, based on the data reported to regulators for
the date closest to the last day of the seventh month preceding the semi-annual
assessment period. Well-capitalized institutions are institutions satisfying the
following capital ratio standards: (i) total risk-based capital ratio of 10.0%
or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions
are institutions that do not meet the standards for well-capitalized
institutions but which satisfy the following capital ratio standards: (i) total
risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital
ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater.
Undercapitalized institutions consist of institutions that do not qualify as
either Awell capitalized" or Aadequately capitalized". Within each capital
group, institutions will be assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A will consist of financially sound institutions with a few minor
weaknesses. Subgroup B consists of institutions that demonstrate weaknesses
which, if not corrected, could result in significant deterioration of the
institution and increased risk of loss to the deposit insurance fund. Subgroup C
consists of institutions that pose a substantial probability of loss to the
deposit insurance fund unless effective corrective action is taken.
<PAGE>
On September 30, 1996, the Deposit Funds Insurance Act of 1996 (the
A1996 Act") was enacted into law, and it amended the FDIA in several ways to
recapitalize the Savings Association Insurance Fund (ASAIF@), which primarily
insures the deposits of savings associations, and to reduce the disparity in the
assessment rates for the BIF and the SAIF that had develop in 1995. The 1996 Act
authorized the FDIC to impose a special assessment on all institutions with
SAIF-assessable deposits in the amount necessary to recapitalize the SAIF. In
addition, the 1996 Act expanded the assessment base for the payments on the FICO
bonds, which were issued in the late 1980s by the Financing Corporation to
recapitalize the now defunct Federal Savings & Loan Insurance Corporation, to
include the deposits of both BIF- and SAIF-insured institutions beginning
January 1, 1997. Until December 31, 1999, or such earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-assessable
deposits shall be one-fifth of the rate imposed on SAIF-assessable deposits. The
rate of assessments for the payments on the FICO bonds is 0.0129% for
BIF-assessable deposits and 0.0644% for SAIF-assessable deposits which began on
January 1, 1997.
The 1996 Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior elimination
of the federal thrift charter. Legislation that would eliminate the federal
savings association charter is under discussion. If such legislation is enacted,
federal savings associations would be required to convert to either a national
bank charter or to a state depository institution charter. Various legislative
proposals also may result in the restructuring of federal regulatory oversight,
including, for example, consolidation of the Office of Thrift Supervision into
another agency, or creation of a new Federal banking agency to replace the
various such agencies which presently exist. The Company is unable to predict
whether such legislation will be enacted or, if enacted, what the effect of such
legislation will be.
FDIC regulations provide that any insured depository institution with a
ratio of Tier 1 capital to total assets of less than 2.0% will be deemed to be
operating in an unsafe or unsound condition, which would constitute grounds for
the initiation of termination of deposit insurance proceedings. The FDIC,
however, will not initiate termination of insurance proceedings if the
depository institution has entered into and is in compliance with a written
agreement with its primary regulator, and the FDIC is a party to the agreement,
to increase its Tier 1 capital to such level as the FDIC deems appropriate.
Insured depository institutions with Tier 1 capital equal to or greater than
2.0% of total assets may also be deemed to be operating in an unsafe or unsound
condition notwithstanding such capital level.
<PAGE>
Transactions with Affiliates and Insiders
Transactions between state non-member banks and any affiliate are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a
bank is any company or entity which controls, is controlled by or is under
common control with the bank but does not include a subsidiary of the bank. The
Company is considered an affiliate of the Bank. Generally, Section 23A (i)
limits the extent to which the bank or its subsidiaries may engage in Acovered
transactions" with any one affiliate to an amount equal to 10% of such bank's
capital and surplus, and contains an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such capital and surplus, and
(ii) requires that all such transactions be on terms that are consistent with
safe and sound banking practices. The term Acovered transaction" includes the
making of loans, purchase of assets, issuance of guarantees and similar other
types of transactions. In addition, most extensions of credit by a bank to any
of its affiliates must be secured by collateral in amounts ranging from 100 to
130 percent of the loan amounts, depending on the type of collateral. Section
23B requires that any covered transaction, and certain other transactions,
including the bank's sale of assets and purchase of services from an affiliate
must be on terms that are substantially the same, or at least as favorable to
the institution, as those that would prevail in comparable transactions with a
non-affiliate.
Banks are also subject to the restrictions contained in Section 22(h)
of the Federal Reserve Act and the FRB's Regulation O thereunder on loans to
executive officers, directors and principal stockholders. Under Section 22(h),
loans to a director, an executive officer or a holder of more than 10% of the
shares of a bank, as well as certain affiliated interests of such persons, may
not exceed, together with all other outstanding loans to such person and
affiliated interests, the loans-to-one-borrower limit applicable to national
banks (generally 15% of an institution's unimpaired capital and surplus) and all
loans to all such persons in the aggregate may not exceed an institution's
unimpaired capital and unimpaired surplus. Regulation O also prohibits the
making of loans in an amount greater than the lesser of $25,000 or 5% of capital
and surplus but in any event over $500,000, to a director, executive officer and
greater than 10% stockholder of a bank, and the respective affiliates of such
person, unless such loans are approved in advance by a majority of the board of
directors of the bank, with any Ainterested" director not participating in the
voting. Further, the FRB, pursuant to Regulation O, requires that loans to
directors, executive officers and principal stockholders (a) be made on terms
substantially the same as those that are offered in comparable transactions to
persons not affiliated with the bank and (b) follow credit underwriting
procedures not less stringent than those prevailing for comparable transactions
with persons not affiliated with the bank. Regulation O also prohibits a
depository institution from paying, with certain exceptions, an overdraft of any
of the executive officers or directors of the institution or any of its
affiliates unless the overdraft is paid pursuant to written pre-authorized
extension or interest-bearing extension of credit or transfer of funds from
another account at the bank.
<PAGE>
State-chartered non-member banks are further subject to the
requirements and restrictions against certain tying arrangements and on
extensions of credit involving correspondent banks. Specifically, a depository
institution is prohibited from extending credit to or offering any other
service, or fixing or varying the consideration for such extension of credit or
service, on the condition that the customer obtain some additional service from
the institution or certain of its affiliates or not obtain services of a
competitor of the institution subject to certain exceptions. In addition, a
depository institution with a correspondent banking relationship with another
depository institution is prohibited from extending credit to the executive
officers, directors and holders of more than 10% of the stock of the other
depository institution, unless such extension of credit is on substantially the
same terms as those prevailing at the time for comparable transactions with
other persons and does not involve more than the normal risk of repayment or
present other unfavorable features.
Real Estate Lending Policies
Under FDIC regulations which became effective March 19, 1993,
state-chartered non-member banks must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit that are
secured by liens or interest in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards,
including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies (the AInteragency
Guidelines") that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, call upon a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multi-family or other nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one-to-four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner-occupied one-to-four-family property), the limit is
85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one-to-four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
<PAGE>
Standards for Safety and Soundness
Under FDICIA, each federal banking agency is required to prescribe, by
regulation, safety and soundness standards for institutions under its authority.
The federal banking agencies, including the FDIC, have adopted standards
covering internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
employee compensation, fees and benefits, asset quality and earnings
sufficiency. These standards are in the form of broad guidelines for performance
that generally leave to each institution the methods for achieving the
objectives. The Company believes that its bank subsidiary meets the FDIC's
safety and soundness standards.
Federal Home Loan Bank System
The Company's bank subsidiary is a member of the FHLB System, which
consists of twelve regional Federal Home Loan Banks subject to supervision and
regulation by the Federal Housing Finance Board (AFHFB@). The Federal Home Loan
Banks provide a central credit facility primarily for member institutions. As a
member of the FHLB of San Francisco, the Company's bank subsidiary is required
to acquire and hold shares of capital stock in the FHLB of San Francisco in an
amount at least equal to 5% of its advances (borrowings).
The FHLB of San Francisco serves as a reserve or central bank for its
member institutions within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It offers policies and procedures established by the FHFB and the Board of
Directors of the FHLB of San Francisco. Long-term advances may only be made for
the purpose of providing funds for residential housing or housing-related
finance.
Federal Reserve System
Pursuant to regulations of the FRB, a bank must maintain average daily
reserves equal to 3.0% of the first $52 million of net transaction accounts,
above an exempt amount of $4.3 million, plus 10% on the remainder. This
percentage is subject to adjustment by the FRB. Because required reserves must
be maintained in the form of vault cash or in a non-interest bearing account at
a Federal Reserve bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of December 31, 1997,
the Company's bank subsidiary met its reserve requirements.
<PAGE>
Nevada Banking Laws and Supervision
Nevada state-chartered banks, such as the Company's bank subsidiary,
are also regulated and supervised by the Nevada Division. The Nevada Division is
required to regularly examine each state-chartered bank. The approval of the
Nevada Division is required to establish or close branches, to merge with
another bank, to form a bank holding company, to issue stock, or to undertake
many other activities. As a general rule, Nevada law permits a state-chartered
bank to perform the activities of a nationally-chartered bank.
Regulation of Holding Company
The Company is subject to examination, regulation and periodic
reporting under the BHCA, as administered by the FRB. The FRB has adopted
capital adequacy guidelines for bank holding companies on a consolidated basis
substantially similar to those of the FDIC for the Bank.
The Company is required to obtain the prior approval of the FRB to
acquire all, or substantially all, of the assets of any bank or bank holding
company. Prior FRB approval will be required for the Company to acquire direct
or indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would, directly
or indirectly, own or control more than 5% of any class of voting shares of such
bank or bank holding company.
The Company is required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the Company's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as Awell capitalized" under applicable
regulations of the FRB, that has received a composite A1@ or A2@ rating at its
most recent bank holding company inspection by the FRB, and that is not the
subject of any unresolved supervisory issues.
The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
<PAGE>
In addition, a bank holding company is prohibited generally from
engaging in, or acquiring 5% or more of any class of voting securities of any
company engaged in non-banking activities. One of the principal exceptions to
this prohibition is for activities found by FRB to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the FRB has determined by regulation to be
so closely related to banking as to be a proper incident thereto are: (1) making
or servicing loans; (ii) performing certain data processing services; (iii)
providing discount brokerage services; (iv) acting as fiduciary, investment or
financial advisor; (v) leasing personal or real property; (vi) making
investments in corporations or projects designed primarily to promote community
welfare; and (vii) acquiring a savings and loan association.
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989, depository institutions are liable to the FDIC for losses suffered or
anticipated by the FDIC in connection with the default of a commonly controlled
depository institution or any assistance provided by the FDIC to such an
institution in danger of default. This law would have potential applicability if
the Company ever acquired, as a separate subsidiary, a depository institution in
addition to its bank subsidiary.
There are no current plans for such an acquisition.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or letter of credit on
behalf of, the bank holding company or its subsidiaries, and on the investment
in or acceptance of stock or securities of such holding company or its
subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amounts of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal stockholders of the Company, its
bank subsidiary, any other subsidiary of the Company and related interests of
such persons. Moreover, subsidiaries of bank holding companies are prohibited
from engaging in certain tie-in arrangements (with the holding company or any of
its subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
Federal Securities Laws
The Company filed a registration statement with the SEC under the
Securities Act of 1933 (the "Securities Act") for the registration of the shares
of the Company's Common Stock which were exchanged pursuant to the
reorganization of the Bank into the Company. Upon completion of the
Reorganization, the outstanding shares of the Company's Common Stock were
registered with the SEC under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company is now subject to the information, proxy solicitation,
insider trading restrictions and other requirements under the Exchange Act.
<PAGE>
The registration under the Securities Act of shares of the Company's
Common Stock which were exchanged in the Reorganization does not cover the
resale of such shares. Shares of the Company's Common Stock purchased by persons
who are not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company are subject to the resale restrictions
of Rule 144 under the Securities Act. If the Company meets the current public
information requirements of Rule 144 under the Securities Act, each affiliate
(generally executive officers and directors) of the Company who complies with
the other conditions of Rule 144 (including those that require the affiliate's
sale to be aggregated with those of certain other persons) would be able to sell
in the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company, or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
Item 2 - Properties
The Company completed construction on the new corporate headquarters
building located on 2.2 acres in the Sierra Executive Center in November, 1995.
The building is approximately 26,000 square feet and houses the Bank's main
branch office, the Company's executive and administrative offices and the real
estate and commercial lending functions. The Company exercised its option to
purchase a one acre adjacent parcel for $174,240 in March, 1995 to facilitate
future expansion of the corporate headquarters facility, but has since
determined that such expansion would be too costly. The Company placed for sale
the one acre parcel adjacent to the headquarters facility. There currently
exists an offer and acceptance and an open escrow on the parcel in the amount of
$340,000 with closing expected either late in the first quarter or early in the
second quarter of 1998.
The Company owns the two story building and property located at 901 N.
Stewart St., Carson City, Nevada 89701. The building consists of approximately
7,360 square feet on a parcel of approximately .80 acres on the corner of N.
Stewart St. and E. Washington St. A branch office, and real estate and
commercial lending representatives occupy this facility.
In August, 1993, the Company opened a 3,600 square foot lending office
in Las Vegas and exercised an option on an additional 1,800 square feet adjacent
to the existing space in March, 1994. In April, 1997, due to fierce competition
which resulted in low lending volumes, high personnel turnover, and the
inability to find suitable management, the Company closed the Las Vegas office.
The existing lease runs through July, 1998.
<PAGE>
In January, 1996, the Company signed a lease for a branch site located
in south Reno in a shopping center anchored by a Raleys Supermarket. The branch
opened in February, 1997. The location, approximately seven miles from the
nearest existing Comstock Bank branch, is in a rapidly growing area at the end
of a new freeway extension.
In January, 1997, the Company signed a lease for a branch site located
in north Sparks, in an area known as Spanish Springs, in a shopping center
anchored by a Scolari's Supermarket. The branch opened in July, 1997. This
location will service another rapidly growing area where the Company had no
previous branch coverage.
In January, 1997, the Company signed a five year lease for 7,130
square feet of warehouse space to house its back office operation and in-house
mainframe computer system. The Company occupied the space, after renovation, in
March, 1997. This facility is located within one mile of the Company's
headquarters.
In March, 1997, the Company purchased a one acre corner parcel located
in a rapidly developing commercial/industrial area. Since the purchase, the
developer has begun the construction of a shopping center on the 2.3 acres
surrounding the Company's parcel. The parcel may be used for a future branch
site.
<PAGE>
The following table sets forth summary information with respect to
property presently leased by the Bank:
Current
Approximate Monthly
Address Square Feet Expiration Rental
4780 Caughlin Parkway(1) 4,140 4-30-2012 $4,250
Reno, Nevada
18100 Wedge Parkway(2) 3,000 2-15-2007 $4,800
Washoe County, Nevada
1200 Disc Drive(3) 3,200 8-01-2017 $7,600
Sparks, Nevada
1662 Hwy 395 South #101(4) 800 6-30-1998 $1,018
Minden, Nevada
333 N. Rancho Rd. #810(5) 5,003 7-31-1998 $7,293
Las Vegas, Nevada
5450 Riggins Court #3(6) 7,130 1-31-2002 $3,922
Reno, NV 89511
(1) Consists of a parcel of land in a regional shopping center in Reno on
which the Company has constructed a branch facility (the "Caughlin
branch"). The Company has three 5-year renewal options. The land lease
terms are as follows:
Years 1-5 $3,625 per month (through April, 1997)
Years 6-10 $4,250 per month
Years 11-15 $5,000 per month
Years 16-20 $5,833 per month
(2) Consists of a branch facility in a regional shopping center in south
Reno that was completed in February 1997 (the "Galena branch"). The
Company has four 5-year renewal options. The lease terms include $4,800
per month for the first two years with increases based on the CPI index
for Urban Wage Earners and Clerical Workers, West Coast Area.
(3) Consists of a branch facility in a regional shopping center north of
Sparks that was completed in July of 1997, (the "Sparks branch"). The
Company has one 10-year renewal option. The lease terms include $7,600
per month for the first two years with increases based on 75% of the
CPI index for Urban Wage Earners and Clerical Workers, West Coast Area.
<PAGE>
(4) This facility housed a lending office located approximately 15 miles
south of Carson City. The office was closed in November of 1997.
(5) This facility housed the Company's Las Vegas lending office and its
southern Nevada Builders' Control Unit. The office was closed in April
of 1997.
(6) This facility houses the Finance, Branch Central Support and Management
Information Systems Departments. The space was previously a warehouse
unit in a small office/warehouse center. The current lease is fixed at
$.55 per square foot for a five year period. The Company has one 5-year
option at $.75 per square foot for the first year and annual increases,
based on the Consumer Price Index for All Western States, not to exceed
$.80 per square foot.
Item 3 - Legal Proceedings
On November 19, 1991, the Company filed an action against Raymond B.
Graber, II (the ADefendant") in the First Judicial District Court of the State
of Nevada in and for Carson City seeking a declaratory judgment permitting the
Company to enforce the Defendant's personal guaranty of the debt of Outdoor
Posters, Inc. The Defendant filed his answer on June 19, 1992, admitting
execution of the guaranty but raising numerous affirmative defenses. Also, on
June 19, 1992, the Defendant filed a counterclaim against the Company alleging,
among other things, intentional misrepresentation, fraudulent nondisclosure,
negligent misrepresentation and fraud. In February, 1993, the District Court
ordered the dispute into arbitration. The arbitration hearing was held in
November, 1993. In December, 1993, the arbitrator awarded Graber an offset of
$28,443.24, but he affirmed that Graber's personal guaranty was enforceable and
that Graber remained liable for the balance of the amount owing on the loan
which Graber had guaranteed (in excess of $170,000.00 plus interest). Graber
disputed the interpretation of the arbitrator's award, claiming he had been
released from any further liability. The Company filed a motion to confirm the
arbitration award with the District Court, and requested the District Court to
remand the award to the arbitrator to clarify any ambiguity. The court remanded
the award to the arbitrator for clarification. The arbitrator reaffirmed that
the personal guaranty of Graber was enforceable and that he remained liable for
the amount owing on the loan. The arbitration award was then confirmed in
District Court. Graber appealed the District Court's decision to the Nevada
Supreme Court which reversed and remanded to the District Court. In the fall of
1996, the District Court in turn remanded the matter to the arbitrator for
answers to specific questions as to the basis for his determination. Graber
objected to the remand to the arbitrator and sought an order from the Supreme
Court prohibiting the District Court from remanding the matter to the arbitrator
for further clarification. In early 1997, the Supreme Court dismissed Graber=s
petition. The District Court then remanded the case to the arbitrator for
specific clarifications. The arbitrator rendered the clarifications, all of
which were favorable to the Company's position. The matter is now pending in the
District Court for confirmations of the Award of the arbitrator, as clarified.
<PAGE>
In 1996, a former employee filed a wrongful termination claim. The
claim alleges damages in excess of $125,000. The action was filed in Federal
District Court and remanded to binding arbitration as required by an employment
agreement between the former employee and the Company. The claimant finally
filed a demand for arbitration with the American Arbitration Association in late
1997. The case is in the early stages of the arbitration proceeding. Company
counsel does not believe any damages will be paid as of result the wrongful
termination claim.
Except for the above, there are no other pending legal proceedings,
other than ordinary routine litigation incidental to the business, to which the
Company is a party.
Item 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
Item 5 - Market for Common Equity and Related Matters
Page 44 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Holders of Record
Nevada Agency and Trust Co., the Bank's stock transfer agent, reported
that, as of December 31, 1997, that there were 459 registered shareholders. In
addition, management believes there are at least an additional 750 beneficial
owners holding stock in "street name" through brokerage firms and other nominee
owners.
Dividends
The payment of cash dividends is governed by Nevada Revised Statutes
("NRS") 661.215, 225 and 235. Under these provisions, cash dividends may only be
paid from positive undivided profits. In February, 1995, the Board declared a
10% stock dividend for holders of record on March 29, 1995. No dividends were
declared in 1996 or 1997 because the Board determined that the Company needed to
retain the majority of its capital for future expansion and capital investment.
In January, 1998, the Company announced a stock repurchase program for up to 5%
of the Company's outstanding stock at the discretion of management. The Board of
Directors determined that a stock repurchase plan would be preferable to cash
dividends due to the taxation of such dividends. Future determination as to cash
dividends will depend upon the earnings, capital requirements and financial
condition of the Company at that time, applicable legal restrictions and such
other factors as the Board of Directors may deem appropriate.
<PAGE>
Item 6 -- Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Pages 4 through 17 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 7 -- Financial Statements
The following information appearing in the Company's Annual Report to
Shareholders for the year ended December 31, 1997 is incorporated in this Annual
Report on Form 10-KSB as Exhibit 13.
Pages in
Annual Report
Annual Report Section
Independent Auditor's Report ............................................... 18
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996 ................................................. 19
Consolidated Statements of Income for Years
Ended December 31, 1997, 1996 and 1995 ..................................... 20
Consolidated Statement of Changes in Stockholder's Equity
Years Ended December 31, 1997, 1996 and 1995 ............................... 21
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995 ............................ 22-23
Notes to Consolidated Financial Statements .............................. 24-42
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1997 is not deemed
filed as part of this Annual Report on Form 10-KSB.
<PAGE>
Item 8 - Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9- Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Information concerning directors, executive officers, promoters and
control persons and compliance with Section 16(a) of the exchange Act is
incorporated by reference to the text under the captions "Election of Directors"
and "Executive Compensation", "Certain Business Relationships" and "Compliance
with Section 16(a) of the Exchange Act" in Registrant's Proxy Statement for its
1998 Annual Meeting of Shareholders.
The Company considers the following individual to be "significant
employees" of the Company's bank subsidiary under Item 401(b) of Regulation S-B:
Robert Hemsath was promoted to Sr. Vice-President of Commercial Lending
at Comstock Bank in January, 1997. He began working as a commercial loan officer
for Comstock in February, 1992 and held the title of Vice-President from
October, 1993 until his 1997 promotion.
Jackie Entrekin was promoted to Senior Vice-President of Branch
Administration in January, 1997. Prior to her appointment as Senior
Vice-President, Ms Entrekin held the title of Vice-President and prior to that
the title of Manager, Branch Administration. She began her employment with
Comstock Bank in November, 1993. Prior to her employment at Comstock, she held a
similar position at Sierra Bank (now SierraWest) in Reno.
Pamela Robinson was promoted to Vice-President of Real Estate Loan
Originations in January, 1997. She has been employed at Comstock Bank since
September, 1988 as the Manager of the Real Estate Loan Origination unit in Reno.
Christiana Duncan was hired in May, 1997 as the Vice-President of Real
Estate Lending Operations. Prior to that, Ms Duncan was the Executive
Vice-President of Golden Empire Mortgage in Bakersfield, CA.
<PAGE>
Max Doane was hired in January, 1997 as the Secondary Market Manager
and was promoted to Vice-President in January, 1998. Prior to his employment at
Comstock, Mr. Doane held a similar position at Crossland Mortgage Co. in Salt
Lake City, UT.
Lisa Milke was promoted to Vice-President, Controller in January, 1995.
She began work for Comstock Bank as its Controller in June, 1993. Prior to that,
she was a consultant to First Interstate Bank (now Wells Fargo).
Carol Rhodes was promoted to Vice-President, Human Resources and
Marketing in January, 1997. She began work at Comstock Bank in March, 1993 in
the Personnel/Marketing Department.
Item 10 - Executive Compensation
Information concerning executive compensation is incorporated by
reference to the text under the captions "Voting and Proxies", "Election of
Directors", and "Executive Compensation" in Registrant's Proxy Statement for its
1998 Annual Meeting of Shareholders.
Item 11 - Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated by reference to the text under the caption
"Voting and Proxies" in Registrant's Proxy Statement for its 1998 Annual Meeting
of Shareholders.
Item 12 - Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated by reference to the text under the caption "Certain Business
Relationships" in Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders.
Item 13 - Exhibits and Reports on Form 8-K
The exhibits and financial statement schedules filed as part of this
Registration Statement are as follows:
<PAGE>
(a) List of Exhibits.
Exhibit
No. Description
*2.1 Plan of Reorganization dated as of February 26, 1997 by and
among Comstock Bank and Comstock Bancorp (included as
Appendix A to the Proxy Statement--Prospectus filed as part
of Comstock Bancorp's Form S-4 Registration Statement on
March 25, 1997).
*3.1 Articles of Incorporation of Comstock Bancorp (included as
Appendix C to the Proxy Statement--Prospectus filed as part
of Comstock Bancorp's Form S-4 Registration Statement on
March 25, 1997).
*3.2 Bylaws of Comstock Bancorp (included as Appendix D to the
Proxy Statement--Prospectus filed as part of Comstock
Bancorp's Form S-4 Registration Statement on March 25, 1997).
*3.3 Composite Articles of Incorporation of Comstock Bank filed as
part of Comstock Bancorp's Form S-4 Registration Statement on
March 25, 1997.
*3.4 Composite Bylaws of Comstock Bank filed as part of Comstock
Bancorp's Form S-4 Registration Statement on March 25, 1997.
*4.1 Form of Stock Certificate of Comstock Bancorp filed as part
of Comstock Bancorp's Amendment No. 1 to Form S-4
Registration Statement on April 14, 1997.
*10.1 Employment Agreement dated as of December 14, 1992 between
the Bank and Robert Barone filed as part of Comstock
Bancorp's Form S-4 Registration Statement on March 25, 1997.
*10.2 Form of Assignment of and First Amendment to Employment
Agreement among Bancorp, the Bank and Robert Barone part of
Comstock Bancorp's Form S-4 Registration Statement on March
25, 1997.
*10.3 Employment Agreement dated as of December 14, 1992 between
the Bank and Larry Platz filed as part of Comstock Bancorp's
Form S-4 Registration Statement on March 25, 1997.
*10.4 Form of Assignment of and First Amendment to Employment
Agreement among Bancorp, the Bank and Larry Platz filed as
part of Comstock Bancorp's Form S-4 Registration Statement on
March 25, 1997.
*10.5 1992 Incentive Plan of Comstock Bank, as amended filed as
part of Comstock Bancorp's Form S-4 Registration Statement on
March 25, 1997.
*10.6 1992 Non-Employee Directors= Stock Option Plan, as amended
filed as part of Comstock Bancorp's Form S-4 Registration
Statement on March 25, 1997.
<PAGE>
*10.7 Form of Comstock Bank Payroll Deduction Stock Purchase Plan
filed as part of Comstock Bancorp's Form S-4 Registration
Statement on March 25, 1997.
*10.8 Form of Assignment of and First Amendment to Warrant
Agreement filed as part of Comstock Bancorp's Form S-4
Registration Statement on March 25, 1997.
**10.9 Comstock Bank Director Deferred Fee Agreement (entered into
by Directors Edward Allison, Stephen Benna, John Coombs,
Michael Dyer and Larry Platz).
**10.10 Comstock Bank/Bancorp Key Employee Deferred Fee Agreement
(entered into by Messrs. Robert Barone and Larry Platz).
**10.11 Comstock Bank Supplementary Salary Continuation Agreement and
First Amendment (entered into by Robert Barone and Larry
Platz).
**11 Statement re: Computation of Earnings per Share.
**13 1997 Annual Report to Shareholders.
**21 Subsidiaries of Registrant.
**27 Financial Data Schedule (filed only in EDGAR format)
* Previously filed.
** Filed herewith.
(b) Reports on Form 8-k
No reports on Form 8-K were filed during the three-month period ended
December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Comstock Bancorp has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMSTOCK BANCORP
Date: February 25, 1998 /s/ Robert Barone
------------------ -------------------------------------
Robert Barone
Chairman, Chief Executive Officer, Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: February 25, 1998 /s/ Edward Allison
------------------ -------------------------------------
Edward Allison, Director
Date: February 25, 1998 /s/ Stephen Benna
------------------ -------------------------------------
Stephen Benna, Director
Date: February 25, 1998 /s/ John Coombs
------------------- -------------------------------------
John Coombs, Director
Date: March 6, 1998 /s/ Michael Dyer
------------------- -------------------------------------
Michael Dyer, Director
Date: February 25, 1998 /s/ Mervyn Matorian
------------------- -------------------------------------
Mervyn Matorian, Director
Date: February 25, 1998 /s/ Samuel McMullen
------------------- -------------------------------------
Samuel McMullen, Director
Date: February 25, 1998 /s/ Ronald Zideck
------------------- -------------------------------------
Ronald Zideck, Director
Date: February 25, 1998 /s/ Larry Platz
------------------- -------------------------------------
Larry Platz, President, Secretary,
and Director
Date: February 25, 1998 /s/ Robert Barone
------------------- -------------------------------------
Robert Barone, Chairman, Chief
Executive Officer and Treasurer
(principal financial and accounting officer
<PAGE>
EXHIBIT 10.9
DIRECTOR DEFERRED COMPENSATION AGREEMENT
<PAGE>
COMSTOCK BANK
DIRECTOR DEFERRED FEE AGREEMENT
THIS AGREEMENT is made this day of ________________, 1997, by and between
COMSTOCK BANK, a Nevada corporation located in Reno, Nevada (the "Company"), and
______________________ (the "Director").
INTRODUCTION
To encourage the Director to remain a member of the Company's Board of
Directors, the Company is willing to provide to the Director a deferred fee
opportunity. The Company will pay the benefits from its general assets.
AGREEMENT
The Director and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the
following words and phrases shall have the meanings specified:
1.1.1 "Change of Control" means the acquisition, directly
or indirectly, by any "person" (as such term is defined for purposes of
Section 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Exchange
Act")) of the beneficial ownership (as such term is defined for purposes
of Section 13(d)(1) of the Exchange Act) of the shares of the Company
which, when added to the other shares the beneficial ownership of which
is held by such acquiror, shall result in such acquiror owning more than
forty percent (40%) of the combined voting power of the Company's then
outstanding voting securities. Not included in the foregoing is an
acquisition of such shares by:
(a) the Company or any subsidiary or affiliate of the
Company; or
<PAGE>
(b) any person (as defined above) who on the date of
this Agreement is a director of the Company or
whose shares or stock therein are treated as
beneficially owned (as defined in Rule 13d-3 of
the Exchange Act) by any such director.
1.1.2 "Code" means the Internal Revenue Code of 1986, as
amended.
1.1.3 "Disability" means the Director's inability to
perform substantially all normal duties of a director, as determined by
the Company's disability insurer pursuant to the terms of its disability
policy on the Director or, if no such insurance policy is in force, by
the Company's Board of Directors in its sole discretion. As a condition
to any benefits, the Company may require the Director to submit to such
physical or mental evaluations and tests as the Board of Directors deems
appropriate.
1.1.4 "Election Form" means the Form attached as Exhibit
A.
1.1.5 "Fees" means the total annual fees payable to the
Director.
1.1.6 "Normal Termination Age" means the Director's 65th
birthday.
1.1.7 "Normal Termination Date" means the later of the
Normal Termination Age or the Director's Termination of Service.
1.1.8 "Projected Benefit" means the amount that would have
been deemed credited to the Director's Deferral Account balance as of the
Distribution Date had the Director continued to defer fees in the amount
he was deferring on the date of his death and interest is credited at
8.0%. Any changes in the deferral amount or the crediting rate will
require a recalculation of the Projected Benefit.
1.1.9 "Termination of Service" means the Director ceasing
to be a member of the Company's Board of Directors for any reason
whatsoever.
Article 2
Deferral Election
2.1 Initial Election. The Director shall make an initial deferral
election under this Agreement by filing with the Company a signed Election Form
within fifteen (15) days after the date of this Agreement. The Election Form
shall set forth the amount of Fees to be deferred. The Election Form shall be
effective to defer only Fees earned after the date the Election Form is received
by the Company.
<PAGE>
2.2 Election Changes
2.2.1 Generally. The Director may modify the amount of
Fees to be deferred annually by filing a new Election Form with the
Company and obtaining written approval by the Board of Directors of the
Company. The modified deferral shall not be effective until the calendar
year following the year in which the subsequent Election Form is received
by the Company.
2.2.2 Hardship. If an unforeseeable financial emergency
arising from the death of a family member, divorce, sickness, injury,
catastrophe or similar event outside the control of the Director occurs,
the Director, by written instructions to the Company may reduce future
deferrals under this Agreement.
Article 3
Deferral Account
3.1 Establishing and Crediting. The Company shall establish a Deferral
Account on its books for the Director, and shall credit to the Deferral Account
the following amounts:
3.1.1 Deferrals. The Fees deferred by the Director as of
the time the Fees would have otherwise been paid to the Director.
3.1.2 Matching Contribution. A matching contribution equal
to (and credited to the Deferral Account at the same time) the amounts
credited to the Deferral Account under Section 3.1.1, subject to an
annual maximum matching contribution of twenty-five percent (25%) of the
first twelve thousand dollars ($12,000) of the Compensation deferred
annually by the Director.
3.1.3 Interest. On each December 31st after the date of
this Agreement, interest shall be credited on the account balance since
the preceding credit under this Section 3.1.2, if any, equal to the then
effective rate as set by the Board of Directors annually in its sole and
absolute discretion but in no case shall it exceed the Company's Prime
Lending Rate plus two percent (2%).
3.2 Statement of Accounts. The Company shall provide to the
Director, within one hundred twenty (120) days after the end of each calendar
year, a statement setting forth the Deferral Account balance, which shall
separately account for Deferrals and Matching Contributions.
3.3 Accounting Device Only. The Deferral Account is solely a
device for measuring amounts to be paid under this Agreement. The Deferral
Account is not a trust fund of any kind. The Director is a general unsecured
creditor of the Company for the payment of benefits. The benefits represent the
mere Company promise to pay such benefits. The Director's rights are not subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment, or garnishment by the Director's creditors.
<PAGE>
Article 4
Lifetime Benefits
4.1 Normal Termination Benefit. Upon the Director's Normal Termination
Date, the Company shall pay to the Director the benefit described in this
Section 4.1.
4.1.1 Amount of Benefit. The benefit under this Section 4.1 is the
Deferral Account balance at the Director's Termination of Service.
4.1.2 Payment of Benefit. Unless a lump sum payment was elected on
Exhibit A, the Company shall pay the benefit to the Director in one
hundred fifty-six (156) equal monthly installments commencing on the
first day of the month following the Director's Termination of Service.
The Company shall annuitize the Deferral Account balance using a
reasonable interest rate as determined by the Company in its sole and
absolute discretion.
4.2 Early Termination Benefit. If the Director terminates service as a
director before the Normal Termination Age for reasons other than death or
Disability, the Company shall pay to the Director the benefit described in this
Section 4.2.
4.2.1 Amount of Benefit. The benefit under this Section 4.2 is
calculated by recomputing the Deferral Account balance at the Director's
Termination of Service from its inception with the following
modifications:
4.2.2 Payment of Benefit. Unless the Board of Directors agrees, in
its sole and absolute discretion to change the payment of benefit to a
lump sum payment, the Company shall pay the benefit to the Director in
one hundred fifty six (156) equal monthly installments commencing on the
first day of the month following the Director's Normal Termination Age.
The Company shall annuitize the Deferral Account balance using a
reasonable interest rate as determined by the Company in its sole and
absolute discretion.
4.3 Disability Benefit. Upon Termination of Service for Disability prior
to the Normal Termination Age, the Company shall pay to the Director the benefit
described in this Section 4.3.
4.3.1 Amount of Benefit. The benefit under this Section 4.3 is the
Deferral Account balance at the Director's Termination of Service.
<PAGE>
4.3.2 Payment of Benefit. Unless the Board of Directors agrees ,
in its sole and absolute discretion to change the payment of benefit to a
lump sum payment, the Company shall pay the benefit to the Director in
one hundred fifty-six (156) equal monthly installments commencing on the
first day of the month following the Director's Normal Termination Age.
The Company shall annuitize the Deferral Account balance using a
reasonable interest rate as determined by the Company in its sole and
absolute discretion.
4.4 Change of Control Benefit. Upon a Change of Control while the
Director is in the active service of the Company, the Company shall pay to the
Director the benefit described in this Section 4.4 in lieu of any other benefit
under this Agreement.
4.4.1 Amount of Benefit. The benefit under this Section
4.4 is the Deferral Account balance at the date of the Director's
Termination of Service.
4.4.2 Payment of Benefit. The Company shall pay the
benefit to the Director in a lump sum within ninety (90) days after
Termination of Service
4.5 Hardship Distribution. Upon the Company's determination in its sole
and absolute discretion (following petition by the Director) that the Director
has suffered an unforeseeable financial emergency as described in Section 2.2.2,
the Company shall distribute to the Director all or a portion of the Deferral
Account balance as determined by the Company, but in no event shall the
distribution be greater than is necessary to relieve the financial hardship.
Article 5
Death Benefits
5.1 Death During Active Service. If the Director dies while in the active
service of the Company, the Company shall pay to the Director's beneficiary the
benefit described in this Section 5.1.
5.1.1 Amount of Benefit. The benefit amount under Section 5.1 is
the Projected Benefit. However in no event shall the Projected Benefit
exceed Seventy-five thousand dollars ($75,000) per year.
5.1.2 Payment of Benefit. Unless the Board of Directors agrees in
its sole and absolute discretion to change the payment of benefit to a
lump sum payment, the Company shall pay the benefit to the beneficiary in
one hundred fifty-six (156) equal monthly installments commencing on the
first day of the month following the Director's Death. The Company shall
amortize the Deferral Account balance using a reasonable discount rate as
determined by the Company in its sole discretion.
<PAGE>
5.2 Death During Benefit Period. If the Director dies after benefit
payments have commenced under this Agreement but before receiving all such
payments, the Company shall pay the remaining benefits to the Director's
beneficiary at the same time and in the same amounts they would have been paid
to the Director had the Director survived.
Article 6
Beneficiaries
6.1 Beneficiary Designations. The Director shall designate a beneficiary
by filing a written designation with the Company. The Director may revoke or
modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Director and accepted by
the Company during the Director's lifetime. The Director's beneficiary
designation shall be deemed automatically revoked if the beneficiary predeceases
the Director, or if the Director names a spouse as beneficiary and the marriage
is subsequently dissolved. If the Director dies without a valid beneficiary
designation, all payments shall be made to the Director's estate.
6.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incompetent, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incompetent
person or incapable person. The Company may require proof of incompetence,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
Article 7
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement that is attributable to
matching contributions under Section 3.1.2 and interest earned under Section
3.1.3 on such contributions:
7.1 Termination for Cause. If the Company terminates the Director's
service as a director for:
7.1.1 Conviction of a felony or of a gross misdemeanor involving
moral turpitude; or 7.1.2 Fraud or willful violation of any law
resulting in an adverse financial effect on the Company.
7.2 Suicide. If the Director commits suicide within two years after the
date of this Agreement, or if the Director has made any material misstatement of
fact on any application for life insurance purchased by the Company.
<PAGE>
Article 8
Claims and Review Procedures
8.1 Claims Procedure. The Company shall notify any person or
entity that makes a claim against the Agreement (the "Claimant") in writing,
within ninety (90) days of Claimant's written application for benefits, of
Claimant's eligibility or ineligibility for benefits under the Agreement. If the
Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (1) the specific reasons for such denial,
(2) a specific reference to the provisions of the Agreement on which the denial
is based, (3) a description of any additional information or material necessary
for the Claimant to perfect Claimant's claim, and a description of why it is
needed, and (4) an explanation of the Agreement's claims review procedure and
other appropriate information as to the steps to be taken if the Claimant wishes
to have the claim reviewed. If the Company determines that there are special
circumstances requiring additional time to make a decision, the Company shall
notify the Claimant of the special circumstances and the date by which a
decision is expected to be made, and may extend the time for up to an additional
ninety-day period. All Claims shall be in writing to the Company's Board of
Directors.
8.2 Review Procedure. If the Claimant is determined by the Company
not to be eligible for benefits, or if the Claimant believes that Claimant is
entitled to greater or different benefits, the Claimant shall have the
opportunity to have such claim reviewed by the Company by filing a petition for
review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
Claimant believes entitle Claimant to benefits or to greater or different
benefits. Within sixty (60) days after receipt by the Company of the petition,
the Company shall afford the Claimant (and counsel, if any) an opportunity to
present Claimant's position to the Company orally or in writing, and the
Claimant (or counsel) shall have the right to review the pertinent documents.
The Company shall notify the Claimant of its decision in writing within the
sixty-day period, stating specifically the basis of its decision, written in a
manner calculated to be understood by the Claimant and the specific provisions
of the Agreement on which the decision is based. If, because of the need for a
hearing, the sixty-day period is not sufficient, the decision may be deferred
for up to another sixty-day period at the election of the Company, but notice of
this deferral shall be given to the Claimant.
Article 9
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Director.
<PAGE>
Article 10
Miscellaneous
10.1 Binding Effect. This Agreement shall bind the Director
and the Company, and their beneficiaries, survivors, executors, administrators
and transferees.
10.2 No Guarantee of Service. This Agreement is not a contract for
services. It does not give the Director the right to remain a director of the
Company, nor does it interfere with the shareholders' rights to replace the
Director. It also does not require the Director to remain a director nor
interfere with the Director's right to terminate services at any time.
10.3 Non-Transferability. Benefits under this Agreement cannot be
sold, transferred, assigned, pledged, attached or encumbered in any manner.
10.4 Tax Withholding. The Company shall withhold any taxes that
are required to be withheld from the benefits provided under this Agreement.
10.5 Applicable Law. The Agreement and all rights hereunder shall
be governed by the laws of the State of Nevada, except to the extent preempted
by the laws of the United States of America.
10.6 Unfunded Arrangement. The Director and beneficiary are
general unsecured creditors of the Company for the payment of benefits under
this Agreement. The benefits represent the mere promise by the Company to pay
such benefits. The rights to benefits are not subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any insurance on the Director's life is
a general asset of the Company to which the Director and beneficiary have no
preferred or secured claim.
10.7 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Director as to the subject matter hereof. No rights
are granted to the Director by virtue of this Agreement other than those
specifically set forth herein.
10.8 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to:
10.8.1 Interpreting the provisions of the Agreement;
10.8.2 Establishing and revising the method of accounting for the
Agreement;
10.8.3 Maintaining a record of benefit payments; and
10.8.4 Establishing rules and prescribing any forms necessary or
desirable to administer the Agreement.
<PAGE>
IN WITNESS WHEREOF, the Director and a duly authorized Company officer
have signed this Agreement.
DIRECTOR: COMPANY:
COMSTOCK BANK
________________________________ By _______________________
Title _______________________
<PAGE>
EXHIBIT A
TO
DEFERRED COMPENSATION AGREEMENT
Deferral Election Form
I elect to defer compensation under my Deferred Compensation Agreement with
Comstock Bank as follows:
Bank Employees
Amount of Deferral
=============================
(Initial and Complete Only One)
I elect to defer __________% of salary
I elect to defer $__________ of salary
I elect not to defer salary
Directors
Amount of Deferral
=============================
(Initial and Complete Only One)
I elect to defer ___________% of my
Director fees
I elect to defer $___________ of my
Director fees
I elect not to defer any Director fees
I understand that I may change the amount of my deferrals by filing a new
election form with Comstock Bank; provided, however, that any subsequent
election will not be effective until the calendar year following the year in
which the new election is received by Comstock Bank.
<PAGE>
Form of Benefit
I elect to receive benefits under the Agreement in the following form:
(Initial One)
Lump sum
Equal monthly installments for months
Beneficiary Designation
I designate the following as beneficiary of benefits under the Deferred
Compensation Agreement, payable following my death:
Primary:
Contingent:
Note: To name a trust as beneficiary, please provide the name of the
trustee and the exact date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new
written designation with Comstock Bank. I further understand that the
designations will be automatically revoked if the beneficiary predeceases me or,
if I have named my spouse as beneficiary, in the event of the dissolution of our
marriage.
Signature .
Date .
Accepted by Comstock Bank this day of , 19
------ ------------------------------
By
Title
<PAGE>
Exhibit 10.10
KEY EMPLOYEE DEFERRED COMPENSATION AGREEMENT
<PAGE>
COMSTOCK BANK
KEY EMPLOYEE DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT is made this day of ________________, 1997, by and between
COMSTOCK BANK, a Nevada corporation located in Reno, Nevada (the "Company"), and
______________________ (the "Key Employee").
INTRODUCTION
To encourage the Key Employee to remain an employee of the Company, the
Company is willing to provide to the Key Employee a deferred compensation
opportunity together with Company matching contributions. The Company will pay
the benefits from its general assets.
AGREEMENT
The Key Employee and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the
following words and phrases shall have the meanings specified:
1.1.1 "Change of Control" means the acquisition, directly
or indirectly, by any "person" (as such term is defined for purposes of
Section 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Exchange
Act")) of the beneficial ownership (as such term is defined for purposes
of Section 13(d)(1) of the Exchange Act) of the shares of the Company
which, when added to the other shares the beneficial ownership of which
is held by such acquiror, shall result in such acquiror owning more than
forty percent (40%) of the combined voting power of the Company's then
outstanding voting securities. Not included in the foregoing is an
acquisition of such shares by:
(a) the Company or any subsidiary or affiliate of the
Company; or
<PAGE>
(b) any person (as defined above) who on the date of
this Agreement is a director of the Company or
whose shares or stock therein are treated as
beneficially owned (as defined in Rule 13d-3 of
the Exchange Act) by any such director.
1.1.2. "Code" means the Internal Revenue Code of 1986 and
the regulations thereunder, as amended from time to time..
1.1.3. "Disability" means the Key Employee's inability to
perform substantially all normal duties of the Key Employee, as
determined by the Company's disability insurer pursuant to the terms of
its disability policy on the Key Employee or, if no such insurance policy
is in force, by the Company's Board of Directors in its sole and absolute
discretion. As a condition to any benefits, the Company may require the
Key Employee to submit to such physical or mental evaluations and tests
as the Board of Directors deems appropriate.
1.1.4. "Election Form" means the Form attached as Exhibit
A.
1.1.5. "Compensation" means the total annual base salary
payable to the Executive plus any bonus payable to the Key Employee.
1.1.6. "Normal Retirement Age" means the Key Employee's
65th birthday.
1.1.7. "Normal Retirement Date" means the later of the
Normal Retirement Age or the Key Employee's Termination of Employment.
1.1.8. "Projected Benefit" means the amount that would
have been deemed credited to the Key Employee's Deferral Account balance
as of the Distribution Date had the Key Employee continued to defer
Compensation in the amount he was deferring on the date of his death and
interest is credited at the then effective rate as set by the Board of
Directors annually in its sole and absolute discretion..
1.1.9. "Termination of Employment" means the Key Employee
ceasing to be employed by the Company for any reason whatsoever.
<PAGE>
Article 2
Deferral Election
2.1 Initial Election. The Key Employee shall make an initial
deferral election under this Agreement by filing with the Company a signed
Election Form within fifteen (15) days after the date of this Agreement. The
Election Form shall set forth the amount of Compensation to be deferred. The
Election Form shall be effective to defer only Compensation earned after the
date the Election Form is received by the Company.
2.2 Election Changes
2.2.1 Generally. The Key Employee may modify the amount of
Compensation to be deferred annually by filing a new Election Form with
the Company and obtaining written approval by the Board of Directors of
the Company. The modified deferral shall not be effective until the
calendar year following the year in which the subsequent Election Form is
received by the Company.
2.2.2 Hardship. If an unforeseeable financial emergency
arising from the death of a family member, divorce, sickness, injury,
catastrophe or similar event outside the control of the Key Employee
occurs, the Key Employee, by written instructions to the Company may
reduce future deferrals under this Agreement.
Article 3
Deferral Account
3.1 Establishing and Crediting. The Company shall establish a Deferral
Account on its books for the Key Employee, and shall credit to the Deferral
Account the following amounts:
3.1.1 Deferrals. The Compensation deferred by the Key
Employee as of the time the Compensation would have otherwise been paid
to the Key Employee.
3.1.2 Matching Contribution. A matching contribution equal
to (and credited to the Deferral Account at the same time) the amounts
credited to the Deferral Account under Section 3.1.1, subject to an
annual maximum matching contribution of fifteen percent (15%) of the
first Twelve Thousand Dollars ($12,000) of the Compensation deferred
annually by the Key Employee.
<PAGE>
3.1.3 Interest. On each January 1st after the date of this
Agreement, interest shall be credited on the account balance since the
preceding credit under this Section 3.1.2, if any, equal to the then
effective rate as set by the Board of Directors annually in its sole and
absolute discretion but in no case shall it exceed the Company's Prime
Lending Rate plus two percent (2%).
3.2 Statement of Accounts. The Company shall provide to the Key
Employee, within one hundred twenty (120) days after each anniversary of this
Agreement, a statement setting forth the Deferral Account balance.
3.3 Accounting Device Only. The Deferral Account is solely a
device for measuring amounts to be paid under this Agreement. The Deferral
Account is not a trust fund of any kind. The Key Employee is a general unsecured
creditor of the Company for the payment of benefits. The benefits represent the
mere Company promise to pay such benefits. The Key Employee's rights are not
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by the Key Employee's creditors.
Article 4
Lifetime Benefits
4.1 Normal Retirement Benefit. Upon the Key Employee's Normal Retirement
Date, the Company shall pay to the Key Employee the benefit described in this
Section 4.1.
4.1.1 Amount of Benefit. The benefit under this Section
4.1 is the Deferral Account balance at the Key Employee's Termination of
Employment.
4.1.2 Payment of Benefit. The Company shall pay the
benefit to the Key Employee in one hundred fifty-six (156) equal monthly
installments commencing on the first day of the month following the Key
Employee's Termination of Employment. The Company shall amortize the
Deferral Account balance using a reasonable Interest rate as determined
by the Company in its sole discretion.
<PAGE>
4.2 Early Retirement Benefit. If the Key Employee terminates employment
before the Normal Retirement Age for reasons other than death or Disability, the
Company shall pay to the Key Employee the benefit described in this Section 4.2.
4.2.1 Amount of Benefit. The benefit under this Section
4.2 is calculated by recomputing the Deferral Account balance from its
inception with the following modifications:
4.2.1.1 Company Match Reduction. In the event Key Employee
is not employed by the Company during the five (5) full calendar years
immediately following the execution of this Agreement, the Company's
matching contributions under Section 3.1.2 shall be reduced by twenty
percent (20%) for each full calendar year less than five (5) for which
the Key Employee is employed by the Company. If this Agreement is signed
by the Key Employee prior to May 31, 1997 then they shall be credited
with one (1) full calendar years vesting for 1997.
4.2.2 Payment of Benefit. Unless the Board of Directors
agrees in its sole and absolute discretion to change the payment of
benefit to a lump sum payment, the Company shall pay the benefit to the
Key Employee in one hundred fifty-six (156) equal monthly installments
commencing on the first day of the month following the Key Employee's
Normal Retirement Age. The Company shall annuitize the Deferral Account
balance using a reasonable interest rate as determined by the Company in
its sole and absolute discretion.
4.3 Disability Benefit. Upon Termination of Employment for
Disability prior to the Normal Retirement Age, the Company shall pay to the Key
Employee the benefit described in this Section 4.3.
4.3.1 Amount of Benefit. The benefit under this Section
4.3 is the Deferral Account balance at the Key Employee's Termination of
Employment.
4.3.2 Payment of Benefit. Unless the Board of Directors
agrees, in its sole and absolute discretion, to change the payment of
benefit to a lump sum payment, the Company shall pay the benefit to the
Key Employee in one hundred fifty-six (156) equal monthly installments
commencing on the first day of the month following the Key Employee's
Termination of Employment. The Company shall annuitize the Deferral
Account balance using a reasonable interest rate as determined by the
Company in its sole and absolute discretion, without adjustment for
vesting.
<PAGE>
4.4 Change of Control Benefit. Upon a Change of Control while the Key
Employee is in the active employment of the Company, the Company shall pay to
the Key Employee the benefit described in this Section 4.4 in lieu of any other
benefit under this Agreement.
4.4.1 Amount of Benefit. The benefit under this Section
4.4 is the Deferral Account balance at the date of the Key Employee's
Termination of Employment.
4.4.2 Payment of Benefit. The Company shall pay the
benefit to the Key Employee in a lump sum within ninety (90) days after
Termination of Employment
4.5 Hardship Distribution. Upon the Board of Director's determination, in
their sole and absolute discretion (following petition by the Key Employee) that
the Key Employee has suffered an unforeseeable financial emergency as described
in Section 2.2.2, the Board of Directors shall distribute to the Key Employee
all or a portion of the Deferral Account balance as determined by the Board of
Directors, but in no event shall the distribution be greater than is necessary
to relieve the financial hardship.
Article 5
Death Benefits
5.1 Death During Active Employment. If the Key Employee dies while in the
active employment of the Company, the Company shall pay to the Key Employee's
beneficiary the benefit described in this Section 5.1.
<PAGE>
5.1.1 Amount of Benefit. The benefit amount under Section
5.1 is the Projected Benefit without adjustment for vesting. However, in
no event shall the Projected Benefit exceed Seventy-five Thousand Dollars
($75,000) per year.
5.1.2 Payment of Benefit. Unless the Board of Directors
agrees in its sole and absolute discretion to change the payment of
benefits to a lump sum payment, the Company shall pay the benefit to the
beneficiary in one hundred fifty-six (156) equal monthly installments
commencing on the first day of the month following the Key Employee's
Death. The Company shall amortize the Deferral Account balance using a
reasonable discount rate as determined by the Company in its sole and
absolute discretion.
5.2 Death During Benefit Period. If the Key Employee dies after benefit
payments have commenced under this Agreement but before receiving all such
payments, the Company shall pay the remaining benefits to the Key Employee's
beneficiary at the same time and in the same amounts they would have been paid
to the Key Employee had the Key Employee survived.
Article 6
Beneficiaries
6.1 Beneficiary Designations. The Key Employee shall designate a
beneficiary by filing a written designation with the Company. The Key Employee
may revoke or modify the designation at any time by filing a new designation.
However, designations will only be effective if signed by the Key Employee and
accepted by the Company during the Key Employee's lifetime. The Key Employee's
beneficiary designation shall be deemed automatically revoked if the beneficiary
predeceases the Key Employee, or if the Key Employee names a spouse as
beneficiary and the marriage is subsequently dissolved. If the Key Employee dies
without a valid beneficiary designation, all payments shall be made to the Key
Employee's estate.
6.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incompetent, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incompetent
person or incapable person. The Company may require proof of incompetence,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
<PAGE>
Article 7
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement that is attributable to
matching contributions under Section 3.1.2 and interest earned under Section
3.1.3 on such contributions:
7.1 Termination for Cause. If the Company terminates the Key
Employee's employment for:
7.1.1 Conviction of a felony or of a gross misdemeanor
involving moral turpitude; or: 7.1.2 Fraud or willful violation of any
law resulting in an adverse financial effect on the Company.
7.2 Suicide. If the Key Employee commits suicide within two years
after the date of this Agreement, or if the Key Employee has made any material
misstatement of fact on any application for life insurance purchased by the
Company.
Article 8
Claims and Review Procedures
8.1 Claims Procedure. The Company shall notify any person or
entity that makes a claim against the Agreement (the "Claimant") in writing,
within ninety (90) days of Claimant's written application for benefits, of
Claimant's eligibility or ineligibility for benefits under the Agreement. If the
Company determines that the Claimant is not eligible for benefits or full
benefits, the notice shall set forth (1) the specific reasons for such denial,
(2) a specific reference to the provisions of the Agreement on which the denial
is based, (3) a description of any additional information or material necessary
for the Claimant to perfect Claimant's claim, and a description of why it is
needed, and (4) an explanation of the Agreement's claims review procedure and
other appropriate information as to the steps to be taken if the Claimant wishes
to have the claim reviewed. If the Company determines that there are special
circumstances requiring additional time to make a decision, the Company shall
notify the Claimant of the special circumstances and the date by which a
decision is expected to be made, and may extend the time for up to an additional
ninety-day period. All claims shall be made in writing to the Company's Board of
Directors.
<PAGE>
8.2 Review Procedure. If the Claimant is determined by the Company
not to be eligible for benefits, or if the Claimant believes that Claimant is
entitled to greater or different benefits, the Claimant shall have the
opportunity to have such claim reviewed by the Company by filing a petition for
review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
Claimant believes entitle Claimant to benefits or to greater or different
benefits. Within sixty (60) days after receipt by the Company of the petition,
the Company shall afford the Claimant (and counsel, if any) an opportunity to
present Claimant's position to the Company orally or in writing, and the
Claimant (or counsel) shall have the right to review the pertinent documents.
The Company shall notify the Claimant of its decision in writing within the
sixty-day period, stating specifically the basis of its decision, written in a
manner calculated to be understood by the Claimant and the specific provisions
of the Agreement on which the decision is based. If, because of the need for a
hearing, the sixty-day period is not sufficient, the decision may be deferred
for up to another sixty-day period at the election of the Company, but notice of
this deferral shall be given to the Claimant.
Article 9
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Key Employee.
Article 10
Miscellaneous
10.1 Binding Effect. This Agreement shall bind the Key Employee
and the Company, and their beneficiaries, survivors, executors, administrators
and transferees.
<PAGE>
10.2 No Guarantee of Employment. This Agreement is not a contract
of employment. It does not give the Key Employee the right to remain employed
with the Company, nor does it interfere with the company's right to terminate
the Key Employee. It also does not require the Key Employee to continue
employment with the Company nor interfere with the Key Employee's right to
resign at any time.
10.3 Non-Transferability. Benefits under this Agreement cannot be
sold, transferred, assigned, pledged, attached or encumbered in any manner.
10.4 Tax Withholding. The Key Employee shall withhold any taxes
that are required to be withheld from the benefits provided under this
Agreement.
10.5 Applicable Law. The Agreement and all rights hereunder shall
be governed by the laws of the State of Nevada, except to the extent preempted
by the laws of the United States of America.
10.6 Unfunded Arrangement. The Key Employee and beneficiary are
general unsecured creditors of the Company for the payment of benefits under
this Agreement. The benefits represent the mere promise by the Company to pay
such benefits. The rights to benefits are not subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any insurance on the Key Employee's
life is a general asset of the Company to which the Key Employee and beneficiary
have no preferred or secured claim.
10.7 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Key Employee as to the subject matter hereof. No
rights are granted to the Key Employee by virtue of this Agreement other than
those specifically set forth herein.
10.8 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to:
10.8.1 Interpreting the provisions of the Agreement;
10.8.2 Establishing and revising the method of accounting
for the Agreement;
10.8.3 Maintaining a record of benefit payments; and
<PAGE>
10.8.4 Establishing rules and prescribing any forms
necessary or desirable to administer the Agreement.
IN WITNESS WHEREOF, the Key Employee and a duly authorized Company
officer have signed this Agreement.
KEY EMPLOYEE: COMPANY:
COMSTOCK BANK
________________________________ By _______________________
Title _______________________
<PAGE>
EXHIBIT A
TO
DEFERRED COMPENSATION AGREEMENT
Deferral Election Form
I elect to defer compensation under my Deferred Compensation Agreement with
Comstock Bank as follows:
Bank Employees
Amount of Deferral
=============================
(Initial and Complete Only One)
I elect to defer ______________% of salary
I elect to defer $______________ of salary
I elect not to defer salary
Directors
Amount of Deferral
=============================
(Initial and Complete Only One)
I elect to defer _____________% of my
Director fees
I elect to defer $_____________ of my
Director fees
I elect not to defer any Director
fees
I understand that I may change the amount of my deferrals by filing a new
election form with Comstock Bank; provided, however, that any subsequent
election will not be effective until the calendar year following the year in
which the new election is received by Comstock Bank.
<PAGE>
Form of Benefit
I elect to receive benefits under the Agreement in the following form:
(Initial One)
Lump sum
Equal monthly installments for months
Beneficiary Designation
I designate the following as beneficiary of benefits under the Deferred
Compensation Agreement, payable following my death:
Primary:
Contingent:
Note: To name a trust as beneficiary, please provide the name of the
trustee and the exact date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new
written designation with Comstock Bank. I further understand that the
designations will be automatically revoked if the beneficiary predeceases me or,
if I have named my spouse as beneficiary, in the event of the dissolution of our
marriage.
Signature
Date
Accepted by Comstock Bank this day of , 19
------ ------------------------------
By
Title
<PAGE>
EXHIBIT 10.11
SALARY CONTINUATION AGREEMENT AND FIRST AMENDMENT
<PAGE>
COMSTOCK BANK
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this day of ________________, 199___, by and
between COMSTOCK BANK, a Nevada corporation located in Reno, Nevada (the
"Company"), and ROBERT BARONE (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words
and phrases shall have the meanings specified:
1.1.1 "Change of Control" means the acquisition, directly or indirectly,
by any "person" (as such term is defined for purposes of Section 13(d)
and 14(d) of the Securities Exchange Act of 1934 ("Exchange Act")) of the
beneficial ownership (as such term is defined for purposes of Section
13(d)(1) of the Exchange Act) of the shares of the Company which, when
added to the other shares the beneficial ownership of which is held by
such acquiror, shall result in such acquiror owning more than forty
percent (40%) of the combined voting power of the Company's then
outstanding voting securities. Not included in the foregoing is an
acquisition of such shares by:
(a) the Company or any subsidiary or affiliate of the
Company; or
(b) any person (as defined above) who on the date of
this Agreement is a director of the Company or
whose shares or stock therein are treated as
beneficially owned (as defined in Rule 13d-3 of
the Exchange Act) by any such director.
1.1.2 "Code" means the Internal Revenue Code of 1986, as
amended.
<PAGE>
1.1.3 "Disability" means the Executive's inability to
perform substantially all normal duties of the Executive, as determined
by the Company's disability insurer pursuant to the terms of its
disability policy on the Executive or, if no such insurance policy is in
force, by the Company's Board of Directors in its sole and absolute
discretion. As a condition to any benefits, the Company may require the
Executive to submit to such physical or mental evaluations and tests as
the Company's Board of Directors deems appropriate.
1.1.4 "Normal Retirement Age" means the Executive's 65th
birthday.
1.1.5 "Normal Retirement Date" means the later of the
Executive's Normal Retirement Age or the date of Termination of
Employment.
1.1.6 "Plan Year" means a twelve-month period commencing
on the 1st day of May and ending on the 30th day of April of each year.
The initial Plan Year shall commence on the effective date of this
Agreement.
1.1.7 "Termination of Employment" means the Executive
ceasing to be employed by the Company for any reason whatsoever other
than by reason of an approved leave of absence.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. If the Executive terminates employment on
or after the Normal Retirement Age for reasons other than death, the Company
shall pay to the Executive the benefit described in this Section 2.1 in lieu of
any other benefit under this Agreement.
2.1.1 Amount of Benefit. The annual benefit under this
Section 2.1 is Sixty-six thousand nine hundred dollars ($66,900) for
Robert Barone and Forty-four thousand seven hundred dollars ($44,700) for
Larry Platz.
2.1.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on the
first day of each month commencing on the month following the Normal
Retirement Date and continuing for one hundred seventy-nine (179)
additional months.
2.2 Early Termination Benefit. If the Executive terminates
employment before the Normal Retirement Age for reasons other than death,
Disability or Change of Control, the Company shall pay to the Executive the
benefit described in this Section 2.2 in lieu of any other benefit under this
Agreement.
<PAGE>
2.2.1 Amount of Benefit. The annual benefit under this
Section 2.2 is the amount set forth on Schedule A, Column C, determined
by the Plan Year completed immediately prior to the Plan Year in which
the Termination of Employment occurred.
2.2.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on the
first (1st) day of each month commencing on the month following the
Normal Retirement Age and continuing for one hundred seventy-nine (179)
additional months. The Board of Directors can, in its sole and absolute
discretion, pay the benefit in a lump sum as determined in Schedule A,
Column B, for the amount of years then credited or, in its sole and
absolute discretion, pay annual benefit for 180 months from Schedule A,
Column D.
2.3 Disability Benefit. If the Executive terminates employment for
Disability prior to the Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this Section 2.3 in lieu of any other benefit
under this Agreement.
2.3.1 Amount of Benefit. The annual benefit under this
Section 2.3 is the amount set forth on Schedule A, Column D, determined
by the Executive's Plan Year completed immediately prior to year in which
the Termination of Employment occurred.
2.3.2 Payment of Benefit. The Company shall pay the annual
benefit to the Executive in 12 equal monthly installments payable on the
first day of each month commencing on the month following the Termination
of Employment and continuing for 179 additional months.
2.4 Change of Control Benefit. Upon a Change of Control, the
Company shall pay to the Executive the benefit described in this Section 2.4 in
lieu of any other benefit under this Agreement.
2.4.1 Amount of Benefit. The lump-sum benefit under this
Section 2.4 is the amount set forth on Schedule A, Column B, determined
by the Plan Year completed immediately prior to the year in which the
Change of Control occurred.
2.4.2 Payment of Benefit. The Company shall pay the
present value of the benefit to the Executive in a lump sum within ninety
(90) days after the Change of Control.
<PAGE>
Article 3
Death Benefits
3.1 Death During Active Employment. If the Executive dies while being
employed by the Company, the Company shall pay to the Executive's beneficiary
the benefit described in this Section 3.1 in lieu of any other benefit under
this Agreement.
3.1.1 Amount of Benefit. The annual benefit under Section
3.1 is the lifetime benefit amount that would have been paid to the
Executive under Section 2.1 calculated as if the date of the Executive's
death were the Normal Retirement Date.
3.1.2 Payment of Benefit. The Company shall pay the annual
benefit to the Beneficiary in 12 equal monthly installments payable on
the first day of each month commencing on the month following the
Executive's death and continuing for 179 additional months.
3.2 Death During Benefit Period. If the Executive dies after
benefit payments have commenced under this Agreement but before receiving all
such payments, the Company shall pay the remaining benefits to the Executive's
beneficiary at the same time and in the same amounts they would have been paid
to the Executive had the Executive survived.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a beneficiary
by filing a written designation with the Company. The Executive may revoke or
modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Executive and accepted by
the Company during the Executive's lifetime. The Executive's beneficiary
designation shall be deemed automatically revoked if the beneficiary predeceases
the Executive, or if the Executive names a spouse as beneficiary and the
marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall be made to the Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incompetent, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incompetent
person or incapable person. The Company may require proof of incompetence,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
<PAGE>
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Termination for Cause. If the Company terminates the
Executive's employment for:
5.1.1 Conviction of a felony or of a gross misdemeanor
involving moral turpitude; or
5.1.2 Fraud or willful violation of any law resulting in
an adverse effect on the Company.
5.2 Suicide. No benefits shall be payable if the Executive commits suicide
within two years after the date of this Agreement, or if the Executive has made
any material misstatement of fact on any application for life insurance
purchased by the Company.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person making a claim
under this Agreement (the "Claimant") in writing, within ninety (90) days of his
or her written application for benefits, of his or her eligibility or
ineligibility for benefits under the Agreement. If the Company determines that
the Claimant is not eligible for benefits or full benefits, the notice shall set
forth (1) the specific reasons for such denial, (2) a specific reference to the
provisions of the Agreement on which the denial is based, (3) a description of
any additional information or material necessary for the claimant to perfect his
or her claim, and a description of why it is needed, and (4) an explanation of
the Agreement's claims review procedure and other appropriate information as to
the steps to be taken if the Claimant wishes to have the claim reviewed. If the
Company determines that there are special circumstances requiring additional
time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may
extend the time for up to an additional ninety-day period. All Claims shall be
made in writing to the Company's Board of Directors.
6.2 Review Procedure. If the Claimant is determined by the Company not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Company by filing a petition for review with the
Company within sixty (60) days after receipt of the notice issued by the
Company. Said petition shall state the specific reasons which the Claimant
believes entitle him or her to benefits or to greater or different benefits.
Within sixty (60) days after receipt by the Company of the petition, the Company
shall afford the Claimant (and counsel, if any) an opportunity to present his or
her position to the Company orally or in writing, and the Claimant (or counsel)
shall have the right to review the pertinent documents. The Company shall notify
the Claimant of its decision in writing within the sixty-day period, stating
specifically the basis of its decision, written in a manner calculated to be
understood by the Claimant and the specific provisions of the Agreement on which
the decision is based. If, because of the need for a hearing, the sixty-day
period is not sufficient, the decision may be deferred for up to another
sixty-day period at the election of the Company, but notice of this deferral
shall be given to the Claimant.
<PAGE>
Article 7
Amendments and Termination
7.1 Generally. This Agreement may be amended or terminated only by
a written agreement signed by the Company and the Executive.
7.2 Exception. Notwithstanding Section 7.1, the Company may amend
or terminate this Agreement at any time if, pursuant to legislative, judicial or
regulatory action, continuation of this Agreement would (i) cause benefits to be
taxable to the Executive prior to actual receipt, or (ii) result in significant
financial penalties or other material detrimental financial impact on the
Company (other than the financial impact of paying the benefits).
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, administrators and
transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment
policy or contract. It does not give the Executive the right to remain an
employee of the Company, nor does it interfere with the Company's right to
discharge the Executive. It also does not require the Executive to remain an
employee nor interfere with the Executive's right to terminate employment at any
time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the State of Nevada, except to the extent preempted by
the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Executive's life is a general
asset of the Company to which the Executive and beneficiary have no preferred or
secured claim.
<PAGE>
8.7 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
8.8 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to:
8.8.1 Interpreting the provisions of the Agreement;
8.8.2 Establishing and revising the method of accounting
for the Agreement;
8.8.3 Maintaining a record of benefit payments; and
8.8.4 Establishing rules and prescribing any forms
necessary or desirable to administer the Agreement.
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: COMPANY:
Comstock Bank
__________________________________ By ____________________
Title ____________________
<PAGE>
COMSTOCK BANK
SALARY CONTINUATION AGREEMENT
Beneficiary Designation
I designate the following as beneficiary of benefits under the Comstock Bank
Salary Continuation Agreement payable following my death:
Primary: __________________________________________________________________
Contingent: __________________________________________________________________
Note: To name a trust as beneficiary, please provide the name of the
trustee(s) and the exact name and date of the trust agreement.
I understand that I may change these beneficiary designations by filing a new
written designation with the Company. I further understand that the
designations will be automatically revoked if the beneficiary predeceases me,
or, if I have named my spouse as beneficiary, in the event of the dissolution
of our marriage.
Signature __________________________________
Date ______________________________
<PAGE>
Comstock Bank
Salary Continuation Agreement
SCHEDULE A
Robert Barone
Column A Column B Column C Column D
Plan Accrued Early Retirement Immediate
Year Benefit Annual Benefit Annual
Payable at Normal Benefit
Retirement
1 28,414 7,753 3,161
2 59,034 14,947 6,567
3 92,030 21,622 10,238
4 127,589 27,817 14,193
5 165,908 33,566 18,456
6 207,201 38,900 23,049
7 251,701 43,851 28,000
8 299,655 48,444 33,334
9 351,332 52,707 39,083
10 407,020 56,662 45,278
11 467,032 60,333 51,953
12 531,703 63,739 59,147
13 601,394 66,900 66,900
Comstock Bank
Salary Continuation Agreement
SCHEDULE A
<PAGE>
Larry Platz
Column A Column B Column C Column D
Plan Accrued Early Retirement Immediate
Year Benefit Annual Benefit Annual
Payable at Normal Benefit
Retirement
1 $ 45,361 $ 7,903 $ 5,046
2 94,244 15,236 10,484
3 146,922 22,041 16,344
4 203,689 28,356 22,659
5 264,864 34,216 29,464
6 330,787 39,654 36,797
7 401,829 44,700 44,700
FIRST AMENDMENT TO THE
COMSTOCK BANK
<PAGE>
SALARY CONTINUATION AGREEMENT
AGREEMENT DATED APRIL 30, 1997
THIS AMENDMENT executed on this ________ day of ___________, 1998, by
and between COMSTOCK BANK, a Nevada corporation located in Reno, Nevada (the
"Bank"), COMSTOCK BANCORP, a bank holding company located in Reno, Nevada (the
"Holding Company"), and __________________ (the "Employee").
On April 30, 1997, the Corporation executed the COMSTOCK BANK KEY
EMPLOYEE DEFERRED COMPENSATION AGREEMENT, by and between the Bank and the
Employee (the "Agreement").
The undersigned hereby amends, in part, said Agreement for the purpose
of eliminating the Bank as a party to the Agreement and substituting the Bank
with the Holding Company. From this day forth, the Holding Company shall be
responsible for the obligations of the Agreement and the Bank shall have no such
obligation.
The name of the Agreement shall hereafter read as follows:
COMSTOCK BANCORP SALARY CONTINUATION AGREEMENT
All references to the Bank in the Agreement shall be changed to the
Holding Company hereafter.
The parties, by executing this First Amendment to the Agreement, agree
to such amendment.
IN WITNESS OF THE ABOVE, the Employee, the Bank and the Holding Company
have agreed to this First Amendment to the Agreement.
Employee: Bank:
COMSTOCK BANK
--------------------- ----------------------
Its____________________
Holding Company:
COMSTOCK BANCORP
----------------------
Its____________________
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<PAGE>
COMSTOCK BANCORP
COMPUTATION OF CONSOLIDATED NET INCOME PER SHARE
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
- --------------------------------------------------------------------------------------------
Net Income: $1,836,060 2,092,108 $1,605,125
Net Income per Common Share (assuming no dilution):
Weighted Avg. Shares Outstd.: 4,355,668 4,233,693 3,704,295
Basic Earnings per Share: $0.42 $0.49 $0.43
Net Income per Common and Common Equivalent
Shares:
Adjusted Weighted Avg. Number of Shares 4,788,732 4,557,341 4,185,151
Outstd. After Giving Effect to the Conversion
of Options and Warrants:
Fully Diluted Earnings per Share: $0.39 $0.46 $0.38
</TABLE>
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
SHAREHOLDER LETTER
Dear Shareholder:
December 31, 1997 marked the 10th consecutive year of profitability for
the Company. Assets increased 34% to $195 million, net loans grew 41% to $135
million, and deposits grew 31% to $172 million. Net income declined 12% from
$2.09 million to $1.84 million.
There were three major factors which impacted the Company in 1997; two
of the factors were transient in nature; management expects the third to have a
positive long-term impact on the Company. The floods in Northern Nevada in early
January, 1997 temporarily reduced demand for home financing. Northern Nevada
real estate loans, one of the Company's staple products, were 29% lower in the
first quarter of '97 when compared to the same 1996 period. They were 11% lower
in the second quarter. But, in the second half of the year, they rose 16%.
In January, 1997, after an internal study of loan origination costs,
the Company decided to adopt a more conservative accounting approach to the
recognition of fee income. The new approach deferred fee income over a longer
period of time than had previously been the practice. The largest impact of this
accounting change was seen in the income statement in the quarters immediately
following the change with the impact lessening over time. Management has
estimated that, had the fee income accounting not been changed in 1997, net
income would have fallen by 5% rather than the 12% decline actually reported.
In 1996, the Company embarked upon an ambitious infrastructure
development plan. Much of the capital spending occurred in 1997 including: 1)
the formation of a holding company and the exchange of Holding Company for Bank
stock on a 2 for 1 basis (the equivalent of a 2 for 1 stock split); 2) the
opening of two full service branches, one in south Reno (February, 1997) and one
in Sparks (July, 1997); 3) the opening of an operations center (March, 1997) to
house the back office, computer, and customer service functions; 4) the physical
separation of the real estate from the commercial lending functions, giving both
functions room for growth (March, 1997); and 5) the acquisition of and
successful migration to (October, 1997) a state of the art in-house computer
system.
With its basic technology platform in place, the Company can now begin
to offer to its client base the automated services that management perceives
will be required by the turn of the century. Such services include cash
management for small businesses, sweeps, debit cards, telebanking, and home
banking. The Company believes that the new systems are Year 2000 Compliant, a
belief that management anticipates will be borne out by the testing process
scheduled for the next 18 months.
Investment in such infrastructure required internal focus by management
in 1997. Furthermore, such capital investments and structural changes do not
come without cost. In last year's Annual Report, management indicated that
"during this period of renewal, preparation and internal focus, perhaps as long
as 24 months, management believes that the earnings growth ... may be less than
that of the recent past," and "during this period, the ROA and ROE could be
lower than the [Company's] recent financial performances." In line with the
above, in 1997, the ROE fell to 12.9% from 17.7% in 1996 and 18.6% in 1995.
December 31, 1997 marked the halfway point of management's originally estimated
period of adjustment. As was communicated last year, management continues to
believe that the capital investments will provide the Company the capacity that
it needs to produce the growth and high level returns that the stockholders have
come to expect.
<PAGE>
The Bank subsidiary of the Company, the only operating unit, had a
regulatory leverage ratio (essentially capital/assets) of 10.9% on December 31,
1997, well above regulatory requirements. Basic book value per share was $3.53,
up from $3.07 at the end of 1996 and $2.58 at the end of 1995.
The Company's common stock trades on the Nasdaq Small Cap market under
the symbol LODE. In 1997, the stock traded as high as $9.63 and as low as $5.13.
It closed the year at $8.25.
/s/Robert Barone /s/Larry Platz
Robert Barone Larry Platz
Chairman & CEO President
<PAGE>
About Comstock Bancorp
Comstock Bancorp, a Nevada bank holding company (the "Company")
operates Comstock Bank (the "Bank") as its only operating subsidiary. The
Company conducts a general banking business, including the acceptance of demand,
savings, and time deposits and the making of commercial, real estate,
installment and other term loans. The Company's deposit accounts are insured up
to the maximum legal limits by the FDIC. The Bank offers checking and savings
accounts, certificates of deposit, money market and NOW accounts, and commercial
real estate, residential real estate, residential construction, commercial and
installment loans. The Company operates five ATM machines, one at each of its
full service branches, offers its customers night depository services,
bank-by-mail, and Visa cards.
The Company provides its range of services primarily to businesses and
individuals in the northern Nevada area. Deposits are gathered primarily from
the Reno and Carson City areas. However, the Company's lending area extends
throughout all parts of northern Nevada, including Reno, Sparks, Carson City,
Minden/Gardnerville, Dayton, Incline Village and other communities at Lake
Tahoe. For example, in 1997, the Company, whose assets averaged $164 million for
the year, originated $269 million of loans, of which $114 million (42%) were
sold in the secondary market.
The Company's primary lending business is real estate construction and
development loans, and first mortgages on existing single family homes. The
majority of the Company's lending is to the real estate industry (both
individual homeowners and developers), primarily in northern Nevada. Beginning
in 1995, the Company began to focus on commercial lending including commercial
real estate development, and on more traditional commercial lending to the
area's small businesses. In 1997, the Company's commercial lending volume was
$126 million. Construction and development loans are higher in risk than first
mortgages to the purchasers of single family homes due to reliance upon
projected data during the underwriting process, as well as the inherent risk
that the loan repayment is dependent on the full and satisfactory completion of
the project. Corresponding to the greater lending risk is a generally higher
interest rate and additional fee income with short note lives when compared to
other lending.
First mortgage lending on single family homes has been a mainstay for
the Company since the mid-1980s. Typically, the Company does not keep these
mortgages for its own portfolio since the maturities of these assets would
mismatch the maturities of the deposit liabilities on the Company's books and
subject the Company to high levels of interest rate risk. Rather, the Company's
goal is to sells such mortgages and their servicing rights in the secondary
market, recoup its cash plus a profit and lend the money to another mortgage
borrower.
Executive management, in the persons of Mr. Barone, the Company's
Chairman and CEO, and Mr. Platz, the Company's President, have been with the
Company since 1984 when the assets were less than $10 million. At the end of
1997, the Company's assets had grown to $195 million. The Company is publicly
traded on the Nasdaq Small Cap Market under the symbol "LODE". As of December
31, 1997, there were 4.4 million shares outstanding.
<PAGE>
Selected Financial Data
<TABLE>
<S> <C> <C> <C> <C> <C>
As of, and for, the years
ended December 31,
1997 1996 1995 1994 1993
---- --- ---- ---- ----
(In thousands of dollars,
except per share data)
Summary of Earnings:
Total Interest Income......................... $15,517 $14,868 $12,814 $9,134 $7,665
Total Interest Expense........................ 5,623 4,434 3,811 2,296 1,621
----- ----- ------ ----- -----
Net Interest Income........................... 9,894 10,434 9,003 6,938 6,044
Provision for loan losses..................... 270 250 270 105 43
----- ----- ----- ----- -----
Net Income after provision
for loan losses...............................
9,624 10,184 8,733 6,733 6,001
Other Operating Income........................ 541 414 278 407 453(1)
Non-Interest Expense.......................... (7,653) (7,603) (6,637) (5,724) (4,424)(2)
BigHorn Joint-Venture (net)................... 0 0 0 0 233(3)
Provision for taxes........................... (676) (903) (769) (422) (631)
------ ------ ----- ------ ---------
Net Income.................................... $1,836 $2,092 $1,605 $994 $1,632
====== ====== ====== ====== ======
Shares:
Outstanding (000's)(4)(5)..................... 4,423 4,236 4,232 3,638 3,360
Earnings per Share(4)(5)(6)................... $.42 $.49 $.43 $.29 $.50
Cash Dividends Declared(4)(5)................. $.00 $.00 $.00 $.472 $.364
Book Value per Share
Outstanding:.................................. $3.53 $3.07 $2.58 $2.07 $1.94
</TABLE>
(1) Excludes $2,265,000 of Joint-Venture revenue.
(2) Excludes $2,064,000 of Joint-Venture expense.
(3) Nets Joint-Venture revenue and expense.
(5) Adjusted for 10% stock dividend declared in February 1995.
(6) Adjusted for conversion to Comstock Bancorp stock, two for one in June
1997.
(7) Adjusted for adoption of SFAS 128 calculation of earnings per share.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
As of, and for, the years
ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars,
except per share data)
Selected Assets & Liabilities:
Total Assets.....................................$194,698 $144,980 $122,805 $103,073 $84,045
Total Deposits...................................$179,101 $131,303 $111,169 $93,006 $76,955
Gross Loans......................................$136,182 $96,524 $86,743 $69,999 $53,394
Stockholders' Equity............................. $15,598 $13,009 $10,884 $7,531 $6,522
Selected Financial Ratios (%):
Reserves for Loan Losses
to End of Period Loans.......................... .89% .77% .62% .75% 79%
Net Charge-Offs to End of
Period Loans (Recoveries)....................... .04% .06% .04% .11% (.01%)
Non-Accruing Loans to Total
End of Period Loans............................. 1.9% 3.3% .2% .2% .3%
Net Income to Average
Stockholders' Equity........................... 12.9% 17.7% 18.6% 14.7% 28.6%
Net Income to Average
Total Assets................................... 1.12% 1.56% 1.41% 1.14% 2.45%
Dividend Payout Ratio............................ 0.0% 0.0% 0.0% 41.4% 18.2%
</TABLE>
Note: Average stockholder equity is calculated using end of month data, as
the Company only computes its income on a monthly basis. However, average
assets are calculated using daily figures.
<PAGE>
Management's Discussion and Analysis of
Financial Conditions and Results of Operations
The following discussion reviews and analyzes the consolidated
operating results and financial condition of the Company. This discussion should
be read in conjunction with the consolidated financial statements and the other
financial data presented elsewhere herein.
Overview
The Company's total assets and deposits continued to grow at a
significant rate in 1997 as they had in 1996 and 1995. Management believes that
asset and deposit totals have increased for the last three years as a result of
an aggressive lending posture on the part of the Company's wholly owned bank
subsidiary, especially in commercial real estate lending, and the addition of a
new branch in 1995, and two in 1997. In addition, management believes that
assets and deposits grew because of consolidation of local institutions with
large out of state banks.
Net income for the year ended December 31,1997 was $1,836,000 ($.42 per
share; $.39 per share fully diluted) compared to $2,092,000 ($.49 per share;
$.46 fully diluted) in 1996, $1,605,000 ($.43 per share; $.38 fully diluted) in
1995; $994,000 ($.29 per share; $.27 fully diluted) in 1994; and $1,632,000
($.50 per share; $.46 fully diluted) in 1993.
Capitalization
As of December 31, 1993, the Company's wholly owned bank subsidiary's
(the "Bank") Leverage Ratio was 8.32%. As of December 31, 1994, the Leverage
Ratio fell to 7.72%. The addition to capital resulting from a stock purchase
rights offering increased the Leverage Ratio, as of December 31, 1995, to 8.57%.
For the year ending December 31, 1996, the Bank's Leverage Ratio increased to
9.16%. As of December 31, 1997, the Company's capital structure was as follows
(excluding outstanding options and warrants to purchase Common Stock):
Shares outstanding.......................................... 4,423,668
Stockholder equity.........................................$15,597,812
Book value/share (stockholder equity)............................$3.53
Leverage Ratio .................................................. 8.52%
If all of the currently outstanding options and warrants were
exercised, the pro forma capital structure would be, as of December 31, 1997:
Shares Outstanding ..........................................5,177,300
Aggregate Per
Amount Share
Stockholder equity .................. $17,844,546 $3.45
<PAGE>
Capital Expenditures
The Company completed construction on the new corporate headquarters
building located on 2.2 acres in the Sierra Executive Center in November, 1995
at a cost of approximately $3.7 million for the land and structure and $1.7
million for the furniture, fixtures and equipment. The building is approximately
26,000 square feet and houses the Bank's main branch office, the Company's
executive and administrative offices and the real estate and commercial lending
functions. The Company exercised its option to purchase a one acre adjacent
parcel for $174,240 in March, 1995 to facilitate future expansion of the
corporate headquarters facility, but has since determined that such expansion
would be too costly. Thus, in November, 1996, the Company signed a lease on
approximately 7,130 square feet of office/warehouse space approximately one mile
from the administrative headquarters to house a computer facility and other back
office administrative functions. The Company made the decision to bring the main
frame data processing operations in-house upon receipt of notification of
cancellation by the then current service provider. Facility renovations of and
department relocations to the new leased property were completed in March, 1997
at a cost of $214,000 (plus $51,000 for furniture, fixtures and equipment). This
facility also houses a full data processing center which became operational in
October, 1997 at a cost of $542,000. In addition, removal of the back-office
functions from the head office facility allowed for the expansion of the
commercial and residential lending origination functions within the headquarters
facility. Those facility renovations and department relocatioins within the
administrative office to expand the commercial and residential lending
departments were completed in May, 1997, at a cost of $56,000 (plus $77,000 for
furniture, fixtures and equipment). Because the Company believes that the
current headquarters building has sufficient room for future expansion, and that
lower cost options to new construction on the one acre adjacent parcel are
available, the Company placed for sale the one acre parcel adjacent to the
headquarters facility. There currently exists an offer and acceptance and an
open escrow on the parcel in the amount of $340,000 with closing expected either
late in the first quarter or early in the second quarter of 1998.
In January, 1996, the Company signed a lease for a branch site located
in south Reno. The branch opened in February, 1997 at a cost of $139,000 for
leasehold improvements and $263,000 for furniture, fixtures and equipment.
In January, 1997, the Company signed a lease for a branch site
located in north Sparks. The branch opened in July, 1997 at a cost of $28,000
for the leasehold improvements and $260,000 for the furniture, fixtures, and
equipment.
In March, 1997, the Company purchased a one acre corner parcel located
in a rapidly developing commercial/industrial area at a cost (including grading)
of $466,000.
The cash to finance the above described capital expenditures came from
existing liquid assets. The Company does not expect to open new facilities in
1998, and its capital budget is expected to be significantly lower than that of
1997.
<PAGE>
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 Company's policy
that all of its business operations will 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").
The FFIEC's Interagency Statement on the Year 2000 outlines five management
phases necessary to facilitate transition to the new century: awareness,
assessment, renovation, validation, and implementation. The Company has finished
the awareness phase and its Board of Directors and Executive Management have
made the commitment to supply the requisite resources. The Company is well into
the assessment phase and plans to have the renovation phase completed by
December 31, 1998. The validation phase will overlap the renovation and
assessment phases and it, along with implementation of required system changes,
will be completed prior to the end of 1999. It is noteworthy that the Company's
largest automation processing platform has already been brought into Year 2000
compliance with the purchase of and conversion to the in-house mainframe
computer system in October, 1997.
The Company has committed the head of the Management Information
Systems department to the project with significant time commitment from its
distributed processing manager. Other staff has been added to take on day to day
responsibilities of these key personnel. Since the major mainframe computer
assets (Year 2000 compliant) were purchased in 1997, the ongoing costs for the
project are estimated to be approximately $321,000 for 1998 and 1999. However,
the Company is committed to allocate whatever resources are deemed necessary for
the successful and timely completion of the project.
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.
Operations and Liquidity
Total post-tax profits for 1997 were $1,836,000, a decrease of 12.2%
from the $2,092,000 earned in 1996. The following table shows the overall
reasons for the change in the Bank's profitability.
<PAGE>
1997 1996 %Change
------------ ------------ -------
Total loan income $10,996,028 $8,870,875 24.0
Total fee income 2,646,867 4,305,502 (38.5)
Overnight and investment
income 1,874,244 1,692,110 10.8
Service charges and
non-interest income 539,621 382,343 41.1
---------- ---------- -----
16,056,760 15,250,830 5.3
Total interest expense 5,623,352 4,433,801 26.8
Salaries and benefits
(excluding management
bonus) 3,879,940 4,338,050 (10.6)
Occupancy expenses 753,876 528,206 42.7
Furniture, fixtures and
equipment 584,839 464,163 26.0
Other operating expenses 2,062,543 1,829,879 12.7
---------- --------- -----
12,904,550 11,594,099 11.3
Loan loss provision 270,000 250,000 8.0
---------- ---------- ----
Income from bank
operations 2,882,210 3,406,731 (15.4)
Management bonus accrual 371,461 442,930 (16.1)
Taxes 675,615 902,960 (25.2)
Other income 926 31,267 (97.0)
-------------- ---------- ------
Net income $1,836,060 $2,092,108 (12.2)
The table shows that net income decreased by 12.2% ($246,048) over
1996. The largest contributing factor, in management's opinion, to the decrease
in income was a 38.5% ($1,658,635) decrease in fee income, most of which
consisted of the impact of a change in accounting for fee income in 1997. Had
the accounting not changed, management estimates that total fee income would
have been $3,806,846, down 11.6% ($498,656) from that of 1996, and in line with
the decrease in loan volume in 1997 when compared to 1996. The table below shows
the accounting impact.
1997 1996 Pct. Chg.
------ ------ ---------
Total fee income as reported: $2,646,867 $4,305,502 (38.5%)
Add back fees used to offset salary expense: 906,871
Add back timing differences from accounting: 253,108
Comparable fee income: $3,806,846 $4,305,502 (11.6%)
Salary Expense as reported: $3,879,940 $4,338,050 (10.6%)
Add back fees used to offset salary expense: 906,871
---------- ---------- -------
Comparable salary expense: $4,786,811 $4,338,050 10.3%
Management believes that the timing differences caused by the accounting change
reduced 1997 gross income by approximately $253,108 and after tax income by
approximately $151,865. As a result, management has estimated that net income
would have fallen by 5.0% to $1,987,925 in the absence of the accounting change
as follows:
<PAGE>
1997 1996 Pct. Chg.
------ ------ ---------
Net income as reported: $1,836,060 $2,092,108 (12.2%)
Add back after tax impact of accounting: 151,865
---------- ---------- --------
Comparable net income: $1,987,925 $2,092,108 ( 5.0%)
Interest income on loans grew 24%, and, again in 1997, was augmented by the
receipt of "additional" interest from a development loan in the Company's
portfolio for which the Company collects monthly interest payments plus an
additional $2,100 for each lot the developer sells. In 1997, 139 lots were sold
and closed giving the Company "additional" interest income of $292,000. In 1996,
128 lots were sold and closed which added $268,800 in "additional" interest to
Company revenue. Of the total 811 lots, 544 remained to be sold on December 31,
1997. The Company expects similar or higher lot sales in 1998, but such sales
are subject to current market conditions including, but not limited to, the
general health of the economy, interest rates, and competition.
The $483,393 decrease in pre-tax income reported was attributable to
the following:
+$2,125,153 increase in interest income
- 1,658,635 decrease in fee income (see discussion on page 9)
+ 182,184 increase in investment income
+ 157,278 increase in non-interest income
- 1,189,551 increase in interest paid on deposits
+ 458,110 decrease in salary and benefit costs (see discussion on page 9)
- 346,346 increase in occupancy and furniture & equipment expense
- 232,664 increase in other operating expenses
+ 21,128 change in bonus, loan loss provision and other
-----------
- 483,393 change in pre-tax income
+ 227,345 decrease in taxes
-----------
- 256,048 decrease in post-tax income
The increase in interest income was due to a larger portfolio of held
to maturity loans. As of December 31, 1997, the Company's held $135 million in
its loan portfolios compared to $96 million, a year earlier. On an average
basis, the Company held $114 million in its loan portfolios in 1997 compared to
$89 million in 1996, a 28.3% increase, similar to the 24.0% increase in loan
income recorded. The 10.8% increase in investment income came primarily from the
increase in investment holdings which rose from $19.1 million at the end of 1996
to $27.1 million at the end of 1997. Investments in overnight funds decreased
from $13.6 million to $9.9 million. The 26.8% increase in interest paid on
deposits resulted mainly from a 22% increase in deposits, on average, between
1997 and 1996. The increased costs of occupancy, furniture and equipment, and
other operating expenses resulted directly from the opening of two new branches,
an operations center, and the acquisition of an in-house mainframe computer
system.
In 1993, the Company originated $206 million in residential real estate
mortgage loans and sold $176 million of this product in the secondary market.
Due to rapidly rising rates in 1994, the market for mortgage refinancing all but
disappeared. This phenomenon, accompanied by a re-emergence of competition from
the larger financial institutions, caused residential real estate loan
originations to fall by 19.6% to $165 million, and secondary market sales to
fall to $147 million. In 1995, the Company originated $160 million in real
estate loans and sold $153 million in the secondary market, a decrease of 3.0%
in loans originated and an increase of 4.1% in loans sold. In 1996, the Company
originated $170 million in residential real estate loans and sold $139 million
in the secondary market, representing an increase of 6.3% and a decrease of
10.1%, from 1995, respectively. In 1997, the Company originated $140 million of
residential real estate mortgage loans and sold $114 million in the secondary
market representing a decrease of 17.6% in originations and 18.0% in secondary
market sales. There were two major reasons for the lower real estate mortgage
loan volume in 1997. First, the floods in Reno in early January, 1997 severely
depressed mortgage loan demand in the first quarter in Northern Nevada. Second,
the Company closed its Las Vegas mortgage loan origination office in April,
1997. Northern Nevada mortgage originations were $138 million in 1997 compared
to $141 million in 1996, a 2% decrease.
<PAGE>
Besides the impact of the floods, management believes that real estate
mortgage loan originations were impacted by the return to the marketplace of the
large portfolio lender banks, Bank of America and a very aggressive Norwest
Mortgage. These portfolio players often underprice the secondary market and
retain mortgage loans in their own portfolios. Because the Company cannot be a
mortgage portfolio lender and must sell in the secondary market, it cannot
underprice the secondary market without a loss on the transaction. Finally, the
Company was adversely impacted by the ability of the larger institutions to
offer future rate guarantees to contractors and developers. The Company could
not make such guarantees without, in the opinion of management, subjecting the
Company to significant interest rate risk.
The Company's liquidity ratio, defined as the value of marketable
assets divided by volatile liabilities, stood at 26% as of December 31, 1997 as
compared to 28% as of December 31, 1996. As of December 31, 1997, the Company
had $9.9 million in overnight funds, $15.7 million in time deposits and
marketable securities which were available for sale, and borrowing capacity at
the Federal Home Loan Bank of San Francisco in excess of $58 million (30% of its
assets). Such borrowing capacity is subject to quarterly review and must be
collateralized. As of December 31, 1997, the Company had borrowed $6,000,000 and
had pledged approximately $25 million in loans and securities to the Federal
Home Loan Bank of San Francisco as collateral for the borrowing line.
In order to generate its relatively high lending volumes, the Company
has higher personnel and overhead expenses than most in its peer group because
residential real estate lending requires extensive back office operations
including loan underwriters, loan processors, a loan servicing staff, secondary
market sales personnel, and compliance personnel. Construction lending requires
a builders' control staff and inspectors. Finally, acquisition and development
lending typically requires close monitoring by lending staff, thus requiring
additional staff for other types of lending. At the beginning of 1993, the
Company had approximately 50 full time equivalent ("FTE") employees. By the end
of 1993, with the expansion of lending to Las Vegas and the gear up for the
planned growth in commercial lending, the Company employed 97 FTE employees. At
the end of 1994 and 1995 FTE employees numbered 108. And, at the end of 1996 the
Company employed 118 FTE employees. The increase included the addition of a
Compliance Officer, expansion of the commercial lending functions and partial
staffing for the additional branch office which opened in February, 1997. At the
end of 1997, FTE were 121. In 1997, two branches were opened and the Company
expanded its commercial lending operation and its Management Information
Department. It also closed its Las Vegas mortgage loan origination facility.
According to data publicly available on first mortgage filings, the
Company believes that it is the second largest first mortgage lender in Washoe
County, and the largest first mortgage lender in Carson City. The income
generated from the Company's high volume of lending activity usually places the
Company's and the Bank's net interest margin in the top 10% of peer group
analysis. Because of the personnel and expense generated in the mortgage
operation which are not found in peer group comparative numbers, management does
not rely on peer group analysis of its specific overhead expense ratios or its
net interest margins when analyzing performance. Rather, management relies on
other productivity measures such as analysis of loan representative lending
volumes and on overall profitability measures including return on assets and
return on stockholders' equity.
<PAGE>
Impact of Changing Interest Rates - Interest Rate Risk
The impact of changing interest rates (and inflation) on banks differs
from the impact on other companies. As financial intermediaries, banks have
assets and liabilities which may move in concert with interest rates. This is
especially true for banks with a high percentage of rate sensitive interest
earning assets and interest bearing liabilities. A bank can reduce the impact of
changing interest rates on its interest margin if it can manage its interest
rate sensitivity gap (the "gap") (also known as "Interest Rate Risk"). The gap
for any period is the volume difference between the assets and the liabilities
which reprice to market conditions in that period. Management's goal is to
adjust the gap so that the impact of falling or rising interest rates has a
neutral impact on the Company's interest margin. To do this, it is necessary for
management to anticipate the general movement of interest rates. Thus, there is
no guarantee that the Company will always be able to maintain its current
interest margins.
Interest Margin
The table below shows the sources of the Company's earnings.
Loan yields, including the fees, increased between 1995 and 1996 and
decreased between 1996 and 1997, largely due to the change in accounting for fee
income and due to increased competition from other institutions. Since 1994, the
Company has expanded its commercial lending while leaving the resources devoted
to its real estate lending constant. Partly because much of the fee income on
commercial lending is now deferred (see Operations and Liquidity above) when
compared with earlier years, loan yields fell in 1997. Yields, excluding fees,
were similar in 1995 and 1996 and decreased between 1996 and 1997. The decrease
in yields was partly due to increased competition from highly liquid local
financial institutions. In 1995, originations were $229 million. In 1996, that
figure rose to $308 million and then fell to $269 million in 1997. The intense
competition for commercial loans in 1997 also tended to reduce gross fees
generated as a result of competitive pricing.
All other portfolio yields had only slight movement between 1996 and
1997, mirroring the general movement of national interest rates. Yields on
investments rose slightly as the Company increased slightly the duration of the
"Available for Sale" portfolio from 1.25 years to 1.69 years. The slightly lower
loan yields in 1997, together with the slightly higher investment yields, held
yields on total earning assets constant from 1996 to 1997.
The cost of funds moved up from 3.7% in 1996 to 4.3% in 1997 partly
reflecting the increase in rates initiated by the Federal Reserve in March,
1997. The slight decline in net interest margin (excluding fees) was the result
of funding costs moving up while earning asset yields were constant.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE BALANCES, YIELDS & RATES of EARNING ASSETS
& BORROWED FUNDS
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
($000s) ($000s) (%) ($000s) ($000s) (%) ($000s) ($000s) (%)
- --------------------------------------------------------------------------------------------------------
ASSETS:
Loans & Receivables $114,069 $88,890 $79,621
Include fees $13,642 11.8% $13,176 14.5% $11,485 14.4%
Exclude fees 10,996 9.4 8,871 9.7 7,729 9.7
Investments 24,740 1,428 5.8 17,738 985 5.6 17,651 954 5.4
Fed Funds Sold 8,169 447 5.5 13,181 708 5.4 6,127 356 5.8
----- ------- ------
Total Earning Assets 146,978 119,809 103,399
======= ======= =======
Include fees 15,517 10.4 14,868 12.2 12,795 12.4
Exclude fees 12,870 8.6 10,562 8.6 9,040 8.7
Loan Loss Allowance 948 794 528
Non-Earning Assets 18,044 14,623 11,159
------ ------ -------
Total Assets $164,074 $133,638 $114,030
======== ======= =======
LIABILITIES And STOCKHOLDERS' EQUITY:
Interest Transaction $47,022 $ 1,542 3.3% $38,678 $1,298 3.4% $31,078 $1,043 3.4%
Savings Accounts 9,844 262 2.7 9,983 268 2.7 12,814 405 3.2
Time Deposits 65,994 3,721 5.3 51,154 2,852 5.4 39,461 2,250 5.7
------ ------ ------ ----- ------ -----
Total Int. Deposits 122,860 5,525 4.5 99,815 4,418 4.4 83,353 3,697 4.4
Subordinated Debt 1,607 98 6.1 251 16 6.3 1,719 114 6.6
-------- ----- ---- --- ----- ----
Total Int. Liab. 124,467 5,623 4.5 100,066 4,434 4.4 85,072 3,811 4.5
======= ===== ======= ===== =======
Non-Int IPC Deposits 24,675 0 21,118 0 19,544 0
------ -- ------ -- ------ --
Total Deposit &
Debt Liabilities 149,142 5,623 4.3 121,184 4,434 3.7 104,616 3,811 3.6
======= ===== ======= ===== ======= =====
Other Liabilities 705 652 785
Stockholder Equity 14,227 11,802 8,629
------ ------ ------
Total Liabilities &
Stockholder Equity $164,074 $133,638 $114,030
======= ======= =======
Net Interest Margin
Include fees: 6.6% 8.5% 8.7%
Exclude fees: 4.8% 4.9% 5.1%
</TABLE>
<PAGE>
Other Assets
In 1995 the Company had one property classified as other real
estate owned with a book value of $134,000. The property, a single family
residence with an appraised value of $183,000 was sold in 1996 for a net
gain of approximately $25,000. There were no OREO properties at the end of
1996, and as of December 31, 1997, the Company had a 15% interest in a
property received through judgment (the other 85% belonged to the loan
guarantor). The OREO value carried on the Company's books was $8,250.
The Bank services a portfolio of loans for the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Corporation ("FNMA") as well as for others. As of December 31, 1997, the
portfolio amounted to $49.0 million. For performing this servicing
function, the Company earned a fee of approximately .47% of the aggregate
principal balance of the loans in the portfolio. The level of the servicing
portfolio has remained steady at about $50 million for the past 3 years due
to the fact that, in falling interest rate environments, management
believes that the Company is better off with the fees earned in selling the
servicing than with the fees earned from directly servicing mortgages that
have an incentive to prepay.
Income & Expense
The table below shows the major income and expense categories. Several
of the categories are discussed and detailed in tables that follow.
<PAGE>
INCOME & EXPENSE
Years ended December 31
1997 1996 1995
(In thousands of dollars)
- --------------------------------------------------------------------------------
Interest income:
Interest income $10,996 $8,871 $7,729
Fee income 2,647 4,305 3,774
Interest and fees on loans 13,643 13,176 11,503
Investments and deposits 1,427 984 955
Interest on fed funds sold 447 708 356
------- ------- -------
Total interest income $15,517 $14,868 12,814
======= ======= =======
Provision for credit losses 270 250 270
Interest expense:
Interest on deposits 5,525 4,418 3,697
Interest on other borrowings 98 16 114
------ ------ -------
Total interest expense $5,623 $4,434 $3,811
====== ====== =======
Non-interest income 541 414 278
Non-interest expense 7,653 7,603 6,637
Income before income taxes, 2,512 2,995 2,374
minority interest, and
extraordinary items
Provision for taxes 676 903 769
------ ------ -------
Post-tax income $1,836 $2,092 $1,605
====== ====== =======
Interest Income
Interest income increased by 24.0% in 1997 ($2,125,000). While loan
yields (excluding fees) fell slightly, the average level of the loan portfolio
grew 28.3% in 1997. In 1994, as a result of a softening in the single family
mortgage lending market, the Company made an effort to increase commercial
lending. As a result, interest income increased by 67.4% in 1995, as increased
commercial portfolio levels combined with increased rates to produce increased
interest income. In 1996 portfolio levels continued to increase while rates
remained constant and interest income rose 14.8%. Fee income rose in 1996 from
1995 levels, but fell in 1997 (see Operations and Liquidity above).
As a result of growth and the use of some of the Company's liquidity in
the investment portfolio, income attributable to investments and overnight
deposits with other financial institutions rose nearly 11% in 1997 to $1.87
million from $1.69 million in 1996.
Interest Expense
In 1995, interest rates began to decline, but the Company's deposit
costs, in dollar terms, were up due to increased deposit levels. In 1996,
interest rates remained fairly steady, while costs rose due to deposit level
increases. In 1997, deposit levels rose significantly, the Company borrowed
funds, and deposit costs were up slightly. As a result, total interest expense
increased 26.8% from $4.4 million in 1996 to $5.6 million in 1997.
<PAGE>
Non-Interest Income
The table below shows non-interest income for the years 1995, 1996, and
1997. Account service charges have remained fairly constant over the period,
having jumped in 1995 as a result of an account repricing at that time.
The line item "Gain on Sale, Investments and Trading Acct" reflected
the impact of marking the trading account to market and the sale of held for
sale securities.
The large increase in "other income" is from three sources. In
accordance with FASB 125, the Company placed a loan service asset on its books
(with no liability offset) in the net amount of $34,000 in 1997. A new accounts
receivable financing product added nearly $40,000, and the Company recognized
the dividends ($51,000) on life insurance policies used to finance a deferred
compensation and a supplemental retirement plan. The following table summarizes
the Bank's non-interest income for 1997, 1996 and 1995:
- --------------------------------------------------------------------------------
Years ended December 31,
1997 1996 1995
(In thousands of dollars)
- --------------------------------------------------------------------------------
Account service charges $288 $265 $261
Gain on sale, investments (9) (13) (47)
And trading account
Other income 262 162 64
---- ---- ----
$541 $414 $278
==== ==== ====
Non-Interest Expenses
Almost all of the non-interest expenses appear high when compared to
the Company's and Bank's peer groups. In order to support its mortgage banking
business the Company has a loan center in the headquarters building in Reno
which handles real estate loan origination, houses loan representatives and
secondary market personnel, loan processing, loan servicing, and a builders'
control unit. The Carson City office also houses real estate loan
representatives and a real estate loan processing unit. The facilities,
equipment and personnel support for the mortgage lending operation make the
non-interest expenses much higher than those of most others in the "peer groups"
which generally do not have extensive mortgage lending units. The fee income
generated from the mortgage lending operations more than offsets the added
expenses.
The following table summarizes non-interest expenses for 1997, 1996 and
1995:
- --------------------------------------------------------------------------------
Years ended December 31,
1997 1996 1995
(In thousands of dollars)
- --------------------------------------------------------------------------------
Salaries and benefits $4,251 $4,781 $3,906
Occupancy expense 754 528 502
Furniture and equipment expense 585 464 373
Other operating expense 2,063 1,830 1,853
------ ------ ------
$7,653 $7,603 $6,637
====== ====== ======
<PAGE>
While the salary and benefit expenses appear lower, when adjusted for
the accounting change for fee income (see Operations and Liquidity above), the
comparable salary expense for 1997 was 10.3% higher than that of 1996. Increases
in occupancy, furniture, fixtures and equipment expenses, and in other operating
expenses occurred as a result of the opening of two new branches and a 7,000
square foot operations center (see Capital Expenditures above).
Taxes
In 1995, the Company's effective tax rate was 32.4%, less than the
statutory 34% due to changes in the timing differences of the recognition of
taxes between the Company's financial statements and its income tax returns. In
1996, the Company's effective tax rate decreased to 30.2% due to tax benefits
derived from tax losses on the sale of certain municipal bonds that were
significantly larger than the financial statement losses. In 1997, as a result
of similar municipal bond sales and tax losses as in 1996, a larger portfolio of
tax exempt securities, and the exercise of stock options by employees for which
the Company received a tax deduction as if it had paid the employees
compensation, the tax rate dropped to 26.9%.
Forward Look Statements
Certain statements herein regarding the Company's financial position,
business strategy and the plans and objectives of Company management for future
operations are forward-looking statements rather than statements of historical
or current fact. When used herein, words such as "anticipate", "believe",
"estimate", "expect", "intend", and similar expressions, as they relate to the
Company or its management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. Such statements are inherently uncertain, and there can be
no assurance that the underlying assumptions will prove valid. Actual results
could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, including but not limited to changes
in prevailing interest rates, competitive factors and pricing pressures, changes
in legal and regulatory requirements, technological change, product development
risks and general economic conditions. Such statements reflect the current views
of the Company with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of the Company. All written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this paragraph.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
of Comstock Bancorp and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Comstock Bancorp and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Bancorp's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Comstock
Bancorp and Subsidiary as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Kafoury Armstrong & Co.
Carson City, Nevada
January 12, 1998
<PAGE>
<TABLE>
<S> <C> <C>
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
ASSETS
1997 1996
Cash and due from banks (non-interest bearing) $9,464,000 $6,738,000
Federal funds sold 9,853,000 13,593,000
Interest-bearing deposits in domestic financial institutions 1,492,000 1,498,000
Trading account securities - Note 3 12,000 28,000
Securities available for sale - Note 4 14,218,000 11,733,000
Securities held to maturity (market value of $10,632,000 and
$5,413,000 at December 31, 1997 and 1996) - Note 4 10,636,000 5,490,000
Federal Home Loan Bank stock
788,000 378,000
Loans held for sale - Note 5 13,946,000 7,806,000
Loans, net of allowance for credit losses of $1,076,000
and $857,000 in 1997 and 1996, respectively - Note 5 121,159,000 87,861,000
Premises and equipment, net - Note 6 7,710,000 6,447,000
Accrued interest receivable 989,000 840,000
Other assets 4,431,000 2,568,000
Total Assets $194,698,000 $144,980,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits (non-interest bearing) $32,299,000 $26,334,000
Savings, money market and NOW accounts 60,917,000 51,717,000
Time deposits, under $100,000 50,944,000 33,958,000
Time deposits, $100,000 and over 27,642,000 19,295,000
Total Deposits 171,802,000 131,304,000
Accrued interest payable 321,000 189,000
Accounts payable and accrued expenses 876,000 478,000
Income taxes payable 102,000 -
Line of credit payable - Note 7 6,000,000 -
Total Liabilities 179,101,000 131,971,000
Stockholders' equity:
Common stock, $.01 par value; 15,000,000 shares
Authorized, 4,423,668 and 4,235,268 shares
Issued and outstanding at December 31, 1997 and
1996, respectively 44,000 42,000
Paid-in surplus 8,908,000 8,184,000
Unrealized gain (loss) on securities available
-for-sale, net of applicable deferred income taxes 17,000 (9,000)
Retained earnings 6,628,000 4,792,000
Total Stockholders' Equity 15,597,000 13,009,000
Total Liabilities and Stockholders' Equity $194,698,000 $144,980,000
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Interest income:
Interest and fees on loans $13,643,000 $13,176,000 $11,503,000
Interest on investment and trading securities:
Taxable 1,112,000 751,000 754,000
Exempt from federal income tax 221,000 124,000 85,000
Interest on federal funds sold 447,000 708,000 356,000
Interest on deposits with banks 94,000 109,000 116,000
Total Interest Income 15,517,000 14,868,000 12,814,000
Interest expense:
Interest on deposits 5,525,000 4,418,000 3,697,000
Interest on line of credit 98,000 16,000 114,000
Total Interest Expense 5,623,000 4,434,000 3,811,000
Net interest income 9,894,000 10,434,000 9,003,000
Provision for credit losses (270,000) (250,000) (270,000)
Net interest income after provision for credit losses 9,624,000 10,184,000 8,733,000
Other income:
Service charges on deposit accounts 288,000 265,000 261,000
Gain (loss) on sale of investment securities 1,000 (19,000) (6,000)
Gain (loss) on sale of trading securities 1,000 6,000 (41,000)
Other 251,000 162,000 64,000
Total Non-Interest Income 541,000 414,000 278,000
Other expense:
Salaries and employee benefits 4,251,000 4,781,000 3,906,000
Occupancy expenses 754,000 528,000 502,000
Furniture and equipment expense 585,000 464,000 373,000
Other operating expenses - Note 8 2,063,000 1,830,000 1,856,000
Total Non-Interest Expense 7,653,000 7,603,000 6,637,000
Income before income taxes 2,512,000 2,995,000 2,374,000
Income tax expense - Note 9 676,000 903,000 769,000
Net income $1,836,000 $2,092,000 $1,605,000
Basic earnings per share - Note 11 $0.42 $0.49 $0.43
Diluted earnings per share - Note 11 $0.39 $0.46 $0.38
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Unrealized
Gain (Loss)
On Securities
Available-For-Sale,
Net of
Common Common Applicable Total
Stock Stock Paid-In Retained Deferred Stockholders'
Shares Amount Surplus Earnings Income Taxes Equity
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994,
As previously reported 3,309,000 $827,000 4,721,000 $2,232,000 $(248,000) $7,532,000
Adjustment in connection with
Pooling of interest - (794,000) 794,000 - - -
Balances, December 31, 1994,
As restated 3,309,000 33,000 5,515,000 2,232,000 (248,000) 7,532,000
Net income - - - 1,605,000 - 1,605,000
Sale of common stock 592,000 6,000 1,515,000 - - 1,521,000
Stock dividends declared - Note 10 331,000 3,000 1,134,000 (1,137,000) - -
Change in unrealized gain (loss)
On securities
available-for-sale,
Net of applicable deferred
income
Taxes of $117,000 - - - - 227,000 227,000
Balances, December 31, 1995 4,232,000 42,000 8,164,000 2,700,000 (21,000) 10,885,000
Net income - - - 2,092,000 - 2,092,000
Sale of common stock 4,000 - 20,000 - - 20,000
Change in unrealized gain (loss)
On securities
available-for-sale,
Net of applicable deferred
income
Taxes of $6,000 - - - - 12,000 12,000
Balances, December 31, 1996 4,236,000 42,000 8,184,000 4,792,000 (9,000) 13,009,000
Net income - - - 1,836,000 - 1,836,000
Sale of common stock 188,000 2,000 724,000 - - 726,000
Change in unrealized gain (loss)
On securities
available-for-sale,
Net of applicable deferred
income
Taxes of $14,000 - - - - 26,000 26,000
Balances, December 31, 1997 4,424,000 $44,000 $8,908,000 $6,628,000 $17,000 $15,597,000
========= ======= ========== ========== ======= ===========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
COMSTOCK BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
(Page 1 of 2)
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Cash flows from operating activities:
Net income $ 1,836,000 $ 2,092,000 $ 1,605,000
Adjustments to reconcile net income to net
Cash provided by operating activities:
Provision for credit losses 270,000 250,000 270,000
Depreciation and amortization 573,000 568,000 321,000
Net (gain) loss on sales of available for sale
securities (1,000) 19,000 6,000
Net (gain) loss on sales of trading securities (1,000) (6,000) 41,000
Increase (decrease) in deferred taxes
due to change in unrealized loss on
securities available-for-sale 14,000 (6,000) (117,000)
Purchases of trading securities - - (3,885,000)
Proceeds from sales of trading securities 17,000 13,000 3,869,000
Net (increase) decrease in:
Accrued interest receivable (149,000) 88,000) (235,000)
Other assets (1,863,000) (259,000) (616,000)
Loans held for sale (6,140,000) 2,777,000 1,816,000
Net increase (decrease) in:
Accrued interest payable 132,000 27,000 48,000
Accounts payable and accrued expenses 398,000 (63,000) 258,000
Income taxes payable 102,000 (48,000) 16,000
Net Cash Provided (Used) By
Operating Activities (4,812,000) 5,276,000 3,397,000
Cash flows from investing activities:
Net change in interest bearing deposits in
Domestic financial institutions 6,000 287,000 (285,000)
Proceeds from sales of available-for-sale securities 3,124,000 4,647,000 3,486,000
Proceeds from maturities of available-for-sale securities 4,958,000 4,029,000 2,350,000
Purchases of available-for-sale securities (10,529,000) (8,768,000) (3,661,000)
Purchases of held-to-maturity securities (6,820,000) (3,157,000) (655,000)
Proceeds from maturities of held-to-maturity securities 1,674,000 506,000 218,000
Net change in loans held to maturity (33,568,000) (12,616,000) (18,593,000)
Purchases of premises and equipment, net (1,861,000) (1,052,000) (3,560,000)
Purchase of Federal Home Loan Bank stock (410,000) (58,000) (20,000)
Net Cash Provided (Used) By
Investing Activities (43,426,000) (16,182,000) (20,720,000)
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
(Page 2 of 2)
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Cash flows from financing activities:
Net change in demand deposits, savings,
Money market and NOW accounts $ 15,165,000 $ 8,967,000 $ 10,272,000
Net change in time deposits 25,333,000 11,168,000 7,893,000
Proceeds of line of credit payable 6,000,000 - -
Payments on line of credit payable - - (2,000,000)
Proceeds from sale of common stock, net 726,000 20,000 1,521,000
Dividends paid - - (108,000)
Net Cash Provided (Used) By
Financing Activities 47,224,000 20,155,000 17,578,000
Increase (Decrease) In Cash
and Cash Equivalents (1,014,000) 9,249,000 255,000
Cash and cash equivalents:
Beginning of year 20,331,000 11,082,000 10,827,000
End of Year $ 19,317,000 $ 20,331,000 $ 11,082,000
============ ============ ============
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 5,204,000 $ 4,407,000 $ 3,763,000
============= ============= =============
Income Taxes $ 797,000 $ 1,054,000 $ 883,000
============= ============= =============
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE 1 - Summary of Significant Accounting Policies:
Principles of Consolidation
On June 16, 1997, Comstock Bancorp (the "Bancorp") acquired
Comstock Bank (the "Bank") in a business combination accounted for as a
pooling of interest. Comstock Bank became a wholly owned subsidiary of
the Bancorp through the exchange of 4,421,668 shares of the Bancorp's
common stock for 100% of the outstanding shares of the Bank. Significant
intercompany accounts and transactions have been eliminated in the
consolidation. The accompanying financial statements for 1997 are based
on the assumption that the companies were combined for the full year,
and financial statements of prior years have been restated to give
effect to the combination.
Nature of Operations
Comstock Bank is a Nevada State chartered bank. The Bank provides
a variety of financial services to individuals and corporate customers
through its branches in Nevada. The Bank's primary deposit products are
non-interest-bearing and interest-bearing checking accounts, savings,
money market, NOW accounts, and certificates of deposit. Its primary
lending products are commercial loans related to the development of
single family homes and commercial properties, and single family
residential loans. Accordingly, its revenues are derived primarily from
these products. The accounting and reporting policies of Comstock Bank
conform with generally accepted accounting principles and with general
practice within the banking industry. The following is a summary of the
most significant of these policies.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for
credit losses on loans and the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans. In connection
with the determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses
on loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on loans
and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination. Because
of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the
near term.
Securities
Management adopted Financial Accounting Standards Board (FASB)
115 on January 1, 1994; and, therefore, determines the appropriate
classification of securities at the time of purchase. If management has
the intent and the ability at the time of purchase to hold securities
until maturity, they are classified as held to maturity and carried at
amortized historical cost. Securities to be held for indefinite periods
of time and not intended to be held to maturity are classified as
available for sale and are carried at fair value. Securities held for
indefinite periods of time include securities that management intends to
use as part of its asset and liability management strategy and that may
be sold in response to changes in interest rates, resultant prepayment
risk and other factors related to interest rate and resultant prepayment
risk changes.
Realized gains and losses on dispositions are based on the net
proceeds and the adjusted book value of the securities sold, using the
specific identification method. Unrealized gains and losses on
investment securities available for sale are based on the difference
between book value and fair value of each security. These gains and
losses are credited or charged to stockholders' equity, whereas realized
gains and losses are charged to operations. Premiums and discounts are
recognized in interest income using the interest method over the period
to maturity.
<PAGE>
Loans
Loans, including the unamortized balance of loan origination,
commitment, and other fees and costs are stated at the principal amounts
outstanding. Loans held for sale are stated at the lower of cost or
market value. Current market value is based on quoted market prices for
similar loans.
Loan Origination Fees
Loan origination fees, net of certain related costs, are being
deferred and amortized over the expected lives of the related loans
using methods that approximate the interest method.
Allowance for Credit Losses
An allowance for credit losses is provided through charges to
operations in the form of a provision for credit losses. Loans which
management believes are uncollectible, together with any accrued income,
are charged against this account with subsequent recoveries, if any,
credited to the account. The amount of the current provision for credit
losses charged to operations is determined by management's evaluation of
the quality and inherent risks in the loan portfolio, economic
conditions, and other factors which warrant current recognition.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization, which is determined using the straight
line method over estimated useful lives ranging from three to forty
years.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are to be sold and are initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After
foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and changes in
the valuation allowance are included in loss on foreclosed real estate.
Typically, such properties are disposed of within one year.
Income Taxes
Provisions for income taxes are based on amounts reported in the
statements of income (after exclusion of non-taxable income and
inclusion of expenses deductible for federal income tax purposes which
are not expenses for financial reporting purposes) and include deferred
taxes on temporary differences in the recognition of income and expense
for tax and financial statement purposes.
Interest Income on Loans
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest on loans
(including unamortized fees) is discontinued when, in the opinion of
management, there is an indication that the borrower may be unable to
meet payments as they come due. Upon such discontinuance, all unpaid
accrued interest is reversed.
Dividends
In accordance with Nevada Revised Statutes, the Bancorp's
dividend policy prohibits payments of dividends in excess of its
retained earnings.
Cash Flow Information
Cash and cash equivalents for purposes of the cash flow
statements include cash and due from banks and federal funds sold.
<PAGE>
Prior Years' Reclassification
The prior years' financial statements have been reclassified
where applicable to conform to the current year's presentation.
NOTE 2 - Loan Contracts Serviced for Others:
Commercial loans and mortgage contracts with unpaid balances of
approximately $55,342,000, $52,004,000, and $50,830,000 were being
serviced for others at December 31, 1997, 1996, and 1995, respectively.
NOTE 3 - Trading Account Securities:
Trading account securities consist of U.S. Treasury and hedging
securities with varying maturity dates. The investments are carried at
market value.
NOTE 4 - Securities:
The carrying amounts of investment securities as shown in the
Statements of Financial Condition of the Bank and their approximate fair
values at December 31 were as follows:
<TABLE>
<S> <C> <C> <C> <C>
Available-for-Sale Securities
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997:
U.S. Treasury and Agency Securities $ 6,730,000 $ 8,000 $ 6,000 $ 6,732,000
State and Municipal Securities 1,265,000 10,000 2,000 1,273,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 6,197,000 23,000 7,000 6,213,000
Other Debt Securities - - - -
-- -- -- --
$14,192,000 $41,000 $15,000 $14,218,000
=========== ======= ======= ===========
December 31, 1996:
U.S. Treasury and Agency Securities $ 7,542,000 $11,000 $27,000 $ 7,526,000
State and Municipal Securities 668,000 5,000 2,000 671,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 3,537,000 13,000 14,000 3,536,000
Other Debt Securities - - - -
----------- ------- ------- -----------
$11,747,000 $29,000 $43,000 $11,733,000
=========== ======= ======= ===========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Held-to-Maturity Securities
Gross Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1997:
U.S. Treasury and Agency Securities $ 2,844,000 $ 9,000 $ 51,000 $ 2,802,000
State and Municipal Securities 3,101,000 56,000 15,000 3,142,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 4,601,000 18,000 17,000 4,602,000
Other Debt Securities 90,000 - 4,000 86,000
------- -- ------ -------
$10,636,000 $84,000 $ 88,000 $10,632,000
=========== ======= ======== ===========
December 31, 1996:
U.S. Treasury and Agency Securities $ 1,190,000 $ - $ 70,000 $ 1,120,000
State and Municipal Securities 2,458,000 18,000 17,000 2,459,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 1,842,000 5,000 13,000 1,834,000
Other Debt Securities - - - -
----------- ------- -------- -----------
$ 5,490,000 $23,000 $100,000 $ 5,413,000
=========== ======= ======== ===========
</TABLE>
The amortized cost and approximate market value of securities
held-to-maturity and available-for-sale at December 31, 1997, by
contractual maturity, are shown below:
<TABLE>
<S> <C> <C> <C> <C>
Held-to-Maturity Available-for-Sale
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
Due within one year $ 316,000 $ 314,000 $ 3,299,000 $ 3,299,000
Due after one year
through five years $6,030,000 $6,001,000 $ 4,713,000 $ 4,734,000
Due after five years
through ten years $3,359,000 $3,376,000 $ 4,467,000 $ 4,466,000
Due after ten years 931,000 941,000 $ 1,713,000 $ 1,719,000
----------- ----------- ---------- -----------
$10,636,000 $10,632,000 $14,192,000 $14,218,000
=========== =========== =========== ===========
</TABLE>
Maturities of mortgage-backed securities are classified in
accordance with the contractual repayment schedules. Expected maturities
will differ from the contractual maturities reported above, because debt
security issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Securities held-to-maturity with a carrying value of
approximately $7,445,000 and $2,854,000 and securities
available-for-sale with a carrying value of approximately $12,928,000
and $10,913,000 were pledged to FHLB and Federal Reserve Bank at
December 31, 1997 and 1996, respectively.
<PAGE>
Gross proceeds, gross realized gains, and gross realized losses
on sales of available-for-sale securities were:
1997 1996
------------ ------------
Gross proceeds:
U.S. Treasury and Agency Securities $ - $2,627,000
State and Municipal Securities 1,445,000 820,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 1,679,000 1,200,000
Other Debt Securities - -
---------- ----------
$3,124,000 $4,647,000
Gross realized gains:
U.S. Treasury and Agency Securities $ - $ 14,000
State and Municipal Securities 7,000 -
Collateralized Mortgage Obligations
and Mortgage-backed Securities 2,000 -
Other Debt Securities - -
-------- --------
$ 9,000 $ 14,000
========== ==========
Gross realized losses:
U.S. Treasury and Agency Securities $ - $ 2,000
State and Municipal Securities 3,000 5,000
Collateralized Mortgage Obligations
and Mortgage-backed Securities 6,000 26,000
Other Debt Securities - -
---------- ----------
$ 8,000 $ 33,000
========== ==========
The net realized gains (losses) of $1,000 and ($19,000) on the
sale of securities resulted in an income tax cost (savings) of
approximately $0 and ($7,000) for 1997 and 1996, respectively.
NOTE 5 - Loans:
Loans held for sale were as follows at December 31:
1997 1996
----------- ----------
Real estate mortgages $13,946,000 $7,806,000
=========== ==========
The Bank funded and subsequently sold approximately $144,392,000
and $139,506,000 of loans held for sale in 1997 and 1996, respectively.
The resulting gain and loss was insignificant in both years.
<PAGE>
Major loan classifications were as follows at December 31:
1997 1996
------------ ------------
Commercial and industrial $101,812,000 $69,579,000
Real estate:
Construction and land development 15,218,000 $13,449,000
Mortgages 2,326,000 3,936,000
Installment 3,411,000 2,060,000
------------- -----------
Subtotal 122,767,000 89,024,000
Deferred loan fees, net (532,000) (306,000)
Allowance for credit losses (1,076,000) (857,000)
----------- -----------
Net Loans $121,159,000 $87,861,000
============ ===========
Loans with a carrying value of approximately $8,250,000 and
$8,733,000 at December 31, 1997 and 1996, respectively, were pledged to
secure the line of credit with FHLB (see Note 7).
The Bank's business activity is with customers primarily located
within Northern Nevada. The Bank grants commercial, real estate, and
installment loans to these customers. Although the Bank has a
diversified loan portfolio, a significant portion of its customers'
ability to repay the loans is dependent upon the economic health of
commercial and residential real estate development. Generally, the loans
are secured by real estate. The loans are expected to be repaid from
cash flow or proceeds from the sale of the real estate of the borrower.
The Bank's policy is generally to require adequate collateral for all
commercial and residential real estate development credit extended. The
Bank may be required to take legal action to enforce its rights to
pledged collateral.
A summary of the changes in the allowance for credit losses for
the years ended December 31 is as follows:
1997 1996 1995
-------- -------- --------
Beginning balance $ 857,000 $665,000 $428,000
Loans charged off (79,000) (61,000) (35,000)
Loan recoveries 28,000 3,000 2,000
---------- -------- ---------
Net Recoveries (Charge-Offs) (51,000) (58,000) (33,000)
Provision charged to operations 270,000 250,000 270,000
---------- --------- ---------
Ending Balance $1,076,000 $857,000 $665,000
========== ======== =========
<PAGE>
Impairment of loans having carrying values of $2,541,000 and
$3,184,000 at December 31, 1997 and 1996, respectively, have been
recognized in conformity with FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan. The total allowance for credit
losses related to those loans was $66,000 and $75,000, respectively. For
impairment recognized in conformity with FASB Statement No. 114, the
entire change in present value of expected cash flows is reported as
provision for credit losses in the same manner in which impairment
initially was recognized or as a reduction in the amount of provision
for credit losses that otherwise would be reported.
The average recorded investment in impaired loans was $2,935,000
and $739,000 during 1997 and 1996, respectively. The amount of interest
income recognized during 1997 and 1996 was approximately $42,000 and
$71,000, respectively, which was approximately the same amount that
would have been recognized on a cash basis. If an impaired loan is
placed on nonaccrual status, all future collections while on nonaccrual
status are recognized as a reduction of the loan investment. For
impaired loans not on nonaccrual status, interest income is recognized
when earned.
At December 31, 1997 and 1996, the Bank's significant credit risk
was in commercial and industrial, and construction and land development
loans. Of the total allowance for credit losses at the end of each of
those years, nearly all of the allowance was for loans in those two
categories.
NOTE 6 - Premises and Equipment:
Premises and equipment consist of the following at December 31:
1997 1996
----------- ------------
Land $ 1,371,000 $ 934,000
Buildings 4,890,000 4,710,000
Furniture, fixtures, and equipment 3,929,000 2,685,000
---------- -----------
10,190,000 8,329,000
Less: Accumulated depreciation
and amortization (2,480,000) (1,882,000)
---------- -----------
$ 7,710,000 $ 6,447,000
=========== ===========
Depreciation and amortization expense was approximately
$573,000, $568,000, and $321,000 for the years ended December 31,
1997, 1996, and 1995, respectively.
NOTE 7 - Credit Arrangement:
The Bank has a credit agreement with the Federal Home Loan Bank
of San Francisco (FHLB) whereby the Bank may borrow up to 30 percent of
the Bank's assets, with terms up to 240 months. The above line of credit
requires the Bank to maintain certain collateral maintenance, credit,
and other requirements as set forth by FHLB. The line is secured by
securities and mortgage loans pledged to the FHLB which amounted to
approximately $25,153,000 and $20,957,000 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, $6,000,000 was owed to FHLB, and at
December 31, 1996, no amounts were owed to FHLB. This amount accrues
interest at an average rate of 6.13 percent and matures in the year
2000.
The Bank also has an uncollateralized credit line with Union Bank
of California, whereby the Bank may borrow federal funds up to
$2,500,000. This agreement expires July 31, 1998 and requires a
compensating balance of $200,000. There were no borrowings on this line
at December 31, 1997 or 1996.
<PAGE>
COMSTOCK BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
NOTE 8 - Other Operating Expenses:
The major categories of other operating expenses for the years
ended December 31 are as follows:
1997 1996 1995
---------- ---------- ----------
Data processing fees $ 191,000 $ 235,000 $ 259,000
Legal and consulting fees 219,000 226,000 185,000
Office supplies 211,000 359,000 328,000
Advertising 400,000 253,000 239,000
Other operating expenses 1,042,000 757,000 845,000
--------- ---------- ----------
$ 2,063,000 $1,830,000 $1,856,000
=========== ========== ==========
All advertising costs are expensed as incurred.
NOTE 9 - Income Taxes:
The components of the provision for income taxes are as follows:
1997 1996 1995
--------- -------- ---------
Current federal income tax expense $ 861,000 $990,000 $ 898,000
Deferred federal income tax expense (185,000) (87,000) (129,000)
--------- -------- ---------
$ 676,000 $903,000 $ 769,000
========= ======== =========
A reconciliation of income tax at the statutory rate to the
Bank's effective rate is as follows:
1997 1996 1995
----- ----- ----
Statutory rate 34.0% 34.0% 34.0%
Tax-exempt life insurance income -1.8% -0.8% -0.3%
Tax loss in excess of book loss on
sale of investment securities -2.0% -0.8% -0.5%
Compensation on stock options -1.2% 0.0% 0.0%
Tax-exempt interest income -3.0% -1.4% -1.2%
Other, net 0.9% -0.8% 0.4%
----- ----- -----
26.9% 30.2% 32.4%
===== ===== =====
<PAGE>
Deferred income taxes result from temporary differences in the basis of
assets and liabilities for financial reporting and income taxes. The source of
these temporary differences and their resulting effect on income tax expense are
as follows:
1997 1996 1995
-------- -------- --------
Depreciation $ 22,000 $ 6,000 $ 5,000
Provision for loan losses (92,000) (85,000) (92,000)
Loan fees (77,000) (15,000) (21,000)
Valuation of loans held for sale - - (20,000)
Other, net (38,000) 7,000 (1,000)
-------- ----- ---------
$(185,000) $(87,000) $(129,000)
========= ======== =========
Significant components of the deferred tax liabilities and assets
at December 31 are as follows:
1997 1996
-------- --------
Deferred tax liabilities:
Depreciation $ 84,000 $ 70,000
Valuation of available-for-sale securities 9,000 -
-------- --------
93,000 70,000
------- --------
Deferred tax assets:
Valuation of available-for-sale securities - 5,000
Excess of financial reporting provision
for credit losses over tax basis 334,000 245,000
Deferred compensation 38,000 -
Deferred fee income 181,000 99,000
------- --------
553,000 349,000
------- --------
Net deferred tax asset $460,000 $279,000
======== ========
NOTE 10 - Stock Dividend:
On February 22, 1995, the Bank declared a 10% stock dividend to
holders of record as of March 29, 1995. All references to number of
shares, number of stock options, and per share information, except for
authorized shares, have been adjusted to reflect the stock dividend on a
retroactive basis to all prior periods.
<PAGE>
NOTE 11 - Earnings Per Share:
Earnings per share have been restated retroactively for the years ended
December 31, 1996 and 1995 to reflect the business combination and the adoption
of SFAS No. 128, "Earnings per Share."
Basic earnings per share and diluted earnings per share have been
computed based on the following:
<TABLE>
<S> <C> <C> <C>
1997
Common
Income Shares
Numerator Denominator EPS
Basic EPS
Income available to common shareholders $1,836,000 4,356,000 $0.42
=====
Dilutive Effect of Potential Common Stock
Stock options - 433,000
---------- --------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $1,836,000 4,789000 $0.39
========== ========= =====
1996
Common
Income Shares
Numerator Denominator EPS
Basic EPS
Income available to common shareholders $2,092,000 4,234,000 $0.49
=====
Dilutive Effect of Potential Common Stock
Stock options - 323,000
----------- --------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $2,092,000 4,557,000 $0.46
========== ========= =====
1995
Common
Income Shares
Numerator Denominator EPS
Basic EPS
Income available to common shareholders $1,605,000 3,704,000 $0.43
=====
Dilutive Effect of Potential Common Stock
Stock options - 481,000
---------- --------
Diluted EPS
Income available to common shareholders
after assumed conversions of dilutive
securities $1,605,000 4,185,000 $0.38
========== ========= =====
</TABLE>
<PAGE>
NOTE 12 - Stock Options:
The Bancorp has stock option plans which provide for the grant of
non-qualified stock options to certain directors, officers, and key
employees. At December 31, 1997, there were 228,836 shares of common
stock available for future grant or award and all of the outstanding
options were exercisable. Options are granted at prices not less than
fair market value at the date of grant and for terms of up to ten years.
Activity in the stock option plans was as follows:
<TABLE>
<S> <C> <C>
Weighted
Average
Number Per Share
of Shares Option Price
Outstanding at December 31, 1994 585,932 2.43
Granted 63,200 3.47
Exercised 8,100 3.44
Cancelled - -
-- --
Outstanding at December 31, 1995 641,032 2.52
Granted 46,700 5.04
Exercised - -
Cancelled - -
-- --
Outstanding at December 31, 1996 687,732 2.68
Granted 47,500 6.99
Exercised 34,400 3.81
Cancelled - -
-- --
Outstanding at December 31, 1997 700,832 2.92
======= ====
</TABLE>
The Bancorp has also issued warrants to shareholders in
connection with the issuance of stock. The activity of those stock
options was as follows:
<TABLE>
<S> <C> <C>
Outstanding at December 31, 1994 206,800 3.87
Granted - -
Exercised - -
Cancelled - -
-- --
Outstanding at December 31, 1995 206,800 3.87
Granted - -
Exercised - -
Cancelled - -
-- --
Outstanding at December 31, 1996 206,800 3.87
Granted - -
Exercised 154,000 3.86
Cancelled - -
-- --
Outstanding at December 31, 1997 52,800 3.86
======= ====
</TABLE>
<PAGE>
The Bancorp applies APB Opinion 25 in accounting for its fixed
and performance-based stock compensation plans. Accordingly, no
compensation cost has been recognized in 1997, 1996, or 1995. Had
compensation cost been determined on the basis of fair value pursuant to
FASB Statement No. 123, net income and earnings per share would have
been reduced as follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
---------- ---------- ----------
Net income:
As reported $1,836,000 $2,092,000 $1,605,000
========== ========== ==========
Pro forma $1,715,000 $2,007,000 $1,530,000
========== ========== ==========
Basic earnings per share:
As reported $.42 $.49 $.43
==== ==== ====
Pro forma $.39 $.47 $.41
==== ==== ====
Diluted earnings per share:
As reported $.39 $.46 $.38
==== ==== ====
Pro forma $.36 $.44 $.36
==== ==== ====
</TABLE>
The fair value of each option grant is estimated on the date of
grant using an option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995: dividend yield of
0.0 percent; expected volatility of 37.15 percent; risk-free interest
rate of 5.53 percent; and expected lives of 10 years for 1997, and
dividend yield of 0.0 percent; expected volatility of 30.45 percent,
risk-free interest rate of 6.68 percent; and expected lives of 10 years
for 1996 and 1995.
NOTE 13 - Profit Sharing Plan:
Effective January 1, 1992, the Bank established a 401(k) Profit
Sharing Plan and Trust that covers all eligible employees. The Bank
makes discretionary matching contributions based on 50 percent of the
amount of salary deferral elected by the employee, up to 6 percent of
the employee's salary. Contributions to the plan charged to operations
were not material for the years ended December 31, 1997, 1996, and 1995.
NOTE 14 - Operating Leases:
The Bank leases premises and equipment under operating leases
expiring through 2011. The aggregate future minimum annual rental
commitment as of December 31, 1997, under operating leases having
non-cancelable lease terms in excess of one year are as follows:
1998 $ 441,663
1999 363,034
2000 350,267
2001 334,313
2002 248,247
Thereafter 2,318,907
------------
$4,056,431
============
Rent expense for the years ended December 31, 1997, 1996, and
1995 amounted to approximately $368,000, $202,000, and $318,000,
respectively. Certain operating leases provide for renewal options for
periods of 5 to 15 years at the fair rental value at the time of
renewal. In the normal course of business, operating leases are
generally renewed or replaced by other leases.
<PAGE>
NOTE 15 - Financial Instruments with Off-Balance Sheet Risk:
In the ordinary course of business, the Bank enters into various
types of transactions which involve financial instruments with
off-balance sheet risk. These instruments include commitments to extend
credit and standby letters of credit and are not reflected in the
accompanying balance sheet. These transactions may involve, to varying
degrees, credit and interest rate risk in excess of the amount, if any,
recognized in the balance sheet.
Management does not anticipate any loss to result from these
commitments; however, in case of default, legal action may be required
to enforce its rights to collateral pledged to secure these commitments.
The Bank's off-balance sheet credit risk exposure is the contractual
amount of commitments to extend credit and standby letters of credit.
The Bank applies the same credit standards to these contracts as it uses
in its lending process.
1997 1996 1995
----------- ----------- ----------
Financial instruments whose
contractual amount represented risk:
Commitments to extend credit $50,453,000 $56,716,000 $55,788,000
=========== =========== ===========
Standby letters of credit $ 3,504,000 $ 3,729,000 $ 3,980,000
=========== =========== ===========
Commitments to extend credit are arrangements to lend to
customers. These commitments have specified interest rates and generally
have fixed expiration dates, but may be terminated by the Bank if
certain conditions of the contract are violated. These commitments are
normally collateralized by real estate.
Standby letters of credit are conditional commitments issued by
the Bank to guarantee the performance of a customer to a third party.
Credit risk arises in these transactions from the possibility that a
customer may not be able to repay the Bank upon default of performance.
Collateral held for standby letters of credit is based on an individual
evaluation of each customer's credit worthiness, but may include cash
and securities.
NOTE 16 - Commitments and Contingencies:
Because of the nature of its business, the Bank is often a
defendant in legal actions. Based upon advice of counsel, management
does not anticipate that the final outcome of any litigation in process,
or anticipated, will have a materially adverse effect on the Bank's
operations or financial condition.
NOTE 17 - Related Party Transactions:
The Bank has entered into transactions (including loans and
deposits) with its directors, officers, and significant shareholders.
Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates
and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other
unfavorable features.
The following is a summary of the aggregate loan activity
involving related party loans during 1996 and 1997.
Balance, December 31, 1995 $ 485,000
Additions 358,000
Repayments (416,000)
Balance, December 31, 1996 427,000
Additions 269,000
Repayments (53,000)
Balance, December 31, 1997 $ 643,000
=========
NOTE 18 - Regulatory Matters:
The Bank is required to maintain certain average reserve
requirements with the Federal Reserve Bank. Reserve requirements are
based on a percentage of deposit liabilities. The required reserves
during 1996 and 1997 averaged $875,000.
<PAGE>
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1997, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1997, the most recent notification from
federal banking agencies categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the
following table:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $16,470,000 11.7% =>$11,309,000 =>8.0% =>$14,136,000 =>10.0%
Tier I Capital
(to Risk Weighted Assets) 15,397,000 10.9% => 5,654,000 =>4.0% => 8,482,000 =>6.0%
Tier I Capital
(to Average Assets) 15,397,000 8.3% => 7,400,000 =>4.0% => 9,250,000 =>5.0%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) 13,872,000 13.5% => 8,250,000 =>8.0% => 10,312,000 =>10.0%
Tier I Capital
(to Risk Weighted Assets) 13,015,000 12.6% => 4,125,000 =>4.0% => 6,187,000 =>6.0%
Tier I Capital
(to Average Assets) 13,015,000 9.2% => 5,684,000 =>4.0% => 7,105,000 =>5.0%
</TABLE>
NOTE 19 - Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures about Fair Values of Financial
Instruments," requires disclosure of information about the fair value of
financial instruments for which it is practicable to estimate a value,
whether or not recognized in the statement of condition. Whenever
possible, quoted market prices are used to estimate fair values. In
cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows.
Therefore, in many cases, the estimated fair values may not be realized
in an immediate sale of the instruments.
<PAGE>
SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate of the estimated fair value amounts is not intended to
represent the underlying value of the Bancorp. The carrying amounts and
the estimated fair values are as follows:
<TABLE>
<S> <C> <C>
December 31, 1997
Carrying Estimated
Amount Fair Value
Assets:
Cash and cash equivalents $ 19,317,000 $19,317,000
Interest-bearing deposits 1,492,000 1,492,000
Trading account securities 12,000 12,000
Investment securities 24,854,000 24,850,000
Federal Home Loan Bank Stock 788,000 788,000
Loans receivable 135,106,000 138,741,000
Accrued interest receivable 989,000 989,000
------------- ------------
Total Asset Financial Instruments $182,558,000 $186,189,000
============ ============
Liabilities:
Deposits $171,802,000 $171,936,000
Accrued interest payable 321,000 321,000
Accounts payable and accrued expenses 876,000 876,000
Income taxes payable 102,000 102,000
Line of credit payable 6,000,000 6,006,000
---------- ----------
Total Liability Financial Instruments $179,101,000 $179,241,000
============ ============
December 31, 1996
Carrying Estimated
Amount Fair Value
Assets:
Cash and cash equivalents $ 20,331,000 $ 20,331,000
Interest-bearing deposits 1,498,000 1,498,000
Trading account securities 28,000 28,000
Investment securities 17,223,000 17,146,000
Federal Home Loan Bank Stock 378,000 378,000
Loans receivable 95,667,000 98,603,000
Accrued interest receivable 840,000 840,000
------------ ------------
Total Asset Financial Instruments $135,965,000 $138,824,000
============ ============
December 31, 1996
Carrying Estimated
Amount Fair Value
Liabilities:
Deposits $131,304,000 $131,341,000
Accrued interest payable 189,000 189,000
Accounts payable and accrued
expenses 479,000 479,000
------------ ------------
Total Liability Financial Instruments $131,972,000 $132,009,000
============ ============
</TABLE>
<PAGE>
The following methods and assumptions were used by the Bancorp in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the statement of financial
condition for cash and cash equivalents approximate those assets' fair
values.
Interest-Bearing Deposits
Fair values for interest-bearing deposits in domestic financial
institutions are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Trading Account Securities
Fair values for the Bank's trading account assets, which also are
the amounts recognized in the statement of condition, are based on
quoted market prices.
Investment Securities
Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Federal Home Loan Bank Stock
Fair values for Federal Home Loan Bank stock is based on its par
value since it is redeemable at par.
Loans Receivable
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values of fixed-rate mortgage loans are based on
quoted market prices of similar loans sold, adjusted for differences in
loan characteristics. The fair values of other fixed-rate loans are
estimated using discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Accrued Interest Receivable
The carrying amount reported in the statement of financial
condition for accrued interest receivable approximates its fair value.
Deposit Liabilities
The carrying amounts for interest-bearing and
non-interest-bearing demand, savings, money market, and NOW accounts
approximate those liabilities' fair values. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Accrued Interest Payable
The carrying amount reported in the statement of financial
condition for accrued interest payable approximates its fair value.
Accounts Payable, Accrued Expenses, and Other Short-Term Liabilities
The carrying amount reported in the statement of financial
condition for accounts payable and accrued expenses, and income taxes
payable, approximates those liabilities' fair values.
<PAGE>
NOTE 20 - Quarterly Financial Data (Unaudited):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gain (Loss)
Provision On Available
Net for for Sale Basic Diluted
Interest Interest Interest Credit Investment Net Earnings Earnings
Three Months Ended Income Expense Income Losses Securities Income Per Share Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 1997 $ 3,306,000 $1,210,000 $ 2,096,000 $ 60,000 $ (3,000) $265,000 $0.06 $0.06
June 30, 1997 3,849,000 1,330,000 2,519,000 60,000 - 431,000 0.10 0.09
September 30, 1997 3,986,000 1,431,000 2,555,000 60,000 - 488,000 0.11 0.10
December 31, 1997 4,376,000 1,652,000 2,724,000 90,000 4,000 652,000 0.15 0.14
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
$15,517,000 $5,623,000 $ 9,894,000 $ 270,000 $ 1,000 $1,836,000 0.42 0.39
========================================================================================================
========================================================================================================
March 31, 1996 $ 3,441,000 $1,028,000 $ 2,413,000 $ 90,000 $ 14,000 $ 409,000 0.10 0.10
June 30, 1996 1,108,000 2,404,000 3,512,000 60,000 (8,000) 383,000 0.09 0.08
September 30, 1996 3,972,000 1,148,000 2,824,000 40,000 23,000 653,000 0.15 0.14
December 31, 1996 3,943,000 1,150,000 2,793,000 60,000 (48,000) 647,000 0.15 0.14
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
$14,868,000 $4,434,000 $10,434,000 $250,000 $(19,000) $2,092,000 $ 0.49 $ 0.46
========================================================================================================
========================================================================================================
</TABLE>
<PAGE>
NOTE 21 - Parent Company Statements:
The parent company was formed during 1997; therefore, no parent company
statements are presented for years prior to 1997.
December 31,
1997
-----------------
Condensed Balance Sheets:
Assets:
Cash $311,000
Investment in subsidiary 15,414,000
Other assets 136,000
----------------
Total Assets $15,861,000
================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses 264,000
Stockholders' equity 15,597,000
---------------
Total Liabilities and
Stockholders' Equity $ 15,861,000
===============
Condensed Statements of Income:
Revenues
Cash dividends from bank subsidiary $ 300,000
Income from subsidiary 1,663,000
Other income 307,000
---------------
Total revenues 2,270,000
---------------
Expenses
Employee compensation and benefits 441,000
Other expenses 61,000
---------------
Total expenses 502,000
---------------
Income before income taxes 1,768,000
Income tax benefit 68,000
---------------
Net Income $1,836,000
===============
<PAGE>
Condensed Statements of Cash Flows:
Cash flows from operating activities:
Net income $1,836,000
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization 7,000
Undistributed earnings of subsidiary (1,663,000)
Change in other assets (143,000)
Change in liabilities 264,000
---------------
Net Cash Provided by Operating
Activities 301,000
---------------
Cash Flows from Financing Activities:
Sale of stock 10,000
---------------
Net Cash Provided by Financing
Activities 10,000
---------------
Net Increase (Decrease) in Cash 311,000
Cash, beginning of year -
---------------
Cash, end of year $311,000
===============
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Directors and Executive Officers
Name Age Director Since Position(s) with Business Experience During
Bank Past 5 Years
- --------------------------- ------- ----------------------- --------------------------- -----------------------------
Edward Allison 58 November, 1993 Director Self-employed; government
relations/investments.
Robert Barone 53 March, 1984 Chairman, Chief Executive Chairman, Chief Executive
Officer and Treasurer Officer
and Treasurer of the Bank.
Stephen Benna 45 June, 1996 Director Manager of CB Concrete Co.,
a manufacturer of concrete.
John Coombs 52 April, 1982 Director Orthodontist; private
practice.
Michael Dyer 50 December, 1984 Director and Counsel Partner in the law firm of
Dyer, Lawrence, Cooney &
Penrose.
Mervyn Matorian 53 March, 1983 Director State Farm insurance agent.
Samuel McMullen 48 September, 1993 Director Self-employed; governmental
law and political strategy.
Larry Platz 59 March, 1984 President, Secretary and President, Secretary and
Director Director of the Bank.
Ronald Zideck 60 December, 1997 Director Managing Partner, Reno
Office of Grant Thornton,
now retired.
</TABLE>
<PAGE>
Market Information
The Company's Common Stock is traded on the Nasdaq Small Cap Market
under the symbol "LODE". Comstock Bancorp is a bank holding company whose
subsidiary is Comstock Bank. The reorganization resulting in Comstock Bancorp
becoming the holding company of Comstock Bank was completed on June 16, 1997.
Prior to completion of the holding company reorganization, Comstock Bank's
Common Stock also traded on the Nasdaq Small Cap Market under the symbol "LODE".
Initial quotations began on March 4, 1993. As of December 31, 1997, there were
approximately 459 holders of record of the Company's Common Stock. Shown below
are the high and low closing prices for the periods indicated.
1996 High Low
- ------------------ ----- ---
First Quarter.................. $5.00 $4.63
Second Quarter............... $4.88 $4.63
Third Quarter................. $4.50 $4.25
Fourth Quarter................ $5.50 $5.13
1997 High Low
- ----------------- ----- ---
First Quarter.................. $6.25 $6.00
Second Quarter............... $7.25 $6.50
Third Quarter................. $7.50 $7.13
Fourth Quarter................ $8.25 $8.00
1998 High Low
First Quarter.................. $9.50 $8.00
(through February 4, 1998)
On February 4, 1998, the last reported sale price of the Common Stock
was $9.50 per share. The current market makers for the Common Stock are: Herzog,
Heine, Geduld, Inc.; Torrey Pines Securities, and Hoefer & Arnett.
<PAGE>
Miscellaneous Information
Annual Meeting
The Annual Meeting of Shareholders will be held in the Conference
Center on the second floor of the Company's Administrative Headquarters at 6275
Neil Road, Reno, Nevada 89511 on Wednesday, April 29, 1998 at 4:00 p.m. All
shareholders are cordially invited to attend.
Transfer Agent
The Company's transfer agent and registrar is Nevada Agency and Trust
Co., 50 West Liberty Street, #880, Reno, Nevada, 89501. Please direct all
inquiries regarding stock transfer matters to Amanda Cardinalli, Vice-President
(702) 322-0626.
Independent Auditors
Kafoury, Armstrong & Co., 307 W. Winne Lane, #1, Carson City, Nevada
89703 serves as the Company's independent auditors.
1997 Annual Report on Form 10KSB
A copy of the Company's Annual Report on Form 10KSB for the fiscal year
ended December 31, 1997, as filed with the Securities and Exchange Commission,
will be furnished without charge to shareholders upon written request to the
Secretary, Comstock Bancorp at P.O. Box 7610, Reno, Nevada, 89510-7610. Form
10KSB is also available on the Company's website at www.comstockbank.com, or via
the EDGAR database on the website of the Securities and Exchange Commission
(www.sec.gov).
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
Percentage State of Incorporation
Parent Subsidiary Ownership or Organization
- --------------------------------------------------------------------------------
Comstock Bancorp Comstock Bank 100% Nevada
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<PAGE>
COMSTOCK BANCORP
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
FINANCIAL DATA SCHEDULE
$ in Thousands
Cash and Due from Banks (Non-Interest Bearing) 9,464
Interest-bearing Deposits in Domestic Financial Institutions 1,491
Fed Funds and Overnight Mutual Funds Sold 9,853
Trading Account Securities 12
Investment and Mortgage back Securities Held for Sale 15,006
Investment and Mortgage back Securities Held to Maturity 10,636
- Carrying Value
Investment and Mortgage back Securities Held to Maturity 10,632
- Market Value
Loans 136,182
Allowance for Credit Losses 1,076
Total Assets 194,698
Deposits 171,802
Short-term borrowings 0
Other Liabilities 1,199
Long term debt 6,000
Preferred stock - mandatory redemption 0
Preferred stock - no mandatory redemption 0
Common Stock 44
Other Stockholders Equity 15,553
Total Liabilities and Stockholders Equity 194,698
Interest and Fees on Loans 13,643
Interest and Dividends on Investments 1,334
Other Interest Income 540
Total Interest Income 15,517
Interest on Deposits 5,525
Total Interest Expense 5,623
Net Interest Income 9,894
Provision for Loan Losses 270
Investment Securities Gains/Losses (9)
Other Expense 7,653
Income/Loss Before Income Tax 2,512
Income/Loss Before Extraordinary Items 2,512
<PAGE>
Extraordinary Items, Less Tax 0
Cumulative Change in Accounting Principles 0
Net Income or Loss 1,836
Earnings Per Share - Primary .42
Earnings Per Share - Fully Diluted .39
Net Yeild - interest earning assets - actual 8.60%
Loans on Non-accrual 2,573
Accruing Loans past due 90 Days or More 103
Troubled Debt Restructuring 13
Potential Loan Problems 903
Allowance for Loan Losses - Beginning of Period 857
Total Charge-Offs 79
Total Recoveries 28
Allowance for Loan Losses - End of Period 1,076
Loan Loss Allowance allocated to Domestic Loans 1,076
Loan Loss Allowance allocated to Foreign Loans 0
Loan Loss Allowance - Unallocated 0
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