<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------
Commission file number 0-19368
-------------
COMMUNITY FIRST BANKSHARES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 46-0391436
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 Main Avenue
Fargo, ND 58124
------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
(701) 298-5600
-------------------
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: YES X NO
---- ----
At August 6, 1997, 18,626,439 shares of Common Stock were outstanding.
1
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1997
INDEX
PART I - FINANCIAL INFORMATION: PAGE
----
Item 1. Condensed Consolidated Financial Statements and Notes. . . 3-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 10-14
Item 3. Quantitative and Qualitative Disclosure About Market Risk. 15
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
(DOLLARS IN THOUSANDS) 1997 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . . $ 124,364 $ 175,732
Federal funds sold and securities purchased under
agreements to resell . . . . . . . . . . . . . . . . . . 705 3,600
Interest-bearing deposits. . . . . . . . . . . . . . . . . 14,898 3,598
Available-for-sale securities. . . . . . . . . . . . . . . 481,500 506,888
Held-to-maturity securities (fair value: 6/30/97 -
$230,204 12/31/96 - $223,200). . . . . . . . . . . . . . 229,857 222,348
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,175,593 2,064,108
Less: Allowance for loan losses . . . . . . . . . . . (30,137) (26,215)
- ----------------------------------------------------------------------------------------
Net loans. . . . . . . . . . . . . . . . . . . . . . . . . 2,145,456 2,037,893
Bank premises and equipment, net . . . . . . . . . . . . . 67,501 65,705
Accrued interest receivable. . . . . . . . . . . . . . . . 30,477 29,233
Intangible assets. . . . . . . . . . . . . . . . . . . . . 39,532 39,182
Other assets . . . . . . . . . . . . . . . . . . . . . . . 30,609 32,219
- ----------------------------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $3,164,899 $3,116,398
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing. . . . . . . . . . . . . . . . . . . $ 384,905 $ 431,078
Interest-bearing . . . . . . . . . . . . . . . . . . . 2,085,786 2,106,362
- ----------------------------------------------------------------------------------------
Total deposits . . . . . . . . . . . . . . . . . . . . . . 2,470,691 2,537,440
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . 70,502 78,369
Other short-term borrowings. . . . . . . . . . . . . . . . 189,151 169,265
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 78,566 46,750
Accrued interest payable . . . . . . . . . . . . . . . . . 15,970 17,027
Other liabilities. . . . . . . . . . . . . . . . . . . . . 18,634 21,665
- ----------------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 2,843,514 2,870,516
Company-obligated mandatorily redeemable
preferred securities of CFB Capital I . . . . . . . . 60,000 -
Minority interest. . . . . . . . . . . . . . . . . . . . . - 1,311
Shareholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . . . . . - 22,988
Common stock . . . . . . . . . . . . . . . . . . . . . . 187 172
Capital surplus. . . . . . . . . . . . . . . . . . . . . 101,017 77,029
Retained earnings. . . . . . . . . . . . . . . . . . . . 159,072 144,239
Unrealized gain available-for-sale securities,
net of tax . . . . . . . . . . . . . . . . . . . . . . 1,232 1,368
Less cost of common stock in treasury --
June 30, 1997 -- 3,534 shares, December 31,
1996 -- 50,810 shares. . . . . . . . . . . . . . (123) (1,225)
- ----------------------------------------------------------------------------------------
Total shareholders' equity . . . . . . . . . . . . . . . . 261,385 244,571
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity . . . . . . . . $3,164,899 $3,116,398
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
(Dollars in thousands, except per share data) (restated) (restated)
(UNAUDITED) 1997 1996 1997 1996
- --------------------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,124 $ 44,223 $ 103,739 $ 86,534
Investment securities. . . . . . . . . . . . . . . . . . 11,330 11,088 22,795 21,860
Interest-bearing deposits. . . . . . . . . . . . . . . . 300 51 345 88
Federal funds sold and resale agreements . . . . . . . 24 175 24 719
- -------------------------------------------------------------------------------------------------------------------
Total interest income. . . . . . . . . . . . . . . . . . . 64,778 55,537 126,903 109,201
- -------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . 21,369 19,743 42,535 39,860
Short-term and other borrowings. . . . . . . . . . . . . 4,016 1,998 7,063 3,198
Long-term debt . . . . . . . . . . . . . . . . . . . . . 587 1,130 1,491 2,464
- -------------------------------------------------------------------------------------------------------------------
Total interest expense . . . . . . . . . . . . . . . . . . 25,972 22,871 51,089 45,522
- -------------------------------------------------------------------------------------------------------------------
Net interest income. . . . . . . . . . . . . . . . . . . . 38,806 32,666 75,814 63,679
Provision for loan losses. . . . . . . . . . . . . . . . . 3,271 1,416 5,032 2,331
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses. . . . 35,535 31,250 70,782 61,348
- -------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts. . . . . . . . . . . 3,581 3,033 7,086 5,878
Insurance commissions. . . . . . . . . . . . . . . . . . 1,429 1,235 2,634 2,179
Fees from fiduciary activities . . . . . . . . . . . . . 919 883 1,852 1,616
Net gain (loss) on sales of available-for-sale
securities . . . . . . . . . . . . . . . . . . . . . . 64 (1) 61 1
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 5,792 1,526 8,335 2,943
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income:. . . . . . . . . . . . . . . . . 11,785 6,676 19,968 12,617
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits . . . . . . . . . . . . . 16,457 13,118 31,469 25,747
Net occupancy. . . . . . . . . . . . . . . . . . . . . . 4,119 3,044 8,117 6,192
FDIC expense . . . . . . . . . . . . . . . . . . . . . . 90 63 102 130
Legal and accounting . . . . . . . . . . . . . . . . . . 521 458 885 933
Other professional service . . . . . . . . . . . . . . . 632 520 1,079 936
Data processing. . . . . . . . . . . . . . . . . . . . . 438 368 720 591
Acquisition expense. . . . . . . . . . . . . . . . . . . - 14 69 19
Company-obligated mandatorily redeemed preferred
securities of CFB Capital I . . . . . . . . . . . 1,331 - 2,145 -
Amortization of intangibles. . . . . . . . . . . . . . . 938 787 1,920 1,538
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 6,130 5,417 11,210 10,571
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense. . . . . . . . . . . . . . . . . 30,656 23,789 57,716 46,657
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item. . . . . 16,664 14,137 33,034 27,308
Provision for income taxes . . . . . . . . . . . . . . . . 5,529 4,849 11,102 9,439
- -------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item . . . . . . . . . . . 11,135 9,288 21,932 17,869
Extraordinary item: Loss from early extinguishment of debt
(Less applicable income taxes of $159) . . . . . . . . . - - (265) -
- -------------------------------------------------------------------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 11,135 $ 9,288 $ 21,667 $ 17,869
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Net income applicable to common equity . . . . . . . . . . $ 11,135 $ 8,885 $ 21,667 $ 17,064
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Earnings per common and common equivalent share:
Primary before extraordinary item. . . . . . . . . . . . $0.59 $0.54 $1.20 $1.04
Extraordinary item . . . . . . . . . . . . . . . . . . . 0.00 0.00 (0.02) 0.00
- -------------------------------------------------------------------------------------------------------------------
Primary. . . . . . . . . . . . . . . . . . . . . . . . . $0.59 $0.54 $1.18 $1.04
- -------------------------------------------------------------------------------------------------------------------
Fully diluted before extraordinary item. . . . . . . . . $0.59 $0.52 $1.17 $1.00
Extraordinary item . . . . . . . . . . . . . . . . . . . 0.00 0.00 (0.02) 0.00
- -------------------------------------------------------------------------------------------------------------------
Fully diluted. . . . . . . . . . . . . . . . . . . . . . $0.59 $0.52 $1.15 $1.00
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Average common and common equivalent shares:
Primary. . . . . . . . . . . . . . . . . . . . . . . . . 18,945,576 16,469,875 18,343,078 16,451,408
Fully diluted. . . . . . . . . . . . . . . . . . . . . . 19,001,175 17,935,189 18,773,723 17,923,147
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------------------------
(In thousands) (restated)
(UNAUDITED) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 21,667 $ 17,869
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . 5,032 2,331
Depreciation . . . . . . . . . . . . . . . . . . . . . 3,863 3,428
Amortization of intangibles. . . . . . . . . . . . . . 1,920 1,538
Net amortization of premiums & discounts
on securities . . . . . . . . . . . . . . . . . . 69 1,067
Increase in interest receivable. . . . . . . . . . . . (1,244) (1,524)
Decrease in interest payable . . . . . . . . . . . . . (1,057) (1,230)
Other - net . . . . . . . . . . . . . . . . . . . . . (3,445) (3,778)
- ---------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . 26,805 19,701
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits . . (11,300) 1,530
Purchases of available-for-sale securities . . . . . . . (134,018) (145,235)
Maturities of available-for-sale securities. . . . . . . 125,269 123,700
Sales of securities, net of gains. . . . . . . . . . . . 33,947 4,598
Purchases of held-to-maturity securities . . . . . . . . (21,874) (13,893)
Maturities of held-to-maturity securities. . . . . . . . 14,169 15,673
Net increase in loans. . . . . . . . . . . . . . . . . . (112,595) (85,284)
Net increase in bank premises and equipment. . . . . . . (5,659) (11,409)
Net (decrease) increase in minority interest . . . . . . (1,311) 280
- ---------------------------------------------------------------------------------------
Net cash used in investing activities. . . . . . . . . . . (113,372) (110,040)
Cash flows from financing activities:
Net decrease in demand deposits, NOW accounts and
savings accounts . . . . . . . . . . . . . . . . . . . . (109,616) (69,625)
Net increase in time accounts. . . . . . . . . . . . . . . 42,867 32,303
Net increase in short-term & other borrowings. . . . . . . 12,019 120,638
Net increase (decrease) in long-term debt. . . . . . . . . 31,751 (40,357)
Proceeds from issuance of company-obligated mandatorily
redeemable preferred securities of CFB Capital I . . . . 60,000 -
Net proceeds from issuance of common stock . . . . . . . . 1,067 -
Purchase of common stock held in treasury. . . . . . . . . (870) (790)
Sale of common stock held in treasury. . . . . . . . . . . 896 2,230
Retirement of common stock . . . . . . . . . . . . . . . . - (349)
Redemption of preferred stock. . . . . . . . . . . . . . . (52) -
Preferred stock dividends paid . . . . . . . . . . . . . . - (805)
Common stock dividends paid. . . . . . . . . . . . . . . . (5,758) (3,199)
- ---------------------------------------------------------------------------------------
Net cash provided by financing activities. . . . . . . . . 32,304 40,046
- ---------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents. . . . . . . . . (54,263) (50,293)
Cash and cash equivalents at beginning of period . . . . . 179,332 163,516
- ---------------------------------------------------------------------------------------
Cash and cash equivalents at end of period . . . . . . . . $ 125,069 $ 113,223
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
Note A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements, which include the accounts of Community First Bankshares, Inc.
(the "Company"), its wholly-owned data processing, credit origination,
insurance agency and properties subsidiaries, and its seven wholly-owned
subsidiary banks, have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for fair
presentation have been included.
The Company acquired Mountain Parks Financial Corporation
("Mountain Parks") on December 18, 1996, in a transaction accounted for as a
pooling of interests. Accordingly, the consolidated financial information
has been restated for all periods prior to the acquisition to include the
accounts and operations of Mountain Parks. The acquisition of Mountain Parks
resulted in the addition of approximately $600 million in assets.
Earnings Per Common Share
Primary earnings per common share is calculated by dividing net
income, after reduction for preferred stock dividends declared, by the
weighted average number of common shares and equivalents outstanding. Common
share equivalents included in the computation represent the number of shares
of common stock issuable upon assumed exercise of stock options and warrants
during each period.
On a fully diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of convertible preferred
stock outstanding from the beginning of the period or date of issuance, if
later. Such adjustments to the weighted average number of shares of common
stock outstanding are made only when such adjustments dilute earnings per
share.
Note B - BUSINESS DIVESTITURES
On April 30, 1997, the Company sold its 24.36% minority interest
in Vail Banks, Inc., the parent company of WestStar Bank, Vail, Colorado for
approximately $3 million. The sale was completed in response to regulatory
requirements with regard to competitive factors resulting from the Company's
December 1996 acquisition through merger of Mountain Parks.
On April 4, 1997, the Company, through its Colorado subsidiary,
completed the sale of its offices in Granby and Grand Lake, Colorado in
response to regulatory requirements with regard to competitive factors
resulting from the Company's merger with Mountain Parks. The transaction
included approximately $24 million in deposits and resulted in the
recognition of a gain of approximately $2.8 million.
Note C -SUBSEQUENT EVENTS
On July 14, 1997, the Company completed the acquisition of KeyBank, N.A.
(Wyoming) with 28 offices located in 24 communities throughout the state of
Wyoming. The transaction resulted in the addition of approximately $1.0
billion in assets and $900 million in deposits.
6
<PAGE>
Note D - ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board issued
Statement no. 128, "Earnings Per Share," which is required to be adopted on
December 31, 1997. This Statement replaces the current method of computing
earnings per share with basic and diluted earnings per share and will require
restatement of all prior periods when adopted. Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock
options will be excluded. The calculation of diluted earnings per share will
be similar to the currently diluted earnings per share. The adoption of SFAS
128 is not expected to have a material impact on the calculation of earnings
per share.
Note E - INVESTMENTS
The following is a summary of available-for-sale and
held-to-maturity securities at June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
Available-for-Sale Securities
- -------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Treasury . . . . . . . $ 101,899 $ 589 $ 364 $ 102,124
United States Government agencies. . 91,400 202 707 90,895
Mortgage-backed securities . . . . . 230,988 3,058 678 233,368
Collateralized mortgage obligations. 34,788 146 224 34,710
State and Political Securities . . . 16,177 188 191 16,174
Other Securities . . . . . . . . . . 4,307 39 117 4,229
- -------------------------------------------------------------------------------------
$ 479,559 $ 4,222 $ 2,281 $ 481,500
------------------------------------------------
------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
- -------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government agencies. . $ 803 $ - $ 12 $ 791
Mortgage-backed securities . . . . . 77,837 417 1,123 77,131
State and political securities . . . 51,620 1,116 51 52,685
Other Securities . . . . . . . . . . 99,597 - - 99,597
- -------------------------------------------------------------------------------------
$ 229,857 $ 1,533 $ 1,186 $ 230,204
------------------------------------------------
------------------------------------------------
</TABLE>
Proceeds from the sale of available-for-sale securities during
the three months ended June 30, 1997 and 1996, were $31,156,000 and
$3,998,000, respectively. Gross gains of $110,000 and $0 were realized on
sales during 1997 and 1996, respectively. Gross losses of $48,000 and $0
were realized on these sales during 1997 and 1996, respectively. Gains and
losses at disposition of these securities were computed using the specific
identification method.
Note F - LOANS
The composition of the loan portfolio at June 30, 1997, was as
follows (in thousands):
Real estate . . . . . . . . . . . $ 975,764
Commercial. . . . . . . . . . . . 563,912
Agricultural. . . . . . . . . . . 236,722
Consumer and other. . . . . . . . 399,195
-------------
2,175,593
Less allowance for loan losses. . (30,137)
-------------
Net loans. . . . . . . . . . . $ 2,145,456
-------------
-------------
7
<PAGE>
Note G - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is party to
financial instruments with off-balance sheet risk to meet the financing needs
of its customers and to manage its interest rate risk. These financial
instruments include commitments to extend credit and letters of credit. The
contract or notional amounts of these financial instruments at June 30, 1997,
were as follows (in thousands):
Commitments to extend credit . . . $ 305,072
Letters of credit. . . . . . . . . 13,310
Note H - SUBORDINATED NOTES
Long-term debt at June 30, 1997 included $60 million of
subordinated notes issued in June 1997. These notes are due June 30, 2004,
and bear an interest rate of 7.30%, with interest payable semi-annually.
Long-term debt also included $12 million in subordinated notes issued in July
1995, which are due August 15, 2005 and bear an interest rate of 9.00%, with
interest payable monthly. At June 30, 1997, both issues, totaling $72
million, qualified as Tier 2 capital.
Note I - INCOME TAXES
The Company's effective tax rate has declined due to expansion
into additional states and implementation of certain tax strategies.
The reconciliation between the provision for income taxes and the
amount computed by applying the statutory federal income tax rate was as
follows (in thousands):
June 30, 1997
-------------
35% of pretax income . . . . . . . . $ 11,562
State income tax, net of federal
tax benefit. . . . . . . . . . . . 820
Tax-exempt interest. . . . . . . . (1,152)
Amortization of goodwill . . . . . 453
Other . . . . . . . . . . . . . (581)
-------------
Provision for income taxes . . . . $ 11,102
Note J - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH
FLOWS
Six months ended June 30 (in thousands) 1997 1996
- -------------------------------------------------------------------------------
Unrealized loss on available-for-sale securities $ 317 $ 8,219
Conversion of preferred stock to common stock 22,988 -
Note K - CONTINGENT LIABILITIES
As a result of certain legal proceedings related to the May 1995
purchase of Abbott Bank Group, Inc. (with offices in Alliance, Nebraska and
10 other Nebraska communities), the Company retained a portion of the
purchase price in the form of a contingency reserve. Upon resolution of
various proceedings, associated balances may be remitted to the former Abbott
Bank Group shareholders. At June 30, 1997, the reserve balance was $908,000.
All remaining issues subject to the reserve are expected to be resolved
within a one-year period. It is management's expectation that resolution of
the remaining issues will not exceed the current reserve balance.
8
<PAGE>
Note L - SHAREHOLDERS' EQUITY
During March 1997, the Company redeemed its 7% Cumulative
Convertible Preferred Stock ("Preferred Stock"). Holders of the Company's
Depositary Shares (stated value of $25 per share) which represented ownership
of one-quarter share of the Preferred Stock were permitted to convert their
shares, prior to redemption into common stock of the Company ("Common Stock")
at a conversion rate of 1.569 shares of Common Stock per Depositary Share or
they could receive $26.40, plus accrued and unpaid dividends. Essentially
all shares were converted to Common Stock resulting in the addition of
approximately 1.4 million shares of Common Stock.
On February 5, 1997, the Company issued $60 million of 8-7/8%
Cumulative Capital Securities, through CFB Capital I, a business trust
subsidiary organized in January 1997. A portion of the proceeds were used to
redeem $23 million in aggregate principal amount of 7.75% Subordinated Notes.
The remainder of the proceeds of the offering were used in the acquisition
of KeyBank N.A. (Wyoming) in July 1997. All $60 million of the capital
securities qualify as Tier I Capital for regulatory capital calculation
purposes.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Basis of Presentation
The following is a discussion of the Company's financial
condition as of June 30, 1997, and December 31, 1996, and its results of
operations for the three month periods ended June 30, 1997 and 1996. On
December 18, 1996, the Company merged with Mountain Parks Financial
Corporation in a transaction accounted for using the pooling of interests
method. Accordingly, the consolidated financial information has been restated
to reflect the results of operations of the two companies on a combined basis
for all periods presented. Each of the other acquisitions described in the
table below is reflected in the Company's results of operations for all
periods following the acquisition and is reflected in the Company's statement
of financial condition at all dates subsequent to the acquisition.
Merger and Acquisition Activity
The Company completed three acquisitions during 1996, and, as of
June 30, 1997, the Company had one pending bank acquisition. Each of these
acquisitions has had, or will have, an effect upon the Company's results of
operations and financial condition.
During 1996, the Company made the following acquisitions of banks or
associated holding companies:
Total Assets
at Date of
Month and Holding Company or Acquisition
Year Location of Bank (In Millions)
---------------------------------------------------------
October 1996 Trinidad, Colorado 70
July 1996 Kiowa, Colorado 58
July 1996 Englewood, Colorado 19
On July 14, 1997, the Company completed the acquisition of
KeyBank N.A. (Wyoming). The transaction, which is expected to be accounted
for as a purchase, will result in the addition of approximately $1.0 billion
in assets and $900 million in deposits. Under terms of the agreement, the
Company made a cash payment of $135 million to KeyCorp, the parent
corporation of KeyBank N.A. (Wyoming). The transaction will result in the
recognition of goodwill by the Company of approximately $60 million.
Overview
For the three months ended June 30, 1997, net income was $11.1
million, an increase of $1.8 million, or 19.4%, from the $9.3 million earned
during the 1996 period. Fully diluted earnings per common share for the
second quarter of 1997 were $0.59.
Return on average assets was 1.43% for the second quarter of
1997, compared with 1.34% for the 1996 period. Return on average common
shareholders' equity for the 1997 and 1996 periods was 17.76% and 18.75%,
respectively. Factors contributing to these changes included incremental net
income provided by entities acquired in 1996 and an increase in net interest
margin.
For the six months ended June 30, 1997, net income was $21.7
million, an increase of $3.8 million, or 21.2%, from the $17.9 million earned
during the 1996 period. This included the effect of a $265,000 after tax
extraordinary expense associated with the Company's early extinguishment of
its $23 million in principal amount of 7.75% Subordinated Notes due April
2000, which were redeemed on March 31, 1997. Primary earnings per common
share for the six months ended June 30, 1997, were $1.18, compared to $1.04
in 1996. Fully diluted earnings per common share for the six months ended
June 30, 1997, were $1.15.
Return on average assets and return on common equity for the six
months ended June 30, 1997 were 1.41% and 18.22%, respectively, as compared
to the 1996 ratios of 1.30% and 18.27%, respectively.
10
<PAGE>
Results of Operations
Net Interest Income
Net interest income for the three months ended June 30, 1997, was
$38.8 million, an increase of $6.1 million, or 18.7%, from the net interest
income of $32.7 million earned during the 1996 period. The increase was
principally due to the increased asset base associated with the acquisitions
completed during 1996, and an increase in the net interest margin to 5.60%
during the second quarter of 1997, from 5.32% during the 1996 period.
Net interest income for the six months ended June 30, 1997 was
$75.8 million, an increase of $12.1 million, or 19.0%, from interest income
of $63.7 million earned during the 1996 period.
Provision for Loan Losses
The provision for loan losses for the three months ended June 30,
1997, was $3.3 million, an increase of $1.9 million, or 135.7%, from the $1.4
million provision during the 1996 period. This increase reflects the
Company's objective of maintaining adequate reserve levels in recognition of
significant loan growth in the Company's specialty lending subsidiaries
acquired through the Company's merger with Mountain Parks in 1996.
Noninterest Income
Noninterest income for the three months ended June 30, 1997, was
$11.8 million, an increase of $5.1 million, or 76.1%, from the 1996 level of
$6.7 million. The increase was due to the combination of an increase of
$446,000 earned by banks acquired in 1996, an increase of $324,000 in the
existing bank deposit service charges, a $185,000 increase in existing bank
insurance commissions, a $36,000 increase in trust fees, and an increase in
other income of $4.1 million, which was due primarily to a gain on the sale
of loans by one of the Company's specialty lending subsidiaries and a gain of
approximately $2.8 million on the sale of the Company's offices in Granby and
Grand Lake, Colorado.
Noninterest income for the six months ended June 30, 1997, was
$20.0 million, an increase of $7.4 million, or 58.7%, from the 1996 level of
$12.6 million. The increase was due to a $1.2 million increase in deposit
service charges, of which $479,000 was in banks acquired in 1996. In
addition, insurance commissions increased $455,000, trust fees increased
$236,000, and other income increased $5.4 million, which was due primarily to
the gain on sale of loans and the gain on the sale of the Granby and Grand
Lake, Colorado offices.
Noninterest Expense
Noninterest expense for the three months ended June 30, 1997, was
$30.7 million, an increase of $6.9 million, or 29.0%, from the level of $23.8
million during the 1996 period. The increase was principally due to an
increase of $3.3 million, or 25.5%, in salaries and employee benefits,
resulting from banks acquired in 1996, flood disaster employee assistance and
charges taken to conform personnel costs in acquired institutions. Net
occupancy increased $1.1 million, or 36.7% due to bank's acquired in 1996.
The second quarter of 1997 included $1.3 million in expenses related to the
$60 million Company-obligated mandatorily redeemable preferred securities of
CFB Capital I.
11
<PAGE>
Noninterest expense for the six months ended June 30, 1997, was
$57.7 million, an increase of $11.0 million, or 23.6%, from $46.7 million
during the 1996 period. The increase was principally due to a $5.7 million
increase in salaries and employee benefits, which included $1.6 million at
banks acquired during 1996, flood disaster employee assistance and charges
taken to conform personnel costs in acquired institutions. In addition, net
occupancy increased $1.9 million or 30.6%, due to banks acquired in 1996.
The 1997 period included $2.1 million in expenses related to the $60 million
Company-obligated mandatorily redeemable preferred securities of CFB Capital
I. Amortization of intangibles increased $382 million or 24.8% from $1.5
million during the period ended June 30, 1996, to $1.9 million during the
current period, due primarily to 1996 acquisitions.
Provision for Income Taxes
The provision for income taxes for the three months ended June
30, 1997, increased $680,000 million, from the prior year, due primarily to
the increase in pre-tax income resulting from acquisitions completed since
March 1996, and an increase in the net interest margin.
The provision for income taxes for the six months ended June 30,
1997, was $11.1 million, an increase of $1.7 million, or 18.1%, from the 1996
level of $9.4 million, due to the increase in the level of pretax income.
Financial Condition
Loans
The following table presents the Company's balance of each major
category of loans:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
---------------------------------------------------------------------------------------------
Percent of Percent of
Amount Total Loans Amount Total Loans
--------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loan Category:
Real estate. . . . . . . . . . . . . $ 975,764 44.85% $ 871,432 42.22%
Commercial . . . . . . . . . . . . . 563,912 25.92% 624,456 30.25%
Agricultural . . . . . . . . . . . . 236,722 10.88% 222,081 10.76%
Consumer and other . . . . . . . . . 399,195 18.35% 346,139 16.77%
- ---------------------------------------------------------------------------------------------
Total loans. . . . . . . . . . . . . 2,175,593 100.00% 2,064,108 100.00%
----------- -------------
----------- -------------
Less allowance for loan losses . . . 30,137 26,215
------------ ------------
Total. . . . . . . . . . . . . . . . . $ 2,145,456 $ 2,037,893
------------ ------------
------------ ------------
</TABLE>
Nonperforming Assets
Nonperforming assets of the Company are summarized in the
following table:
June 30, December 31,
1997 1996
-----------------------------------
Loans:
Nonaccrual loans. . . . $ 14,642 $ 12,796
Restructured loans. . . . . 195 267
- --------------------------------------------------------------------------
Nonperforming loans . . 14,837 13,063
Other real estate owned. . . . . . . . 1,874 1,426
- --------------------------------------------------------------------------
Nonperforming assets . . . . . . . . . $ 16,711 $ 14,489
- --------------------------------------------------------------------------
Loans 90 days or more past due
but still accruing . . . . . . . . . $ 2,077 $ 1,956
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Nonperforming loans as a percentage
of total loans . . . . . . . . . . . .68% .63%
Nonperforming assets as a percentage
of total assets. . . . . . . . . . . .53% .46%
Nonperforming assets as a percentage
of loans and OREO. . . . . . . . . . .77% .70%
12
<PAGE>
At June 30, 1997, nonperforming assets were $16.7 million,
including $6.3 million at the Company's specialty lending subsidiaries, an
increase of $2.2 million, or 15.2%, from the $14.5 million level at December
31, 1996. The increase was principally due to an increase in the level of
non-accrual loans at the Company's specialty lending subsidiaries, consistent
with their growth in loans. The specialty lending subsidiaries consist of
(i) a specialty consumer mortgage company involved in originating
non-conforming residential mortgages and (ii) a consumer finance company with
approximately $39 million in total assets as of June 30, 1997 that focuses on
the purchase, origination and servicing of consumer installment contracts.
At June 30, 1997, nonperforming loans as a percent of total loans was .68%,
as a result of the combination of .49% at the bank level and 5.24% at the
Company's specialty lending subsidiaries, up from the December 31, 1996 level
of .63%. OREO was $1.9 million of which $1.7 million was attributed to the
Company's specialty lending subsidiaries, at June 30, 1997, an increase of
$448,000 from $1.4 million at December 31, 1996.
Allowance for Loan Losses
The following table sets forth the Company's allowance for loan
losses:
June 30,
1997 1996
-------------------------
(Dollars in thousands) (restated)
Balance at beginning of period . . . . . . . $ 26,215 $ 22,712
Acquired bank and other allowances . . . . . 1,110 44
Charge-offs:
Commercial. . . . . . . . . . 814 390
Real estate . . . . . . . . . 182 97
Agricultural. . . . . . . . . 172 144
Consumer and other. . . . . . 2,318 943
- -------------------------------------------------------------------
Total charge-offs. . . . . . 3,486 1,574
- -------------------------------------------------------------------
Recoveries:
Commercial. . . . . . . . . . 494 111
Real estate . . . . . . . . . 296 201
Agricultural. . . . . . . . . 62 44
Consumer and other. . . . . . 414 126
- -------------------------------------------------------------------
Total recoveries . . . . . . 1,266 482
Net charge-offs. . . . . . . . . . . . . . . 2,220 1,092
Provision charged to operations. . . . . . . 5,032 2,331
- -------------------------------------------------------------------
Balance at end of period . . . . . . . . . . $ 30,137 $ 23,995
- -------------------------------------------------------------------
- -------------------------------------------------------------------
Allowance as a percentage of total loans . . 1.39% 1.30%
Annualized net charge-offs to average
loans outstanding . . . . . 0.21% 0.12%
At June 30, 1997, the allowance for loan losses was $30.1
million, an increase of $3.9 million from the December 31, 1996 level of
$26.2 million. Net charge-offs during the 1997 period were $306,000 more
than those incurred during the three months ended June 30, 1996, as a result
of net charge-offs at the Company's specialty lending subsidiaries of
$603,000 and a $297,000 reduction in bank net charge-offs.
At June 30, 1997, the allowance for loan losses as a percentage
of total loans was 1.39%, an increase from the June 30, 1996, level of 1.30%.
During the three months ended June 30, 1997, net charge-offs increased to
$2.2 million. These charge-offs related to the Company's continued periodic
review of the existing loan portfolios and an increase of $815,000 in
charge-offs related to loan growth at the Company's specialty lending
subsidiaries.
13
<PAGE>
Investments
The investment portfolio, including available-for-sale securities
and held-to-maturity securities, decreased $18 million, or 2.5%, to $711
million at June 30, 1997, from $729 million at December 31, 1996. At June
30, 1997, the investment portfolio represented 22.5% of total assets,
compared with 23.4% at December 31, 1996. In addition to investment
securities, the Company had investments in interest-bearing deposits of $15
million at June 30, 1997, an $11 million increase from the $4 million at
December 31, 1996.
Deposits
Total deposits were $2.5 billion at June 30, 1997 and December
31, 1996. Noninterest-bearing deposits at June 30, 1997, were $385 million,
a decrease of $46 million, or 10.7%, from $431 million at December 31, 1996.
The company's core deposits as a percent of total deposits were 90.1% and
90.8% as of June 30, 1997, and December 31, 1996, respectively.
Interest-bearing deposits were $2.1 billion at June 30, 1997 and December 31,
1996. The shift in the Company's deposit mix from noninterest-bearing
deposits to interest-bearing deposits and the decrease were due to
seasonality of deposits, which were at relatively high year-end levels.
Borrowings
Short-term borrowings of the Company were $189 million as of June
30, 1997, as compared to $169 million at December 31, 1996, an increase of
$20 million, or 11.8%.
Long-term debt of the Company was $79 million as of June 30,
1997, compared with $47 million as of December 31, 1996. The increase
reflects the net impact of the Company's redemption of its $23 million 7.75%
Subordinated Notes due April 15, 2000 on March 31, 1997 at a redemption price
of 100% of principal amount and the issuance of $60 million of 7.30%
Subordinated Notes due June 30, 2004 during June 1997.
Capital Management
Shareholders' equity increased $16 million, or 6.5%, to $261
million at June 30, 1997, from $245 million at December 31, 1996. At June
30, 1997, the Company's Tier 1 capital, total risk-based capital and leverage
ratios were 11.26%, 15.34%, and 8.89%, respectively, compared to minimum
required levels of 4%, 8% and 3%, respectively (subject to change and the
discretion of regulatory authorities to impose higher standards in individual
cases). At June 30, 1997, the Company had risk-weighted assets of $2.5
billion.
During March 1997, the Company redeemed its 7% Cumulative
Convertible Preferred Stock ("Preferred Stock"). Holders of the Company's
Depositary Shares (stated value of $25 per share) which represented ownership
of one-quarter share of the Preferred Stock were permitted to convert their
shares, prior to redemption into common stock of the Company ("Common Stock")
at a conversion rate of 1.569 shares of Common Stock per Depositary Share or
they could receive $26.40, plus accrued and unpaid dividends. Essentially
all shares were converted to Common Stock resulting in the addition of
approximately 1.4 million shares of Common Stock.
On February 5, 1997 the Company issued $60 million of 8-7/8%
Cumulative Capital Securities, through CFB Capital I, a business trust
subsidiary organized in January 1997. All $60 million of the capital
securities qualify as Tier I Capital for regulatory capital calculation
purposes.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
None.
Item 2. Changes in Securities:
None.
Item 3. Defaults upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K:
On July 29, 1997, the Company filed a current report on
Form 8-K dated July 14, 1997, which reported the Company's
acquisition of KeyBank, N.A. (Wyoming).
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY FIRST BANKSHARES, INC.
Date:
-----------------------------------------
Mark A. Anderson
Executive Vice President, Chief Financial
Officer, Treasurer, Secretary
(Principal Financial and
Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT IN FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 124,364
<INT-BEARING-DEPOSITS> 14,898
<FED-FUNDS-SOLD> 705
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 481,500
<INVESTMENTS-CARRYING> 229,857
<INVESTMENTS-MARKET> 230,204
<LOANS> 2,175,593
<ALLOWANCE> 30,137
<TOTAL-ASSETS> 3,164,899
<DEPOSITS> 2,470,691
<SHORT-TERM> 189,151
<LIABILITIES-OTHER> 105,106
<LONG-TERM> 78,566
0
0
<COMMON> 187
<OTHER-SE> 261,198
<TOTAL-LIABILITIES-AND-EQUITY> 3,164,899
<INTEREST-LOAN> 53,124
<INTEREST-INVEST> 11,330
<INTEREST-OTHER> 324
<INTEREST-TOTAL> 64,778
<INTEREST-DEPOSIT> 21,369
<INTEREST-EXPENSE> 25,972
<INTEREST-INCOME-NET> 38,806
<LOAN-LOSSES> 3,271
<SECURITIES-GAINS> 64
<EXPENSE-OTHER> 30,656
<INCOME-PRETAX> 16,664
<INCOME-PRE-EXTRAORDINARY> 11,135
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,135
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
<YIELD-ACTUAL> 0
<LOANS-NON> 14,642
<LOANS-PAST> 2,077
<LOANS-TROUBLED> 195
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,215
<CHARGE-OFFS> 3,486
<RECOVERIES> 1,266
<ALLOWANCE-CLOSE> 30,137
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
