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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
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COMMISSION FILE NO. 0-19368
COMMUNITY FIRST BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 46-0391436
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
520 MAIN AVENUE
FARGO, ND 58124-0001
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(Address of principal executive offices and zip code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (701) 298-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE
7% CUMULATIVE CONVERTIBLE PREFERRED STOCK
DEPOSITARY SHARES REPRESENTING 7% CUMULATIVE
CONVERTIBLE PREFERRED STOCK
PREFERRED STOCK PURCHASE RIGHTS
8-7/8% CUMULATIVE CAPITAL SECURITIES, $25 LIQUIDATION
AMOUNT*
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and 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-K or any amendment to this
Form 10-K.
As of March 14, 1997, assuming as market value the price of $31.125 per share,
the average between the high and low sale prices on the Nasdaq National Market,
the aggregate market value of shares held by nonaffiliates was approximately
$456 million.
As of March 14, 1997, the Company had outstanding 17,183,660 shares of Common
Stock, $.01 par value, net of treasury shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Shareholders and the Proxy Statement for
the Company's Annual Meeting of Shareholders to be held May 6, 1997, are
incorporated by reference into Parts II and III, respectively, of this Form
10-K, to the extent described in such Parts.
* The 8-7/8% Cumulative Capital Securities (the "Capital Securities") were
issued by CFB Capital I ("CFB Capital"), a wholly owned Delaware business trust
subsidiary of the Company. The Company has also fully and unconditionally
guaranteed all of CFB Capital's obligations under the Capital Securities.
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TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . 4
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . 14
Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS . . . . . . . . . . . . . . . . . 15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . 15
Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . 15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. . . . . . . . . . . . . . . . . . . 15
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . 15
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . 16
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT. . . . . . . . . . . . . . . . . 16
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . 16
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . 16
Item 13. CERTAIN ELATIONSHIPS AND RELATED
TRANSACTIONS . . . . . . . . . . . . . . . . . . . 16
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS OF FORM 8-K. . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 22
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Community First Bankshares, Inc. (the "Company"), is a multi-bank
holding company that as of December 31, 1996 operated banks and bank branches
(the "Banks") in 79 communities in Colorado, Iowa, Minnesota, Nebraska, North
Dakota, South Dakota and Wisconsin. Total assets of the Company were $3.1
billion as of December 31, 1996. On February 18, 1997, the Company signed a
purchase agreement with KeyCorp to acquire its Wyoming subsidiary bank, KeyBank
National Association, Cheyenne, Wyoming ("KeyBank"), for a purchase price of
$135 million. As of December 31, 1996, KeyBank had total assets of $1.2 billion
and banking offices in 24 communities in Wyoming. Regulatory approval of the
purchase and consummation of the transaction will result in the recognition of
goodwill by the Company of approximately $60 million.
The Banks are community banks that provide a full range of commercial
and consumer banking services primarily to individuals and businesses in small
and medium-sized communities and the surrounding market areas. The Company
encourages local autonomy by local Bank presidents, while providing to the Banks
the benefits of holding company affiliation. The Company maintains a subsidiary
bank phantom stock program, pursuant to which presidents of the subsidiary Banks
participate in the equity appreciation of their respective local Banks. The
Company believes this program is important to provide these individuals with a
direct incentive to improve the performance of their Banks.
In 1986, officers of the Company formed three separate bank holding
companies to acquire 21 banks and bank branches from First Bank System, Inc.
("FBS") in Minnesota, North Dakota and South Dakota. In 1987, the three holding
companies purchased these original banks from FBS and its affiliates. After the
adoption of the necessary interstate banking laws in these three states, the
three holding companies were merged into a single bank holding company in
transactions in 1989 and 1991. Since its formation, the Company has acquired 23
community banks, purchased 4 bank or thrift branches and acquired 28 insurance
agencies currently operated in communities served by the Company's Banks.
COMMUNITY BANKING STRATEGY
The Company's strategy is to operate and continue to acquire banks with
approximately $20 million to $150 million in assets in each of the Company's
selected communities, which communities generally have populations between 3,000
and 50,000 and are generally located in the key target acquisition states of
Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, North Dakota, South
Dakota, Wisconsin and Wyoming, and additionally in the adjacent states of Idaho,
Illinois, Missouri, New Mexico, Oklahoma and Utah (this sixteen state area is
collectively referred to as the "Acquisition Area"). Such communities are
believed to provide the Company with a stable, relatively low-cost deposit base.
The Company provides the Banks with the advantages of affiliation with a
multi-bank holding company, such as data processing services, credit policy
formulation and review, purchases of assets, investment management and
specialized staff support. The Company grants substantial autonomy to managers
of the Banks with respect to day-to-day operations, customer service decisions
and marketing. The Banks are encouraged to participate in community activities,
support local charities and community development, and otherwise enhance their
images in their communities.
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THE BANKS
The Banks provide a full range of commercial and consumer banking
services primarily to individuals and businesses in small and medium-sized
communities and the surrounding market areas. The Banks draw most of their
deposits from and make most of their loans within their respective market areas.
The Banks owned by the Company as of December 31, 1996, were located in
Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin.
COMMUNITIES SERVED
The Banks, as of December 31, 1996, were located in communities with
populations ranging from approximately 200 to 20,000, except for Fargo, which
has a population of approximately 77,000, and Englewood, Colorado, a suburb of
Denver. Each of the Banks serves a market area with greater population because,
in many cases, there are few or no other financial institutions within a
reasonable distance from the community in which the Bank is located. The
economies of the Banks' communities, especially those in Nebraska, North Dakota
and South Dakota, depend primarily on farming, farm service and agricultural
supply businesses. Agriculture in these communities is affected by many factors
beyond the control of the Banks, including weather, governmental policies,
fluctuating commodity prices, demand and production and natural disasters. As
with other small, nonmetropolitan communities in the Upper Midwest, many of the
communities in which the Banks presently operate have experienced and are
expected to experience no growth or a decline in population. The Company has
operated profitably in these communities. However, if reductions in population
or adverse economic trends in specific communities result in decreased
profitability in the Banks or offices located in those communities, the Company
may consider selling such Banks or offices or reducing the level of services
provided in such communities.
ACQUISITION STRATEGY
The Company intends to continue its growth by making acquisitions of
community banks and other financial institutions in selected communities in the
Acquisition Area. The Company believes it is well-positioned to acquire and
profitably operate community banks because of its experience in operating
community banks, its ability to provide centralized management to those banks
and its access to capital. The Company believes many owners of community banks
are seeking to sell their banks for a variety of reasons, including lack of
shareholder liquidity, management succession problems, the difficulty of
compliance with current multiple-layered bank regulations and increasing
competition from non-bank organizations. The Company believes there are over
2,000 community banks that are possible acquisition candidates in the
Acquisition Area.
The Company competes with individuals and institutions, including major
regional bank holding companies, for suitable acquisition candidates within the
Acquisition Area. Acquisition competitors of the Company in the Acquisition
Area range from regional bank holding companies to individual bank owners who
own or control banks in the Acquisition Area. The process of industry
consolidation is likely to accelerate as a result of the adoption of the
Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"). Effective
September 29, 1995, the new law eased remaining state barriers to interstate
acquisitions. IBBEA provides for multi-state branch systems beginning June 1,
1997, subject to special "opt-in" and "opt-out" provisions. Most states have
now adopted implementing legislation. The effect of the new legislation is
likely to both facilitate the Company's acquisitions and to increase the number
of potential acquirers of banks in the Acquisition Area.
The Company has established a due diligence review process to evaluate
acquisition targets and has established acquisition parameters for target
acquisitions relating to market factors, financial performance and
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certain nonfinancial factors. Market factors considered by the Company include
the size and long-term viability of the community and market area served by the
target bank, the dominance of the acquisition target (which should be the
largest or second largest financial institution in the market) and the proximity
of other existing Banks owned by the Company. In exploring markets in regions
not currently served by the Company, management looks for similarities between
the new market areas and the Company's existing market areas in terms of culture
and economic bases. Financial analyses performed by the Company in evaluating
acquisition prospects include review of historical performance, comparison to
peers and the Company's Banks in terms of key operating performance ratios
(including earnings, staffing and loan quality) and target ratios. The Company
determines the price it is willing to pay for an institution based on, among
other factors, the anticipated ten-year average return on invested equity
capital. Nonfinancial considerations in evaluating an acquisition prospect
include the quality of the management team's skill and the demand on management
resources to integrate the target institution. Finally, each target acquisition
must undergo an extensive review of loan asset quality, operating procedures and
deposit structure before the Company commits to a purchase. The Company's level
of future acquisitions will depend, in part, on its ability to attract and
retain management level employees capable of performing efficient review of
credit quality standards of proposed acquisition candidates. Acquisition
opportunities presented to the Company that have not met the requirements
described above have not been pursued.
Because of limited growth opportunities in many of the existing markets
served by the Company, management believes future growth in the business
earnings of the Company will largely depend on consummation of acquisitions
consistent with the Company's acquisition strategy. Successful completion of
acquisitions by the Company depends upon such factors as the availability of
suitable acquisition candidates, necessary regulatory approvals and necessary
approvals of holders of the Company's and other providers of credit, compliance
with applicable capital requirements and, in the case of expansion into new
states, the availability of additional management resources required to operate
banks in widely dispersed geographical areas.
PENDING ACQUISITIONS
The Company routinely solicits and reviews acquisition opportunities
and, at any given time, may have bids outstanding or may be involved in
negotiations with the owners of financial institutions or other parties relative
to a particular financial institution, its branches or its deposit accounts.
On February 18, 1997, the Company signed a purchase agreement with
KeyCorp to acquire KeyBank National Association, Cheyenne, Wyoming ("KeyBank")
for a purchase price of $135 million. As of December 31, 1996, KeyBank had
total assets of $1.2 billion and banking offices in 24 communities in Wyoming.
The transaction, which will be accounted for as a purchase, will result in the
recognition of goodwill of approximately $60 million. The purchase price is
expected to be funded through a combination of the proceeds from the Company's
January 1997 issue of $60 million 8-7/8% Cumulative Capital Securities, portions
of bank lines of credit, net income received prior to closing and the proceeds
of any possible further sales of subordinated debt or equity securities prior to
the closing of the transaction. The transaction is subject to regulatory
approval and is anticipated to close during the third quarter of 1997.
RECENT ACQUISITIONS
In 1996, the Company completed the acquisitions described below, each of
which was accounted for as a pooling of interests.
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FINANCIAL BANCORP, INC. On October 1, 1996, the Company acquired
Financial Bancorp, Inc., Trinidad, Colorado ("Financial Bancorp"), the holding
company of Trinidad National Bank, Trinidad Colorado (the "Trinidad Bank"). At
September 30, 1996, Financial Bancorp had total assets of approximately $69.5
million and total stockholders' equity of approximately $9.6 million. Upon
completion of the merger, the Company issued 538,803 shares of common stock to
the former holders of Financial Bancorp common stock. The market value of the
Company's common stock issued in the merger was approximately $12.7 million,
based on the closing price of the Company's common stock on the Nasdaq National
Market on September 30, 1996. The Trinidad Bank is a community bank located in
southeastern Colorado that serves a wide range of commercial, agricultural and
consumer banking needs within its market.
MOUNTAIN PARKS FINANCIAL CORP. On December 18, 1996, the Company
acquired Mountain Parks Financial Corp. ("Mountain Parks"), a bank holding
company that operated a state chartered bank with full service commercial
banking facilities in 17 Colorado communities. At September 30, 1996, Mountain
Parks had total assets of approximately $581.8 million and total stockholders'
equity of approximately $57.1 million. Upon completion of the merger, the
Company issued approximately 5.2 million shares of common stock to the former
holders of Mountain Parks common stock. The market value of the Company's
common stock issued in the merger was approximately $142.2 million, based on the
closing price of Company common stock on the Nasdaq National Market on December
18, 1996.
As part of the acquisition of Mountain Parks, the Company also acquired
(i) an 85% interest in Equity Lending, Inc., a specialty consumer mortgage
company involved in originating non-conforming residential mortgages in Arizona,
Colorado, Minnesota and Wisconsin, and (ii) Mountain Parks Financial Services,
Inc., a consumer finance company located in Denver, Colorado that focuses on the
purchase, origination and servicing of consumer installment contracts, primarily
sub-prime auto finance contracts. On January 3, 1997, the Company acquired the
remaining 15% interest in Equity Lending, Inc.
ADMINISTRATION OF BANKS
The Company provides policy and management direction and specialized
staff support in general areas while relying on Bank managers for day-to-day
operations, customer service decisions and community relations. The Company is
responsible for policy-related functions, such as supervisory credit review,
audits, personnel policies and internal examination activities. Resource
allocations for administrative support by the Company are balanced to provide
adequate support services for the Banks' operations, while carefully controlling
service costs charged to the Banks. The major areas of administration are as
follows:
CREDIT. The Company's lending activities are guided by the general loan
policy established by the Board of Directors. The Senior Credit Committee of
the Company has established loan approval limits for each region of the Company
and each subsidiary Bank. Amounts in excess of the individual Bank lending
authority are presented to the Regional Credit Officers. Loans above $1,500,000
per nonclassified borrower and $250,000 per classified borrower are presented to
the Senior Credit Committee for approval. The Company's credit policy
establishes guidelines for approval of all credits, including local loans and
purchased loans and loan participations. The credits of the Banks are subject
to internal review by Bank officers every 12 months. The loan portfolios of the
Banks are subject to examination by the Company's credit examination staff every
12 to 24 months, the frequency of which is based on a variety of factors,
including the credit quality of the institution. The credit examination staff
is also responsible for credit review with respect to the assets of banks to be
acquired by the Company.
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FINANCE. The Board of Directors of the Company has established policies
in the areas of asset/liability management, investments, capital expenditures,
accounting procedures and capital and dividend management. Policies are
implemented and monitored for compliance by the Chief Financial Officer and the
Asset/Liability Committee of the Company.
OPERATIONS. Community First Service Corporation ("CFSC"), a subsidiary
of the Company, provides data processing and operations support services to the
Banks by contract. CFSC's system is designed to provide for all Bank and
customer data processing needs at the lowest possible cost and can be expanded
to accommodate future growth and additional service applications. The Company
believes CFSC has sufficient capacity to provide services to the banks the
Company has agreed to acquire. In addition to its own office facilities in
Fargo, North Dakota, CFSC also uses Mountain Park's data processing facility in
Golden, Colorado. Additional expenditures for equipment, consistent with the
increased data processing volumes, would likely be necessary if additional
significant acquisitions occur during 1997.
OTHER SERVICES. The Company provides other services for the benefit of
the Banks, such as outside professional services, central human resources
services, benefits administration, marketing guidance and centralized purchasing
of supplies.
INSURANCE AGENCIES
The Company currently owns and operates insurance agencies located in 30
communities served by the Banks through its subsidiaries, Community Insurance,
Inc. ("CII"), and Community First Insurance Agencies, Inc. ("CFIA"). These
agencies are primarily engaged in the sale of property and casualty insurance
and make some sales of other types of insurance, such as life, accident and crop
hail insurance. The Company had commission revenue of $4.2 million in 1996.
OTHER ACTIVITIES
The Company has steadily consolidated Banks located in each state into
single legal charters with multiple locations. As of December 31, 1996, the
Company had 14 separately chartered subsidiary Banks. That number was
subsequently reduced, on February 14, 1997, to 10 Banks, and on April 1, 1997,
the Company expects to have 7 subsidiary Banks. The subsidiary Banks of the
Company in six locations maintain trust departments, but their services are more
broadly available and the Company may expand its trust activities in the future.
Trust services are made available to customers in several locations through
local trust officers or by appointment with members of the trust department.
Most of the Banks also sell annuities. Federal bank regulation permits bank
holding companies to engage in other limited activities, such as the
distribution of certain types of securities, and future changes in such
regulation may further expand the types of activities in which the Company may
engage. Although the Company intends to maintain its focus on the banking
business in its targeted market areas, the Company will consider other permitted
business activities as opportunities arise.
COMPETITION
Commercial banking is highly competitive. In the conduct of certain
aspects of their business, the Banks compete with other commercial banks,
savings and loan institutions, issuers of fixed income investments, finance
corporations, credit unions and money market funds, among other types of
institutions. The Banks compete with these institutions in such areas as
obtaining new deposits, offering new types of services and setting loan rates
and interest rates on various types of deposits, as well as other aspects of the
banking business. Management believes community residents and businesses prefer
to deal with local banks and the Banks have generally been
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able to compete successfully in their respective communities because of the
Company's emphasis on local ownership and the autonomy of Bank management in
community relations. At the same time, the Company provides the Banks with the
advantages of centralized sophisticated administration and the opportunity to
make larger loans and diversify their lending activity through Bank group
participations. Further, because most of the Banks have a significant market
share in the communities they serve, the Company believes the Banks can, to a
degree, influence deposit and loan pricing in their markets and are subject to
less competition based on deposit and loan pricing than would be the case in
larger metropolitan markets with more competitors. However, the Banks have
experienced increased price competition from credit unions in certain market
areas in recent periods. Future changes in government regulation of banking,
particularly any future state legislation permitting interstate branching or
legislation in certain states to permit statewide branching, may increase
competition by both out-of-state and in-state banking organizations and by other
financial institutions. See "Supervision and Regulation," below. The Banks
compete with other financial institutions, including government lending
agencies, for high quality loans in the Banks' market areas and for purchases of
loan assets and investment assets. While management believes the Banks will
continue to compete successfully in their communities, there is no assurance
that future competition will not adversely affect the Banks' earnings.
EMPLOYEES
The Company had 1,680 employees at December 31, 1996, including 1,280
full-time employees and 400 part-time employees. Of these individuals, 78 were
employed at the holding company level, 1,368 (including 1,038 full-time
employees) were employed at the Bank level, 158 were employed by CFSC and 76
were employed by CII and CFIA.
SUPERVISION AND REGULATION
GENERAL. In addition to a variety of generally applicable state and
federal laws governing businesses and employers, the Company and the Banks are
extensively regulated by federal and state laws applicable only to financial
institutions. Virtually all aspects of the Company's operations are subject to
specific requirements or restrictions and general regulatory oversight from laws
regulating consumer finance transactions, such as Truth In Lending Act, Home
Mortgage Disclosure Act and Equal Credit Opportunity Act, to laws regulating
collections and confidentiality, such as Fair Debt Collections Practices Act,
Fair Credit Reporting Act and Right to Financial Privacy Act. With few
exceptions, state and federal banking laws have as their principal objective
either the maintenance of the safety and soundness of the Federal Deposit
Insurance System or the protection of consumers or classes of consumers, rather
than the specific protection of security holders of the Company.
With the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the FDIC Improvement Act of 1991 ("FDICIA")
and the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"),
Congress enacted comprehensive legislation affecting the commercial banking and
thrift industries. FIRREA, among other things, abolished the Federal Savings
and Loan Insurance Corporation and established two new insurance funds under the
jurisdiction of the FDIC: the Bank Insurance Fund ("BIF"), which insures most
commercial banks, including the Banks, and the Savings Association Insurance
Fund, which insures most thrift institutions. In addition to effecting
far-reaching restructuring of the financial industry, FIRREA provided a
phased-in increase in the rate of annual insurance assessments paid by insured
depository institutions. FDICIA increased funding for the BIF and expanded
regulation of depository institutions and their affiliates, including parent
holding companies. FDICIA further provided authority for special assessments
against insured deposits and for the development of a system of assessing
deposit insurance premiums based upon the institutions's risk.
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IBBEA generally liberalized multi-state expansion. Effective September
29, 1995, IBBEA significantly eased restrictions on interstate acquisition of
banks by bank holding companies. Beginning June 1, 1997, banks located in
different states may merge and operate the resulting institution as a single
charter with interstate branches. However, the legislation includes special
"opt-out" and "opt-in" provisions that individuals may adopt prior to the
effective date of interstate branching. IBBEA does NOT affect the branching
laws within a state, and imposes concentration limits limiting the resulting
organization's market share to 30% of state deposits and 10% of total United
States deposits.
Congress continues to consider wide-ranging proposals for altering the
structure, regulation and competitive relationships of the nation's financial
institutions. It cannot be predicted whether or in what form any of these
proposals will be adopted or the extent to which the business of the Company may
be affected thereby.
BANK HOLDING COMPANY REGULATION. The Company is a bank holding company
within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). As a result, the Company's activities are subject to certain limitations
under the BHC Act, and transactions between the Company and the Banks and other
affiliates are subject to certain restrictions. As a registered bank holding
company, the Company is required to file semiannual reports with the Federal
Reserve Board ("FRB") and such other information as the FRB may require, and is
subject to examination by the FRB. The FRB has the authority to issue cease and
desist orders against the Company and its nonbank subsidiaries if the FRB
determines that actions by the Company are unsafe, unsound or violate the law.
Under certain circumstances, redemptions, dividends or distributions by the
Company with respect to its equity securities may be considered unsafe or
unsound practices.
As a bank holding company, the acquisition of "control" of the Company
by an individual or a "company" is subject to the prior approval of the FRB.
The term "company" is broadly defined to include any corporation, partnership,
association or trust or similar organization, while the definition or control
for these purposes may be met by (i) the ownership, control or power to vote 10%
or more of the outstanding shares of any class of voting stock of the Company,
directly or indirectly, (ii) control over the election priority of Directors of
the Company, or (iii) the power to exercise, directly or indirectly, controlling
influence over the management or policies of the Company.
Under the BHC Act, a bank holding company must obtain prior FRB approval
before it acquires direct or indirect ownership or control of any voting shares
of any bank or other bank holding company if, after such acquisition, it will
own or control directly or indirectly more than 5% of the voting stock of the
target, unless it already owns a majority of the voting stock of the target. A
bank holding company also must obtain prior FRB approval before it acquires all
or substantially all of the assets of a bank or merges or consolidates with
another bank holding company.
A bank holding company is, with limited exceptions, prohibited from
acquiring direct or indirect ownership or control of a company that is not a
bank or a bank holding company, and must engage in the business of banking or
managing or controlling banks or furnishing services to or performing services
for its subsidiary banks. The FRB, by order or regulation, may authorize a bank
holding company to engage in or acquire stock in a company engaged in activities
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities the FRB has determined by regulation
to be incidental to the business of banking are: making and servicing loans or
certain types of leases, engaging in discount brokerage activities, performing
certain data processing services and providing insurance brokerage services
under certain conditions and subject to certain limitations.
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In reviewing any application or proposal by a bank holding company, the
FRB is required to consider the financial and managerial resources and future
prospects of the bank holding company and the banks concerned, the convenience
and needs of the community to be served, as well as the probable effect of the
transaction upon competition. Recent decisions by the FRB under the BHC Act
have underscored the importance placed by the FRB upon the record of the
applicant and its subsidiary banks in meeting the credit needs of its community
in accordance with the Community Reinvestment Act of 1977.
BANK REGULATION. The Banks are subject to detailed federal and state
laws and regulations. National bank subsidiaries of the Company are primarily
supervised by the Office of the Comptroller of the Currency (the "OCC"), a
bureau of the United States Department of Treasury. The OCC regularly examines
national banks in such areas as reserves, loans, investments, trust services,
management practices, Community Reinvestment Act compliance and other aspects of
bank operations. These examinations are designed for the protection of the
deposit insurance system and the enforcement of federal and state laws and
regulations, and not for the shareholders of the Company. In addition to
undergoing these regular examinations, national banks must furnish reports
containing detailed and accurate financial statements and schedules to the OCC
quarterly.
Bank subsidiaries of the Company that are chartered under state law are
regulated and supervised by the respective state's banking agency. In addition,
state-chartered banks, as members of the FDIC, are regulated and supervised by
the FDIC. Each of these agencies conducts regular examinations of each Bank,
generally on an alternate basis, reviewing the adequacy of the reserves, quality
of the loans and investments, propriety of management practices, compliance with
laws and regulations, including the Community Reinvestment Act, trust, and other
aspects of Bank operations. These examinations are designed for the protection
of the deposit insurance system and the enforcement of federal and state laws
and regulations, and are not conducted for the benefit of the shareholders of
the Company.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, investments a bank may make, reserves a
bank must maintain, loans a bank makes and collateral it takes, the activities
of a bank with respect to mergers and consolidations and the establishment of
branches. The OCC, in the case of national banks, and the FDIC, in the case of
state-chartered, nonmember banks, are the respective primary regulatory
authorities under the Financial Institution Supervisory Act, and are thereby
provided authority under that Act to impose penalties, initiate civil and
administrative actions and take other steps intended to prevent a bank from
engaging in an unsafe or an unsound practice in the conduct of its business. In
extreme cases, the FDIC has authority to revoke deposit insurance, and may
assess civil money penalties and impose cease and desist orders against the bank
and affiliated individuals, including the bank's attorneys and accountants.
Under FDICIA, federal banking authorities are also authorized to establish
safety and soundness standards for banks, thrifts and their parent holding
companies covering a wide range of operational and managerial matters, including
asset quality, earnings, stock valuation and employee compensation.
Under current law, national and state bank subsidiaries of the Company
are subject to state law restrictions in branching, including restrictions on
the number, location and characteristics of branches. The laws vary from
liberal branching states, like North Dakota and Wisconsin, which allow banks to
branch freely, subject only to application and approval, to states like Iowa
and Nebraska, which severely restrict branching, although they allow banks to
combine and retain preexisting locations.
In June 1993, the FDIC adopted a risk-based premium schedule that
increases the assessment rates for depository institutions. Under the new
schedule, which took effect for the assessment period beginning January 1, 1994,
each financial institution is assigned to one of three capital groups: well
capitalized, adequately capitalized or undercapitalized, as defined in the
regulations implementing the prompt corrective action provisions
11
<PAGE>
of the FDICIA; and further assigned to one of three subgroups within a capital
group, on the basis of supervisory evaluations by the institution's primary
federal and, if applicable, state supervisors and other information relevant to
the institution's financial condition and the risk posed to the applicable
insurance fund. The actual assessment rate applicable to a particular
institution depends upon the risk assessment classification so assigned to the
institution by the FDIC. Because the BIF has reached its required reserve level
of 1.25% of insured deposits, banks in the lowest risk classification pay no
deposit insurance premiums currently. Each of the Banks currently qualifies for
the lowest level of deposit insurance.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
NAME AGE POSITION
Donald R. Mengedoth 52 President, Chief Executive Officer and
Chairman of the Board
Mark A. Anderson 39 Executive Vice President, Chief Financial
Officer, Secretary and Treasurer
Ronald K. Strand 50 Executive Vice President - Banking Group
David E. Groshong 48 Executive Vice President - Financial
Services
Thomas E. Hansen 44 Senior Vice President and Central Region
Manager
Bruce A. Heysse 45 Senior Vice President - Acquisitions
Thomas A. Hilt 54 Senior Vice President - Operations and
Administration
Gary A. Knutson 49 Senior Vice President and Western Region
Manager
David A. Lee 53 Senior Vice President and Eastern Region
Manager
Patricia J. Staples 41 Senior Vice President - Marketing
Harriette S. McCaul 46 Senior Vice President - Human Resources
Donald R. Mengedoth has been President, Chief Executive Officer, Chairman
of the Board and a director of the Company since its organization in 1986. He
was Senior Vice President of First Bank System, Inc. ("FBS") from 1982 to 1987
and has worked in the banking business since 1966, including management
positions in retail banking operations, human resources and commercial lending.
From 1984 to 1987, Mr. Mengedoth was Regional Managing Director of FBS. From
1979 to 1982, Mr. Mengedoth was Vice President - Operations for FBS. Prior to
that time, he was Senior Vice President of First Bank Milwaukee.
Mark A. Anderson has been Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company since its organization in 1986.
He was Vice President and Regional Controller for FBS from
12
<PAGE>
1984 to 1987. From 1979 to 1984, he held various positions with FBS-affiliated
banks in the finance and credit analysis areas. Mr. Anderson is a Chartered
Financial Analyst and a Certified Management Accountant.
Ronald K. Strand has been Executive Vice President - Banking Group since
February 1993. He was previously Senior Vice President and Regional Manager for
South Dakota and North Dakota for the Company from January 1991 to February
1993. Previously, Mr. Strand had been Vice President and Regional Manager for
the Company and President, Chief Executive Officer and a director of the
Company's affiliate bank in Wahpeton, North Dakota since 1988. Prior to his
affiliation with the Company, he served as President and Chief Executive Officer
of Norwest Bank of North Dakota, N.A., Wahpeton, from 1985 until 1988. He was
employed by Norwest for a total of 15 years, having previously worked in Norwest
banks in Jamestown, North Dakota, and Moorhead, Minnesota.
David E. Groshong has been Executive Vice President - Financial Services
since May 1996. He was previously Chairman and Chief Executive Officer of the
Company's affiliate bank in Alliance, Nebraska from May 1995 to May 1996.
Previously, Mr. Groshong had been President and Chief Executive of the Company's
affiliate bank in Fergus Falls, Minnesota since 1992 and as Senior Vice
President and Senior Loan Officer of the Fargo Bank since 1985. He was employed
by Norwest Bank of Minnesota, N.A. for a total of eight years and prior to that
worked in the consumer finance industry.
Thomas E. Hansen has been Senior Vice President and Central Region Manager
since April 1993. He also served as President, Chief Executive Officer and
director of the Company's affiliate bank in Fargo, North Dakota from April 1993
to December 1996. Previously, he was employed by Norwest Bank Fargo for 19
years, most recently as President.
Bruce A. Heysse has been Senior Vice President - Acquisitions since July
1996. He was Senior Vice President and Integration Manager of the Company from
November 1995 to June 1996. He was Vice President and Senior Credit Officer of
the Company from 1987 to November 1995. He began his banking career at the
Company's affiliate bank in Wahpeton, North Dakota, and had a total of 11 years
of banking experience prior to joining the Company.
Thomas A. Hilt has been Senior Vice President - Operations and
Administration of the Company since 1987 and President of Community First
Service Corporation, the Company's data processing subsidiary, since 1988. He
was Vice President and Manager - Operations Support for the Regional Division of
FBS from 1984 to 1987. Prior to 1984, he held various positions with FBS since
1967, including responsibility for systems development, programming, audit and
examination functions.
Gary A. Knutson has been Senior Vice President and Western Region Manager
of the Company since September 1993. He was President, Chief Executive Officer
and director of the Company's affiliate bank in Wahpeton, North Dakota from
January 1991 to September 1993. He began his banking career at the Company's
affiliate bank in Lidgerwood, North Dakota, and had a total of 14 years of
banking experience prior to joining the Company.
David A. Lee has been Senior Vice President and Eastern Region Manager of
the Company since January 1991. He had been a Region Manager of the Company
since 1987. He was President and Chief Executive Officer and a director of the
Company's affiliate bank in Little Falls from 1988 to January 1993. Mr. Lee
held various positions with FBS from 1966 to 1982.
13
<PAGE>
Patricia J. Staples has been Senior Vice President - Marketing since July
1994. Previously, Ms. Staples was employed as the public relations manager with
MeritCare Health System for 10 years.
Harriette S. McCaul, Ph.D., has been Senior Vice President of Human
Resources since February 1997. Previously, she was the Dean of the College of
Business Administration at North Dakota State University in Fargo, North Dakota.
She joined NDSU in 1983 and held various teaching and administrative positions
in the Business Department and human resources area. Prior to that time, she
was an instructor at Moorhead State University, Moorhead, Minnesota, and the
director of faculty and staff benefits at the University of Kansas.
ELECTION. The Company's officers are elected by the Board of Directors.
The officers serve until their successors are elected or until their earlier
resignation, removal or death.
ITEM 2. PROPERTIES
In January 1996, the Company formed a new subsidiary, Community First
Properties, Inc. ("CFPI"), for the purpose of acquiring and owning the space
currently occupied by the Company. CFPI owns all of the portions of the office
building not owned by the Company's Fargo Bank subsidiary at 520 Main Avenue,
Fargo, North Dakota.
The Company maintains its offices at 520 Main Avenue, Fargo, North Dakota,
consisting of 12,564 square feet at an annual rental of $297,948, payable to its
subsidiary, CFPI. The Company believes these facilities will be adequate for
the foreseeable future. Each of the Banks owns its main office and those of its
branches, and these facilities range in size from approximately 1,200 to 36,000
square feet. CFSC leases 11,089 square feet of office space in Fargo at an
annual rental of $120,108 through August 31, 1997. CFSC will continue to lease
this space on a month-to-month basis until the completion of a building being
constructed by the Company, into which CFSC anticipates moving in the fourth
quarter of 1997.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are subject to various
legal actions and proceedings in the normal course of business, some of which
may involve substantial claims for compensatory damages. In some cases, these
actions and proceedings relate in whole or in part to activities of banks prior
to their acquisition and may be covered by agreements of former owners of these
banks to indemnify the Company. Although litigation is subject to many
uncertainties and the ultimate exposure with respect to current matters cannot
be ascertained, management does not believe that the final outcome will have a
material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information as to the principal market on which the Company's common stock
is traded, market price information for the common stock of the Company, the
approximate number of holders of record as of December 31, 1996, and the
Company's dividend policy is incorporated herein by reference from the inside
back cover of the 1996 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1996,
consisting of data captioned "Financial Highlights" on page 1 of the 1996 Annual
Report to Shareholders, "Consolidated Statement of Condition--Five-Year Summary"
on page 44 of the Annual Report and "Consolidated Statement of Income-Five Year
Summary" on page 45 of the Annual Report are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 15 through 26 of the 1996 Annual Report to
Shareholders is incorporated hereby by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Statements of Financial Condition of the Company as of
December 31, 1996 and 1995, and the related Consolidated Statements of Income,
Shareholders' Equity and Cash Flows for each of the three years ended December
31, 1996, the Notes to the Consolidated Financial Statements and the Report of
Ernst & Young LLP, independent auditors, contained in the Company's 1996 Annual
Report to Shareholders on pages 27 through 43 are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Company's 1997 Proxy Statement under the
caption "Election of Directors" is incorporated herein by reference.
Information regarding the executive officers of the Company is included under
separate caption in Part I of this Form 10-K.
15
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the 1997 Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference, except that
information under the captions "Compensation Committee Report on Executive
Compensation" and "Comparative Stock Performance" is not so incorporated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the 1997 Proxy Statement under the caption
"Security Ownership of Principal Shareholders and Management" is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the 1997 Proxy Statement under the caption
"Certain Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS FORM 10-K:
1. FINANCIAL STATEMENTS. See Item 8, above.
2. FINANCIAL STATEMENT SCHEDULES. All financial statement schedules are
omitted as the required information is inapplicable or the information
is presented in the financial statements or related notes.
3. PRO FORMA FINANCIAL INFORMATION. None.
(b) REPORTS ON FORM 8-K. None.
On October 18, 1996, the Company filed a Form 8-K report describing under
Item 5 the acquisition of Financial Bancorp, Inc. and certain recent
litigation.
(c) EXHIBITS.
16
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger dated as of August 12, 1994, between
the Registrant and Minowa Bancshares, Inc. (incorporated by
reference to Exhibit 2.1 to the Registrant's Registration
Statement on Form S-4 [File No. 33-84746], as declared effective
by the Commission on January 23, 1995).
2.2 Restated Agreement and Plan of Merger dated as of December 6,
1994, among the Registrant, Colorado Acquisition Corporation and
First Community Bankshares, Inc. (incorporated by reference to
Exhibit 10.1 to the Form 8-K report of the Registrant dated
January 20, 1995).
2.3 Agreement and Plan of Merger dated as of November 28, 1994,
between the Registrant and Abbott Bank Group, Inc. (incorporated
by reference to Exhibit 10.2 to the Form 8-K report of the
Registrant dated January 20, 1995).
2.4 Master Agreement dated July 22, 1994, between the Registrant and
Bank of Colorado Holding Company, including as Exhibit A the form
of Purchase and Assumption Agreement executed by Colorado
Community First State Bank of Steamboat Springs and Vail Bank
(incorporated by reference to Exhibit 2.13 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
[the "1994 Form 10-K"]).
2.5 Stock Purchase Agreement dated as of June 7, 1995 by and among
BNCCORP, Inc., Gregory Cleveland and Tracy Scott, and the
Registrant relating to Farmers & Merchants Bank of Beach
(incorporated by reference to Exhibit 2.12 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995
[the "1995 Form 10-K"]).
2.6 Agreement and Plan of Merger dated as of March 8, 1996 among the
Registrant, Trinidad Acquisition Corporation and Financial
Bancorp, Inc. (the holding company for Trinidad National Bank)
(incorporated by reference to Exhibit 2.1 to the Registrant's
Registration Statement on Form S-4 [File No. 333- 6239], as
declared effective by the Commission on August 9, 1996.
2.7 Agreement and Plan of Reorganization dated as of June 25, 1996
between the Registrant and Mountain Parks Financial Corp.
(incorporated by reference to the Appendix to the Registrant's
Joint Proxy Statement with Mountain Parks Financial Corp.
included in the Registration Statement on Form S-4 [File No.
333-14439], as declared effective by the Commission on November
7, 1996).
2.8 Stock Purchase Agreement dated as of February 18, 1997 by and
among the Registrant, KeyCorp and Key Bank of the Rocky
Mountains, Inc. (the holding company for KeyBank National
Association (Wyoming)).
3.1 Restated Certificate of Incorporation of the Registrant, as
amended by a Certificate of Amendment filed with the Delaware
Secretary of State on December 18, 1996.
17
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 [File
No. 33-41246], as declared effective by the Commission on August
13, 1991 [the "1991 S-1"]).
4.1 Certificate of Designations, Preferences and Rights of 7%
Cumulative Convertible Preferred Stock of the Registrant
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-3 [File No. 33-77398], as
declared effective by the Securities and Exchange Commission on
May 4, 1994 [the "1994 Form S-3"]).
4.2 Deposit Agreement dated as of May 4,1994, by and among the
Registrant, Norwest Bank Minnesota, National Association, as
Depositary, and the Holders, from time to time, of the Depositary
Receipts (incorporated by reference to Exhibit 4.2 to the 1994
Form S-3).
4.3 Form of Rights Agreement dated as of January 5, 1995, between the
Registrant, and Norwest Bank Minnesota, National Association,
which includes as Exhibit B thereto the form of Rights
Certificate (incorporated by reference to Exhibit 1 to the Form
8-A report dated January 6, 1995).
10.1 1996 Annual Incentive Plan for Holding Company Management.*
10.2 Restated 1987 Stock Option Plan (incorporated by reference to Exhibit
10.7 to the Registrant's Registration Statement on Form S-8 [File No.
33-46744], as declared effective by the Commission on May 6, 1992).*
10.3 Form of Tax Sharing Agreement between the Registrant and each of its
subsidiary Banks (incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 [the "1995 Form 10-K"]).
10.4 Form of Service Agreement for Data Processing between Community
First Service Corporation and each of the subsidiary Banks of the
Registrant (incorporated by reference to Exhibit 10.4 to the 1995
Form 10-K).
10.5 Form of Bank Services Agreement between the Registrant and each of its
subsidiary Banks (incorporated by reference to Exhibit 10.5 to the 1995
Form 10-K).
10.6 Form of Agency Agreement between the Registrant and each of its
subsidiary Banks, and Assignment of Agency Agreement and Second
Assignment of Agency Agreement, which assign the Registrant's
interest in the Agency Agreement to Community First Financial,
Inc. (relating to the Registrant's subsidiary Banks)
(incorporated by reference to Exhibit 10.6 to the 1995 Form
10-K).
18
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
10.7 Real Property Lease dated May 1991 among Richard A. Hentges, HLS
Associates and the Registrant relating to the Registrant's
previous corporate offices (incorporated by reference to Exhibit
10.24 to the 1991 S-1).
10.8 Office Lease Agreement dated October 18, 1988, between Dacotah
Prairie Associates and Community First Service Corporation, and
addendum to Office Lease Agreement dated April 30, 1991
(incorporated by reference to Exhibit 10.25 to the 1991 S-1).
10.9 Lease Agreement dated November 8, 1988, between Winthrop
Resources Corp. and Community First Service Corporation
(incorporated by reference to Exhibit 10.26 to the 1991 S-1).
10.10 Lease dated April 27, 1993, between Community First Properties,
Inc. (formerly Fargo Tower Partners) and the Registrant
(incorporated by reference to Exhibit 10.11 to the 1994 10-K).
10.11 Letter Agreement dated May 11, 1995 by and between the Registrant
and Norwest Bank Minnesota, N.A. (incorporated by reference to
Exhibit 10.11 to the 1995 Form 10-K)
10.12 Promissory Note dated December 21, 1995, issued to Norwest Bank
Minnesota, National Association, in the principal amount of
$26,000,000 (incorporated by reference to Exhibit 10.12 to the
1995 Form 10-K).
10.13 Letter Agreement dated May 11, 1995, by and between the
Registrant and Harris Trust and Savings Bank regarding
$10,000,000 Line of Credit (incorporated by reference to Exhibit
10.13 to the 1995 Form 10-K).
10.14 Form of Indemnification Agreement entered into by and between the
Registrant and the Registrant's officers and directors
(incorporated by reference to Exhibit 10.33 to the 1993 Form
10-K).
10.15 1996 Stock Option Plan, as approved by the Board of Directors on
February 6, 1996(incorporated by reference to Exhibit 10.15 to the
1995 Form 10-K).
13.1 Annual Report to Shareholders.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
- -----------------
*Executive compensation plans and arrangements.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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.
("Registrant")
Dated: March 19, 1997 By/S/ DONALD R. MENGEDOTH
-----------------------------------
Donald R. Mengedoth
President, Chief Executive
Officer and Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant, in
the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
/S/ DONALD R. MENGEDOTH March 19, 1997
- ---------------------------------------
Donald R. Mengedoth
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
/S/ MARK A. ANDERSON March 19, 1997
- ---------------------------------------
Mark A. Anderson
Executive Vice President, Chief
Financial Officer, Secretary and
Treasurer (Principal Financial
and Accounting Officer)
/S/ PATRICIA A. ADAM March 19, 1997
- ---------------------------------------
Patricia A. Adam, Director
/S/ JAMES T. ANDERSON March 19, 1997
- ---------------------------------------
James T. Anderson, Director
/S/ PATRICK E. BENEDICT March 19, 1997
- ---------------------------------------
Patrick E. Benedict, Director
20
<PAGE>
SIGNATURE AND TITLE DATE
- ---------------------------------------
/S/ PATRICK DELANEY March 19, 1997
- ---------------------------------------
Patrick Delaney, Director
/S/ JOHN H. FLITTIE March 19, 1997
- ---------------------------------------
John H. Flittie, Director
/S/ CARGILL MACMILLAN, JR. March 19, 1997
- ---------------------------------------
Cargill MacMillan, Jr., Director
/S/ DEAN E. SMITH March 19, 1997
- ---------------------------------------
Dean E. Smith, Director
/S/ THOMAS C. WOLD March 19, 1997
- ---------------------------------------
Thomas C. Wold, Director
/S/ HARVEY L. WOLLMAN March 19, 1997
- ---------------------------------------
Harvey L. Wollman, Director
/S/ DENNIS M. MATHISEN March 19, 1997
- ---------------------------------------
Dennis M. Mathisen, Director
<PAGE>
EXHIBIT 2.8
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
by and among
COMMUNITY FIRST BANKSHARES, INC.,
KEY BANK OF THE ROCKY MOUNTAINS, INC.,
and
KEYCORP
Dated as of February 18, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1 DEFINITIONS.....................................................1
ARTICLE 2 PURCHASE AND SALE...............................................4
2.1 Purchase by the Buyer.............................................4
2.2 Purchase Price; Adjustments to Purchase Price.....................5
2.3 Earnest Money Deposit.............................................6
2.4 Closing Date......................................................6
2.5 Intercompany Accounts.............................................7
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF
THE SELLER......................................................7
3.1 Organization, Standing and Authority
of the Seller and the Holding Company...........................7
3.2 Organization, Standing and Authority
of the Bank.....................................................8
3.3 Authorized and Effective Agreement................................8
3.4 Capital Structure of the Bank.....................................9
3.5 Financial Statements; Call Reports...............................10
3.6 Certain Events Since September 30, 1996..........................11
3.7 Absence of Undisclosed Liabilities...............................12
3.8 Loans............................................................12
3.9 Legal Proceedings................................................13
3.10 Compliance with Laws.............................................13
3.11 Brokers and Finders..............................................13
3.12 Properties.......................................................14
3.13 Agreements with Regulatory Authorities...........................15
3.14 Certain Contracts................................................15
3.15 Contract Defaults................................................15
3.16 Insurance........................................................15
3.17 Employee Benefit Plans...........................................16
3.18 Taxes and Tax Returns............................................17
3.19 Labor Matters....................................................18
3.20 Environmental Matters............................................18
3.21 Regulatory Approval..............................................19
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF
THE BUYER......................................................19
4.1 Organization, Standing and Authority
of the Buyer and Buyer's Holding Company.......................19
4.2 Authorized and Effective Agreement...............................20
4.3 Legal Proceedings................................................21
4.4 Brokers and Finders..............................................21
4.5 Financing........................................................21
4.6 Regulatory Approval..............................................21
4.7 Agreements with Banking Authorities..............................21
4.8 Non-Distributive Intent..........................................21
<PAGE>
ARTICLE 5 COVENANTS......................................................22
5.1 Applications.....................................................22
5.2 Efforts..........................................................22
5.3 Conduct of Business of the Bank Pending
Closing........................................................23
5.4 Current Information..............................................26
5.5 Access to Properties and Records.................................27
5.6 Employment and Employee Benefits After
the Closing....................................................27
5.7 No Solicitation..................................................28
5.8 Public Announcements.............................................28
5.9 Divestiture......................................................28
5.10 Covenant Not to Compete..........................................29
5.11 Use of Name "Key"................................................30
5.12 Transfer of Retained Assets and
Liabilities Prior to the Closing...............................30
5.13 Environmental Remediation........................................30
5.14 Vacation Policy..................................................34
ARTICLE 6 CONDITIONS TO CLOSING..........................................34
6.1 Conditions to Closing - The Seller and
The Buyer......................................................34
6.2 Conditions to Closing - The Buyer................................35
6.3 Conditions to Closing - The Seller...............................36
ARTICLE 7 TERMINATION, INDEMNIFICATION, WAIVER AND
AMENDMENT......................................................37
7.1 Termination......................................................37
7.2 Effect of Termination............................................37
7.3 Survival of Representations, Warranties
and Covenants; Indemnification.................................37
7.4 Waiver...........................................................41
7.5 Amendment or Supplement..........................................41
ARTICLE 8 MISCELLANEOUS..................................................41
8.1 Expenses.........................................................41
8.2 Entire Agreement, etc............................................41
8.3 No Assignment....................................................41
8.4 Notices..........................................................42
8.5 Captions.........................................................43
8.6 Counterparts.....................................................43
8.7 Governing Law....................................................43
8.8 Effect of Investigations.........................................43
8.9 Severability.....................................................43
8.10 Specific Enforceability..........................................43
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
Schedule 1 Retained Assets and Liabilities
Schedule 3.2 Subsidiaries and 5% Investments
Schedule 3.6 Certain Events Since September 30, 1996
Schedule 3.8 Third-Party Loan Servicing Agreements and Classified Loans,
Leases, Other Extensions of Credit and Commitments to Extend
Credit Required to be Disclosed Pursuant to Section 3.8 of the
Agreement
Schedule 3.9 Litigation
Schedule 3.12 Real Property
Schedule 3.14 Certain Contracts
Schedule 3.17 Employee Benefit Plans
Schedule 3.18 Tax Allocation or Tax Sharing Procedures
Schedule 3.20 Environmental Matters
Schedule 5.3 Certain Events Since the Date of the Agreement
Schedule 5.6 Employment and Employee Benefit Matters Following the Closing
Exhibit A Tax Agreement
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (this "Agreement") dated as of February 18, 1997,
among KEYCORP, an Ohio corporation (the "Seller"), KEY BANK OF THE ROCKY
MOUNTAINS, INC., a Colorado corporation (the "Holding Company"), and COMMUNITY
FIRST BANKSHARES, INC., a Delaware corporation (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Seller owns beneficially all of the issued and outstanding
shares of capital stock of the Holding Company which in turn owns all of the
issued and outstanding shares of capital stock (the "Stock") of KeyBank National
Association (Wyoming), a national banking association chartered under the laws
of the United States of America (the "Bank"); and
WHEREAS, the Buyer desires to purchase the Stock, directly or indirectly,
from the Seller and the Seller desires to sell the Stock to the Buyer upon the
terms and subject to the conditions hereinafter set forth (the "Acquisition");
and
WHEREAS, the Seller and the Buyer desire to provide for certain
undertakings, conditions, representations, warranties and covenants in
connection with the transactions contemplated hereby;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, the parties hereto do hereby agree as
follows:
ARTICLE 1
DEFINITIONS
"ACQUISITION TRANSACTION" shall have the meaning specified in Section 5.7
hereof.
"BANK COMMON STOCK" shall have the meaning specified in Section 3.4(a)
hereof.
"BANK CUSTOMER LIST" shall have the meaning specified in Section 5.10(b)
hereof.
"BANK HOLDING COMPANY ACT" shall mean the Bank Holding Company Act of
1956, as amended.
"CALL REPORTS" shall mean those periodic consolidated reports of condition
and income on Form FFIEC 032 filed by the Bank with the FDIC as of December 31,
1995 and September 30, 1996 for the periods
<PAGE>
then ended, and as of and for the periods ending after September 30, 1996 and
prior to the Closing Date.
"CHARTER" shall mean the articles or certificate of incorporation, statute,
constitution, joint venture or partnership agreement or articles or other
charter of any Person other than an individual, each as from time to time
amended or modified.
"CLOSING" shall mean the consummation of the Acquisition.
"CLOSING DATE" shall mean the date specified pursuant to Section 2.4(a)
hereof as the date on which the parties hereto shall consummate the Acquisition.
"CODE" shall mean the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder.
"CONFIDENTIALITY AGREEMENT" shall mean that certain letter agreement dated
November 27, 1996 between the parties hereto.
"DAMAGES" shall mean, in respect of any obligation to indemnify any person
pursuant to the terms of this Agreement, any and all losses, claims, damages,
liabilities, obligations, judgments, settlements, awards, demands, offsets,
defenses, counterclaims, actions or proceedings, reasonable out of pocket costs,
expenses and attorneys' fees (including any such reasonable costs, expenses and
attorneys' fees actually incurred in enforcing such right of indemnification
against any indemnitor or with respect to any appeal) and penalties and
interest, if any, but shall not include any tax benefit arising out of payments
of such amounts or any payment from a third party (including insurers) or any
such amounts for which the Bank has recorded a specifically allocated reserve
that is reflected in the unaudited balance sheet of the Bank included in the
September 30 Call Report (as defined in Section 3.5(a) hereof).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and the regulations promulgated thereunder.
"ERISA AFFILIATE" shall mean any trade or business (whether or not
incorporated) under common control with the Bank within the meaning of
Section 414(b), (c), (m) or (o) of the Code.
"ESTIMATED BALANCE SHEET" shall mean the unaudited consolidated balance
sheet of the Bank as of the last day of the month preceding the month in which
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the Closing Date occurs prepared to reflect adjustments necessary, on an actual
or proforma basis, in connection with the transfer of the Retained Assets and
Liabilities.
"FDIA" shall mean the Federal Deposit Insurance Act, as amended.
"FDIC" shall mean the Federal Deposit Insurance Corporation.
"FEDERAL RESERVE BOARD" shall mean the Board of Governors of the Federal
Reserve System and/or the appropriate regional Federal Reserve Bank to the
extent applicable.
"FINAL BALANCE SHEET" shall mean the unaudited consolidated balance sheet
of the Bank as of the Closing Date prepared to reflect adjustments necessary, on
an actual or proforma basis, in connection with the transfer of the Retained
Assets and Liabilities.
"INTERCOMPANY ACCOUNTS" shall have the meaning specified in Section 2.5
hereof.
"LOAN(S)" shall have the meaning specified in Section 3.8 hereof.
"MATERIAL ADVERSE EFFECT" shall mean, when used with respect to any Person,
a material adverse effect on the business, operations, results of operations or
financial condition of such Person taken as a whole; PROVIDED, HOWEVER, that
changes in the business, operations, results of operations or financial
condition of a Person resulting directly or indirectly from changes in law,
regulations or generally accepted accounting principles (or interpretations of
any thereof), changes in the general level of market interest rates, or changes
in the economic, financial or market conditions affecting the financial services
industry generally or in the regions in which the Bank operates shall not
constitute a Material Adverse Effect.
"ORIGINAL BALANCE SHEET" shall mean the unaudited consolidated balance
sheet of the Bank as of September 30, 1996 prepared in a manner consistent with
the books and records of the Bank.
"PBGC" shall mean the Pension Benefit Guaranty Corporation of any successor
thereto under law.
"PERSON" shall mean any individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other legal entity,
or any governmental agency or political subdivision thereof.
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"PLAN" shall have the meaning assigned to such term in Section 3.17(a)
hereof.
"PURCHASE PRICE" shall mean the consideration to be paid by the Buyer for
the Stock which shall be in the amount and subject to the adjustments set forth
in Section 2.2 and which shall be payable in the form set forth in
Section 2.4(b)(i) hereof.
"RETAINED ASSETS AND LIABILITIES" shall mean those assets and liabilities
of the Bank which will be transferred to another affiliate of Seller prior to,
or as promptly as possible following, the Closing. The Retained Assets and
Liabilities include the Retained Loans and the other assets and liabilities of
the Bank set forth on Schedule 1 hereto.
"RETAINED LOANS" shall mean the loans set forth under the heading "Retained
Loans" on Schedule 1 hereto.
"RIGHTS" shall mean warrants, options, rights, convertible securities and
other arrangements or commitments which obligate a Person to issue or dispose of
any of its capital stock.
"STOCK" shall have the meaning specified in the first Whereas clause
hereof.
"SUBSIDIARIES" shall mean, when used with reference to a Person, any
corporation, partnership or other organization, whether incorporated or
unincorporated, which is consolidated with such Person for financial reporting
purposes. Notwithstanding anything to the contrary herein, no representation or
warranty of Seller provided for hereunder with regard to any Subsidiary of the
Bank shall constitute a representation or warranty with regard to any Subsidiary
of the Bank the capital stock of which is included on Schedule 1 hereto.
"TAX AGREEMENT" shall have the meaning specified in Section 6.2(d) hereof.
Other terms used herein are defined in the preamble and the recitals to,
and in certain provisions of, this Agreement.
ARTICLE 2
PURCHASE AND SALE
2.1 PURCHASE BY THE BUYER. Upon the terms and subject to the conditions
set forth in this Agreement, the Buyer agrees to purchase all of the Stock,
directly or
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indirectly, from the Seller, and the Seller agrees to sell all of the Stock to
the Buyer.
2.2 PURCHASE PRICE; ADJUSTMENTS TO PURCHASE PRICE. (a) The Purchase
Price shall be an amount payable in cash equal to $135,000,000, adjusted as set
forth below.
(b) The Purchase Price shall be increased or decreased to the extent the
shareholders' equity of the Bank on the Closing Date (the "Shareholders'
Equity") is more than or less than $75,000,000.
(c) DETERMINATION OF SHAREHOLDERS' EQUITY. (i) The determination of the
Estimated Shareholders' Equity (as defined below) and the determination of the
Shareholders' Equity shall comply in all respects with the rules, regulations
and instructions for the preparation of the Call Reports of the Bank, and, in
the absence of direction therein to the contrary, to generally accepted
accounting principles applied on a basis consistent with prior periods.
Notwithstanding the Bank's practice in prior periods, however, the determination
of the Estimated Shareholders' Equity and Shareholders' Equity amounts shall
take into account all appropriate expense accruals (including, but not limited
to, real estate taxes not yet due), provisions for income tax and loan and lease
losses. Notwithstanding anything to the contrary above, however, the
determination of the Estimated Shareholders' Equity and Shareholders' Equity
amounts shall not take into account any adjustments otherwise required by
FASB 115.
(ii) Promptly following the end of the month preceding the month in which
the Closing Date occurs, and not less than five (5) business days prior to the
Closing Date, the Seller shall prepare and deliver to the Buyer the Estimated
Balance Sheet. The Estimated Balance Sheet shall reflect the Bank's
shareholders' equity, calculated as of the close of business on the last day of
the month preceding the month in which the Closing Date occurs (the "Estimated
Shareholders' Equity"). The Estimated Shareholders' Equity shall be used by
Buyer and Seller for purposes of making the adjustment to the Purchase Price due
at Closing pursuant to Section 2.2(b) hereof.
(iii) As soon as reasonably practicable following the Closing Date, the
Seller shall prepare and deliver to the Buyer the Final Balance Sheet which
shall reflect the Shareholders' Equity (excluding any adjustment for any special
pre-Closing dividend declared by the Bank and paid to the Holding Company in
connection with the payment of the Purchase Price adjustments required by
Section 2.2(b) hereof). Promptly following completion and delivery of the Final
Balance Sheet, (x) Buyer shall pay to Seller the amount, if any, by which the
Shareholders'
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Equity exceeds the Estimated Shareholders' Equity, or (y) Seller shall pay to
Buyer the amount, if any, by which the Estimated Shareholders' Equity exceeds
the Shareholders' Equity; in either event, such payment to be made by wire
transfer of immediately available federal funds to such bank account in the
United States of America as the Seller or Buyer, as applicable, shall designate.
(iv) Buyer and Seller shall cooperate and promptly commence good faith
negotiations to resolve any disputes regarding the Final Balance Sheet. In the
event any dispute regarding the Final Balance Sheet shall continue unresolved
twenty (20) days after the Closing Date, then either Buyer or Seller may require
resolution of the dispute by binding arbitration determined by Price Waterhouse
LLP. The fees and expenses of Price Waterhouse LLP shall be shared equally by
Buyer and Seller.
2.3 EARNEST MONEY DEPOSIT. Buyer shall wire transfer in immediately
available federal funds to Seller, contemporaneously with the signing hereof, an
earnest money deposit of a portion of the Purchase Price in the amount of
$13,000,000, which earnest money deposit shall be non-refundable to Buyer,
except in the event of a material breach by Seller prior to the Closing of any
of its covenants or agreements contained herein or any material inaccuracy in
any of its representations or warranties contained herein and, in either case,
if such breach or inaccuracy has not been cured or otherwise corrected within 45
days after the date on which written notice of such breach or inaccuracy is
given to Seller.
2.4 CLOSING DATE. (a) Subject to the terms and conditions of this
Agreement, the purchase and sale of the Stock hereunder shall occur at the
offices of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota, or at such other
place as shall be mutually agreeable to the parties, on a date which shall be
not less than five days nor more than forty-five days after the date upon which
the last of the conditions to Closing set forth in Article 6 hereof has been
satisfied or properly waived and as shall be mutually agreed to by the parties.
(b) On the Closing Date, the following actions shall be taken:
(i) the Buyer shall pay to the Seller an amount equal to the
Purchase Price, including any adjustments provided in Section 2.2 and
excluding the earnest money deposit, plus interest on such deposit
from the date hereof to the Closing Date at the rate of 5.07% per
annum, provided in Section 2.3, to
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the Seller by wire transfer of immediately available federal funds to such
bank account in the United States of America as the Seller shall designate
in writing at least two (2) business days prior to the Closing Date;
(ii) the Seller shall deliver or cause to be delivered one or
more certificates for the Stock to Buyer, duly endorsed in blank or
with stock powers duly endorsed in blank, together with such other
documents as the Buyer may reasonably request to evidence the transfer
to Buyer of good and valid title in and to the Stock, free and clear
of any lien, security interest, pledge, charge, encumbrance, option to
purchase or call (except such as may be created by the Buyer); and
(iii) each party shall, or Seller shall cause the Bank to, take
such other actions, and shall execute and deliver such other
instruments or documents, as shall be required under Article 6 hereof.
2.5 INTERCOMPANY ACCOUNTS. All intercompany accounts between the
Bank and any of its Subsidiaries, on the one hand, and the Seller or any of its
Subsidiaries, on the other hand (the "Intercompany Accounts"), as of the Closing
shall be settled in the manner provided in this Section 2.5. At least five
business days prior to the Closing, the Seller shall prepare and deliver to the
Buyer a statement setting out in reasonable detail the calculation of all
Intercompany Account balances based upon the latest available financial
information as of such date. All such Intercompany Accounts balances shall be
paid in full in cash prior to the Closing. As promptly as practicable, but not
later than 30 days after the Closing Date, the Seller will cause to be prepared
and delivered to the Buyer a statement setting out in reasonable detail the
calculation of such Intercompany Account balances as of the Closing Date (giving
effect to any settlement hereunder and any other payments). The Buyer and the
Seller shall cooperate in the preparation of any such calculation and in
resolving any disputes related thereto.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF THE SELLER
The Seller represents and warrants to the Buyer as follows:
3.1 ORGANIZATION, STANDING AND AUTHORITY OF THE SELLER AND THE HOLDING
COMPANY. (a) The Seller is a duly organized corporation, validly existing and
in good standing under the laws of the State of Ohio and is registered as a bank
holding company with the Federal Reserve Board under the Bank Holding Company
Act, and has all requisite corporate power, right and authority to own and lease
its properties and assets and to carry on its business as now being conducted.
(b) The Holding Company is a duly organized corporation, validly existing
and in good standing under the laws of the State of Colorado and is registered
as a bank holding company with the Federal Reserve Board under the Bank Holding
Company Act, and has all requisite corporate power, right and authority to own
the Stock.
3.2 ORGANIZATION, STANDING AND AUTHORITY OF THE BANK. (a) The Bank is a
national banking association duly organized and validly existing under the laws
of the United States of America and has all requisite corporate power, right and
authority and all necessary federal and state authorizations to own and lease
its properties and assets and to carry on its business as now being conducted.
The deposits of the Bank are insured by the FDIC in accordance with the FDIA,
and the Bank has paid all assessments and filed all reports required by the
FDIA.
(b) Schedule 3.2 lists the Subsidiaries of the Bank and each other
corporation, limited liability company, partnership or other association or
organization in which the Bank has the power to vote 5% or more of any class of
capital stock or of any other equity interest therein. Each of the Bank's
Subsidiaries is a duly organized corporation, validly existing and in good
standing under the laws of the state of its incorporation and has full corporate
power, right and authority to own and lease its properties and assets and to
carry on its business as now being conducted. The Bank is the lawful record and
beneficial owner of all of the shares of the outstanding capital stock of each
of its Subsidiaries free and clear of any lien, security interest, pledge,
charge, encumbrance, option to purchase or call.
(c) Copies of the Charter and by-laws of the Bank, as amended to the date
hereof and as currently in
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effect, have been made available to the Buyer and are true and complete.
3.3 AUTHORIZED AND EFFECTIVE AGREEMENT. (a) Each of the Seller and the
Holding Company has all requisite corporate power and authority to enter into
and perform all of its obligations under this Agreement. The execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
in respect hereof on the part of each of the Seller and the Holding Company.
This Agreement constitutes a legal, valid and binding obligation of each of the
Seller and the Holding Company, enforceable against each such party in
accordance with its terms, except that enforcement thereof may be limited by the
receivership, conservatorship and supervisory powers of bank regulatory agencies
generally, as well as bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting enforcement of creditors' rights generally and
except that enforcement thereof may be subject to general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law) and the availability of equitable remedies.
(b) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, nor the compliance by
either Seller or the Holding Company with any of the provisions hereof shall
(i) conflict with or result in a breach of any provision of the Charter or
by-laws of the Seller, the Holding Company or the Bank, (ii) constitute or
result in a breach of any term, condition or provision of, or constitute a
default under, or give rise to any right of termination, cancellation or
acceleration with respect to, or result in the creation of any lien, charge or
encumbrance upon any property or asset of the Bank or the Stock pursuant to, any
note, bond, mortgage, indenture, license, agreement or other instrument or
obligation, the result of which, individually or in the aggregate, would have a
Material Adverse Effect on the Bank or (iii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Seller, the
Holding Company or the Bank, or any of the Bank's Subsidiaries excluding from
this clause (iii) violations which, either individually or in the aggregate,
would not have a Material Adverse Effect on the Bank or otherwise prevent the
Seller or the Holding Company from performing its obligations under this
Agreement.
(c) Except as set forth in Section 5.1 hereto and except for consents,
approvals, filings, notices or registrations the failure of which to make or
obtain would not, individually or in the aggregate, have a Material Adverse
Effect on the Bank or prevent the
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consummation of the Acquisition, no consents or approvals of, notices to, or
filings or registrations with, any public body or authority are necessary, and
no consents or approvals of or notices to any third parties are necessary, in
connection with the execution, delivery and performance of this Agreement by the
Seller or the Holding Company or the consummation by the Seller or the Holding
Company of the Acquisition.
3.4 CAPITAL STRUCTURE OF THE BANK. (a) The authorized capital stock of
the Bank consists solely of 5,000 shares of common stock, $100 par value ("Bank
Common Stock"). As of the date hereof, there were 5,000 shares of Bank Common
Stock issued and outstanding. There are no options or other contracts of any
kind that require the issuance of any Bank Common Stock. All issued and
outstanding shares of Bank Common Stock have been duly authorized and are
validly issued, fully paid and nonassessable. None of the issued and
outstanding shares of Bank Common Stock were issued in violation of any
preemptive rights.
(b) The Holding Company is the lawful record and beneficial owner of all
of the issued and outstanding shares of Bank Common Stock (the "Stock") free and
clear of all liens, security interests, pledges, charges, encumbrances, options
to purchase, or calls of any kind. The Holding Company will, upon delivery of
the Stock to the Buyer effective as of the Closing Date pursuant to the terms
hereof, transfer to the Buyer good and valid title to the Stock free and clear
of all liens, security interests, pledges, charges, encumbrances, options to
purchase or calls except for those created by the Buyer.
3.5 FINANCIAL STATEMENTS; CALL REPORTS. (a) Seller has previously
delivered to Buyer each of the Call Reports filed by the Bank with the FDIC as
of December 31, 1995 (the "December 31 Call Report") and September 30, 1996 (the
"September 30 Call Report"). The balance sheets included in the December 31
Call Report and the September 30 Call Report fairly present the financial
condition of the Bank as of the dates indicated, and the statements of income
included in the December 31 Call Report and the September 30 Call Report fairly
present the results of operations of the Bank for the periods then ended, in
conformity with regulatory accounting principles generally applicable to
depository institutions such as the Bank, and, in the case of interim
statements, subject to normal year-end adjustments.
(b) When delivered, the Original Balance Sheet, the Estimated Balance
Sheet and the Final Balance Sheet shall have been prepared in a manner
consistent with the books and records of the Bank except as otherwise
specifically provided herein.
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(c) The Call Reports comply in all material respects with the rules,
regulations, and instructions applicable to the preparation thereof. The Bank
has filed all Call Reports required to have been filed by it with the FDIC. The
balance sheets included in the Call Reports fairly present the financial
condition of the Bank as of the dates indicated, and the statements of income
included in the Call Reports fairly present the results of operations of the
Bank for the periods then ended, in conformity with regulatory accounting
principles generally applicable to depository institutions such as the Bank,
and, in the case of interim statements, subject to normal year-end adjustments.
3.6 CERTAIN EVENTS SINCE SEPTEMBER 30, 1996. Since September 30, 1996,
except as disclosed in Schedule 3.6 hereto or as otherwise expressly
contemplated by this Agreement or any Schedule hereto, the Bank has conducted
its business in the ordinary course of business, and there has not been:
(a) any change or event which, individually or in the aggregate,
has had a Material Adverse Effect on the Bank;
(b) any employment contract, severance contract, contract with
an obligation to a director or employee triggered upon a change in
control, bonus, pension, retirement, incentive or similar arrangement
or plan instituted, agreed to or amended by the Bank or any of its
Subsidiaries;
(c) any increase in the compensation payable or to become
payable to any of the officers, directors or employees of the Bank or
any of its Subsidiaries or any bonus payment or arrangement made to or
with any of them, except grants of normal individual bonuses and
increases in compensation to employees in the ordinary course of
business in amounts and upon terms consistent with the prior practice
of the Bank;
(d) any agreement, contract or commitment entered into or agreed
to be entered into by the Bank or any of its Subsidiaries except for
those in the ordinary
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course of business (none of which, individually or in the aggregate, has
had a Material Adverse Effect on the Bank);
(e) any change in any of the accounting methods or practices of
the Bank or any of its Subsidiaries other than changes required by
applicable law or regulation, generally accepted accounting principles
or regulatory accounting principles generally applicable to depository
institutions such as the Bank;
(f) except as contemplated on Schedule 5.3 hereto, any
declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of Bank Common Stock;
(g) any purchase, redemption, retirement or other acquisition,
hypothecation, pledge or other encumbrance of any shares of Bank
Common Stock;
(h) any acquisition of all or any material portion of the assets
of any other Person or any sale of all or any material portion of the
Bank's consolidated assets, other than in the ordinary course of
business; or
(i) any new commitment or undertaking entered into by the Bank
or any of its Subsidiaries to extend credit to any Person in an amount
which exceeds the limitations set forth in Section 5.3(b)(x).
3.7 ABSENCE OF UNDISCLOSED LIABILITIES. The Bank and its Subsidiaries do
not have any liabilities (as such term is used under generally accepted
accounting principles), contingent or otherwise, that individually or in the
aggregate would be material to the Bank except as disclosed in the Call Reports.
3.8 LOANS. Except for the Retained Loans, all currently outstanding loans
of, or current extensions of credit by, the Bank or any of its Subsidiaries
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(individually, a "Loan", and collectively, the "Loans") were solicited,
originated and currently exist in compliance in all material respects with all
applicable requirements of federal and state law and regulations promulgated
thereunder. Except as disclosed on Schedule 3.8 hereto, none of the Loans are
presently serviced by third parties who are not affiliated with Seller and there
is no obligation, except as set forth on such Schedule 3.8, which would result
in any Loan becoming subject to any such third-party servicing. Without
limitation to the foregoing, the Bank's consolidated reserve for losses on loans
included in the Bank Consolidating Summary Balance Sheet for the period ending
December 31, 1996 provided by Seller to Buyer during its due diligence review
was approximately $7,745,000, representing 1.56% of its total consolidated loans
held in portfolio (exclusive of the Retained Assets). The amount of such
reserve for losses on loans was adequate to absorb reasonably expectable losses
in the loan portfolios of the Bank as of such date. To the best knowledge of
the Seller and the Holding Company on the date hereof, there are no facts which
would cause it to increase the level of such allowance for losses on loans. The
documentation relating to the loan portfolio of the Bank and relating to all
security interests, mortgages and other liens with respect to all collateral for
such portfolio, taken as a whole, is adequate for the enforcement of the
material terms of the loans in such portfolio and of the related security
interests, mortgages and other liens, except where any inadequacy would not
result in a Material Adverse Effect on the Bank. To the best knowledge and
belief on the date hereof of the executive officers of the Holding Company and
the Bank, the terms of such loans and of the related security interests,
mortgages and other liens comply in all material respects with all applicable
laws, rules and regulations (including laws, rules and regulations relating to
the extension of credit). Except as set forth in Schedule 3.8 hereto, to the
best knowledge and belief on the date hereof of the executive officers of the
Holding Company and the Bank, there are no loans, leases, other extensions of
credit or commitments to extend credit of the Bank that should have been
classified by the Bank as nonaccrual, as restructured, as 90 days past due, as
still accruing and doubtful of collection or any comparable classification that
have not been so classified and Seller has provided to Buyer true, correct and
complete in all material respects such written information concerning the loan
portfolio of the Bank as Buyer has requested.
3.9 LEGAL PROCEEDINGS. (a) Except as set forth on Schedule 3.9 hereto,
there are no pending, or to the knowledge of Seller, threatened, legal,
administrative, arbitration or other proceedings, claims, actions or
governmental investigations of any nature against the Bank or any of its
Subsidiaries, or any director or officer of
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the Bank or of any of its Subsidiaries, which, if adversely determined, would,
individually or in the aggregate, result in Damages to the Bank in an amount
exceeding $500,000.
(b) There are no pending, or to the knowledge of Seller, threatened,
legal, administrative, arbitration or other proceedings, claims, actions or
governmental investigations of any nature against the Seller which, if
adversely determined, would prevent the Seller from performing its obligations
under this Agreement.
3.10 COMPLIANCE WITH LAWS. The Bank and its Subsidiaries hold all
licenses, franchises, permits and authorizations required for the lawful conduct
of their businesses under, and are in compliance with, all laws, statutes,
orders, rules and regulations, and published policies or guidelines of any
federal, state or local government authority applicable to the conduct of its
business, except where the failure to so hold or comply would not, individually
or in the aggregate, have a Material Adverse Effect on the Bank.
3.11 BROKERS AND FINDERS. Neither the Seller nor the Bank nor any of
their respective officers, directors, employees or agents has employed any
broker, finder or financial advisor or incurred any liability for any fees or
commissions in connection with the transactions contemplated hereby, except for
legal, accounting and other professional fees payable by Seller in connection
with the Acquisition.
3.12 PROPERTIES. Schedule 3.12 hereto sets forth a true and complete list
of all real property owned, leased (as lessor or lessee) or operated by the Bank
or its Subsidiaries (including all of the Bank's branches and all of the Bank's
properties acquired by foreclosure proceedings in the ordinary course of
business) as of the date hereof. The Bank directly or indirectly through its
Subsidiaries has good and marketable title, free and clear of all liens,
encumbrances (other than leases in which the Bank is the Lessor as listed in
Schedule 3.12) or charges, to all of the properties and assets, real and
personal, reflected on the balance sheet included in the September 30 Call
Report or acquired after such date, except (a) liens for current taxes not yet
due and payable or being contested in good faith by appropriate proceedings,
(b) pledges to secure deposits and other liens incurred in the ordinary course
of the Bank's and its Subsidiaries' businesses, (c) such imperfections of title,
easements and encumbrances, if any, as are not material in character, kind or
extent, and (d) dispositions and encumbrances for adequate consideration in the
ordinary course of business or as expressly permitted by the terms of this
Agreement after September 30, 1996. The Bank has not received any
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written notice of violation of any applicable zoning or environmental
regulation, ordinance or other law, order, regulation, or requirement relating
to its properties. Neither the Bank nor any of its Subsidiaries is in default,
and there has not occurred any event that with the lapse of time or giving of
notice or both would constitute a default, under any leases pursuant to which
the Bank or any of its Subsidiaries leases any real property, except for such
defaults which, individually or in the aggregate, would not result in the
forfeiture of the use or occupancy of the property covered by any such lease or
would not result in a Material Adverse Effect on the Bank. All such leases
constitute legal, valid and binding obligations of the Bank or a Subsidiary of
the Bank and, to the knowledge of Seller, the other party thereto enforceable by
the Bank in accordance with their respective terms, except that enforcement
thereof may be limited by the receivership, conservatorship and supervisory
powers of bank regulatory agencies generally as well as bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting enforcement of
creditors' rights generally and except that enforcement thereof may be subject
to general principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law) and the availability of equitable remedies.
Neither the Bank nor any of its Subsidiaries has received any written notice of,
or made a claim with respect to, any breach or default under any leases pursuant
to which the Bank or any such Subsidiary leases any real property.
3.13 AGREEMENTS WITH REGULATORY AUTHORITIES. Neither the Bank nor any of
its Subsidiaries is a party to any commitment, letter (other than letters
addressed to regulated banking institutions generally or examination reports),
written agreement, memorandum of understanding or order to cease and desist with
any federal or state governmental entity charged with the supervision or
regulation of the Bank or engaged in the insurance of bank deposits, which
restricts the conduct of its business or in any manner relates to its capital
adequacy, credit policies, management or overall safety and soundness, and
neither the Bank nor the Seller has received written notification from any such
federal or state governmental entity that the Bank or any such Subsidiary may be
requested to enter into, or otherwise be subject to, any such commitment,
letter, written agreement, memorandum of understanding or cease and desist
order.
3.14 CERTAIN CONTRACTS. Other than in connection with Loans, loan
commitments, letters of credit and other similar agreements entered into in the
ordinary course of the Bank, on the date hereof, neither the Bank nor any of its
Subsidiaries is a party to any agreement, other than agreements disclosed in
Schedule 3.14 hereto or otherwise expressly permitted under the terms of this
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Agreement, pursuant to which the Bank may be required to expend in excess of
$125,000 in any twelve (12)-month period. Except as set forth on Schedule 3.14
hereto, on the date hereof, neither the Bank nor any of its Subsidiaries is a
party to any agreement relating to the employment, election, retention in office
or severance of any present or former director or officer of the Bank or any
such Subsidiary.
3.15 CONTRACT DEFAULTS. Neither the Bank nor any of its Subsidiaries is
in any default, and there has not occurred any event that with the lapse of time
or giving of notice or both would constitute such a default, under any of the
agreements, commitments or other instruments referred to on Schedule 3.14
hereto.
3.16 INSURANCE. The Seller has made available to the Buyer a description
of the claims history under the insurance policies maintained by the Seller or
the Bank with respect to the Bank's properties and the conduct of the Bank's
business and a description of the insurance maintained by Seller or another
affiliate of Seller for the Bank under policies which, as of the Closing Date,
will no longer be in effect with respect to the Bank or its properties or
business.
3.17 EMPLOYEE BENEFIT PLANS. (a) Except as listed on Schedule 3.17
hereto, neither the Bank nor any ERISA Affiliate maintains or contributes to any
bonus, deferred compensation, incentive compensation, severance, pension,
profit-sharing, retirement, stock purchase, stock option, employee welfare
benefit or any other fringe benefit plan, agreement, arrangement or practice for
which the Bank has any liability. Schedule 3.17 hereto sets forth a true and
complete list of each plan which is an "employee benefit plan" (within the
meaning of Section 3(3) of ERISA) maintained or contributed to by the Bank
(each, a "Plan"). Each Plan is and has been operated in compliance with the
provisions of ERISA, the Code, all regulations, rulings and announcements
promulgated or issued thereunder, and all other applicable governmental laws and
regulations, except where the failure to do so would not, individually or in the
aggregate, result in any Material Adverse Effect on the Bank. Each other
benefit plan, agreement, arrangement or practice which is not an "employee
benefit plan" (the "Other Benefit Arrangements") is and has been operated in
compliance with its terms and all applicable governmental laws, regulations,
rulings and announcements, except where the failure to do so would not,
individually or in the aggregate, result in any Material Adverse Effect on the
Bank.
(b) The present value of all accrued benefits under each Plan which is
subject to Title IV of ERISA did not, as of the latest valuation date, exceed
the
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then current value of the assets of such Plan allocable to such accrued
benefits, based upon the actuarial assumptions currently utilized for such Plan.
Full payment has been made of all amounts which the Bank is required under the
terms of all Plans to have paid as contributions or premiums to or in respect of
such Plans as of the last day of the most recent fiscal year of each such Plan
ended prior to the date hereof. All expenses relating to contributions or
premiums due and owing with respect to the Plans have been properly accrued and
reflected in the Call Reports as of the date of such Call Reports or will be
properly accrued and reflected in the Closing Date Balance Sheet. None of the
Plans have incurred any "accumulated funding deficiency" (within the meaning of
Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of
the last day of the most recent fiscal year of each such Plan ended prior to the
date hereof. Except as set forth on the Closing Date Balance Sheet, the Bank
has no liability for any "employee benefit plan" of the Seller or any ERISA
Affiliate.
(c) Neither the Bank, any ERISA Affiliate nor any "party in interest"
(within the meaning of Section 4975 of the Code) has engaged in a transaction or
transactions in connection with which the Bank could be subject, individually or
in the aggregate, to either civil penalties assessed pursuant to Section 502(i)
of ERISA or tax liabilities imposed by Section 4975 of the Code that would have
a Material Adverse Effect on the Bank. No material liability under Title IV of
ERISA has been incurred either directly or indirectly by the Bank or any ERISA
Affiliate, other than liability for premiums to the PBGC, that has not been
satisfied in full. There have been no "reportable events" (within the meaning
of Section 4043(b) of ERISA) with respect to any Plan with respect to which the
thirty (30)-day notice period has not been waived or with respect to which the
PBGC has not determined to waive penalties pursuant to PBGC Technical Update
95-3. No event has occurred and there exists no condition or set of
circumstances which presents a risk of the termination or partial termination of
any Plan which could result in any liability to the PBGC. There is no pending
or, to the knowledge of the Seller, threatened claim against or otherwise
involving any Plan, or any fiduciary thereof, by or on behalf of any participant
or beneficiary under any Plan (other than routine claims for benefits), nor is
there any pending or, to the knowledge of Seller, threatened claim by or on
behalf of any of the Plans, which has or could have a Material Adverse Effect on
the Bank.
(d) Except as set forth on Schedule 3.17, there are no unfunded
obligations under any Plan providing benefits after termination of employment to
any employee of
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the Bank (other than continuation of health coverage as required by Part 6 of
Title I of ERISA).
3.18 TAXES AND TAX RETURNS. The Bank and each of its Subsidiaries has
timely filed all federal, state, and local tax returns required to be filed by
it before the date of this Agreement or have obtained extensions for filing such
tax returns and has duly paid or made provisions for the payment of all taxes
and other governmental charges (including penalties and interest) which are
shown on such tax returns. All of such returns are complete and accurate in all
material respects. The amounts set up as reserves as shown on the September 30
Call Report for accrued but unpaid federal, state and local taxes (including any
interest or penalties thereon), whether or not disputed, through the period
ended September 30, 1996 or for any year or period ending prior thereto, and for
which the Bank may be liable in its own right or as transferee of the assets of,
or successor to, any Person are adequate under generally accepted accounting
principles except where the failure to so reserve would not have a Material
Adverse Effect on the Bank. Except as set forth on Schedule 3.18 hereto, there
are no claims asserted for federal, state or local taxes or assessments upon the
Bank, nor has the Bank given or been requested to give any currently effective
waivers extending the statutory period of limitation applicable to any federal
or state income tax return for any period, except in each case, which would not
have a Material Adverse Effect on the Bank. Except as set forth on
Schedule 3.18 hereto, the Bank is not a party to or bound by any tax allocation
or tax sharing procedure. Any such tax allocation or tax sharing procedure will
be terminated as of the Closing Date. Neither Seller nor Holding Company is
aware of any reason why an election under Section 338(h)(10) of the Internal
Revenue Code (and similar provisions of state law) would not be available for
this transaction.
3.19 LABOR MATTERS. As of the date of this Agreement, neither the Bank
nor any of its Subsidiaries is a party to any collective bargaining or labor
agreement or union contract, there are no labor or representation negotiations
or union organizing efforts pending which involve the Bank, any of its
Subsidiaries, or any of their employees and there are no charges of unfair labor
practices pending or, to the knowledge of the Seller, threatened by or before
any governmental authority which involve the Bank, any of its Subsidiaries, or
any of their present or former employees. The Bank is in compliance in all
material respects with the terms of each of its written policies and with all
applicable governmental laws, regulations, rulings and announcements respecting
employment. All liabilities for wages due and owing as of the Closing Date will
have been paid or properly accrued for on the Closing Date Balance Sheet in
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accordance with generally accepted accounting principles. Except as
provided in Schedules 3.17 and 3.14, there are no written employment contracts
or other agreements to pay wages during employment, upon termination of
employment or as a result of the transactions contemplated by this
Agreement.
3.20 ENVIRONMENTAL MATTERS. To the knowledge of Seller, the Bank and each
of its Subsidiaries is in compliance with all environmental laws, rules and
regulations of the United States of America and of states and localities in
which it conducts its business ("ENVIRONMENTAL LAWS"), except for any such
noncompliance which, individually or in the aggregate, has not had, and is not
expected to have, to the knowledge of Seller, a Material Adverse Effect on the
Bank. To the knowledge of Seller, neither the Bank nor any of its Subsidiaries
has any liability which, taken singularly or as a whole, if adversely
determined, would have a Material Adverse Effect on the Bank (a) for alleged
noncompliance with any Environmental Law or (b) relating to the discharge or
release into the environment of any hazardous material or waste at or on a site
owned, leased or operated by the Bank or any of its Subsidiaries as a branch or
otherwise in the conduct of its business ("PROPERTIES OWNED").
Except as set forth in Schedule 3.20, to the knowledge of Seller, no Toxic
Substances (as defined below) have been deposited or disposed of in, on or under
any Property Owned during the period in which Holding Company or the Bank has
owned, occupied, managed, controlled or operated such properties, except to the
extent the same, in the aggregate with any other conditions described in this
Section 3.20, would not have a Material Adverse Effect upon the Bank. Except as
set forth in Schedule 3.20, to the knowledge of Seller, (A) no portion of the
Properties Owned has ever been used as a dump, gasoline service station, or dry
cleaning establishment, by any person, including past owners, occupants and
operators of such properties and (B) no Toxic Substances have ever been
deposited or disposed of or allowed to be deposited or disposed of in, on or
under such properties, except to the extent the same, in the aggregate with any
other conditions described in this Section 3.20, would not have a Material
Adverse Effect upon the Bank. Except as disclosed in Schedule 3.20, to the
knowledge of Seller, there are no underground or above ground storage tanks
(whether or not currently in use) located on or under any Property Owned, and no
underground tank previously located on the Property Owned has been removed
therefrom. For purposes of this Agreement, (1) "Toxic Substances" shall mean
petroleum or petroleum-based substances or waste, hazardous waste, PCBs,
pesticides, herbicides, radioactive materials, asbestos or asbestos
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containing materials, urea formaldehyde foam insulation, or substances defined
as "hazardous substances" or "toxic substances" in any Environmental Laws;
(2) materials will be considered to be deposited or disposed of in, on or under
any real property if such materials have been stored, treated, recycled or used
in violation of applicable law or accidentally or intentionally spilled,
released, dumped, emitted or otherwise placed, deposited or disposed of, in, on
or under such property; and (3) costs of violations or conditions shall take
into account, without limitation, liabilities, damages, penalties, injunctive
relief or removal, remediation or other costs under any applicable Environmental
Law.
3.21 REGULATORY APPROVAL. The Seller is not aware of any reason why the
condition set forth in Section 6.1(a) would not be satisfied on or before
June 1, 1997.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Seller as follows:
4.1 ORGANIZATION, STANDING AND AUTHORITY OF THE BUYER AND BUYER'S HOLDING
COMPANY. The Buyer is a duly organized corporation, validly existing and in
corporate good standing under the laws of the State of Delaware and is
registered as a bank holding company with the Federal Reserve Board under the
Bank Holding Company Act and has full corporate power, right and authority to
own and lease its properties and assets and to carry on its business as now
conducted.
4.2 AUTHORIZED AND EFFECTIVE AGREEMENT. (a) The Buyer has all requisite
corporate power and authority to enter into and perform all of its obligations
under this Agreement. The execution and delivery of this Agreement and
consummation of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
the Buyer. This Agreement constitutes a legal, valid and binding obligation of
the Buyer enforceable against the Buyer in accordance with its terms, except
that enforcement thereof may be limited by the receivership, conservatorship and
supervisory powers of bank regulatory agencies generally, as well as bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
enforcement of creditors' rights generally and except that enforcement thereof
may be subject to general principles of equity (regardless of whether
enforcement is considered in
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a proceeding in equity or at law) and the availability of equitable remedies.
(b) Neither the execution and delivery of this Agreement, consummation of
the transactions contemplated hereby nor compliance by the Buyer with any of the
provisions hereof shall (i) conflict with or result in a breach of any provision
of the Charter or by-laws of the Buyer, (ii) constitute or result in a breach of
any term, condition or provision of, or constitute a default under, or give rise
to any right of termination, cancellation or acceleration with respect to, or
result in the creation of any lien, charge or encumbrance upon any property or
asset of the Buyer or any of its Subsidiaries pursuant to, any note, bond,
mortgage, indenture, license, agreement or other instrument or obligation, the
result of which, individually or in the aggregate, would prevent the Buyer from
performing its obligations under this Agreement or (iii) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the Buyer,
excluding from this clause (iii) violations which, either individually or in the
aggregate, would not prevent the Buyer from performing its obligations under
this Agreement.
(c) Except as provided in Section 5.1 hereto and except for consents,
approvals, notices, filings or registrations the failure of which to make or
obtain would not, individually or in the aggregate, prevent the Buyer from
performing its obligations under this Agreement, no consents or approvals of,
notices to or filings or registrations with, any public body or authority are
necessary, and no consents or approvals of or notices to any third parties are
necessary, in connection with the execution, delivery and performance of this
Agreement by the Buyer or the consummation by the Buyer of the Acquisition.
4.3 LEGAL PROCEEDINGS. There are no pending or, to the knowledge of
Buyer, threatened legal, administrative, arbitration or other proceedings,
claims, actions or governmental investigations of any nature against the Buyer
which, if adversely determined, would, individually or in the aggregate, prevent
the Buyer from performing its obligations under this Agreement.
4.4 BROKERS AND FINDERS. Neither the Buyer nor any of its officers,
directors, employees or agents has employed any broker, finder or financial
advisor or incurred any liability for any fees or commissions in connection with
the transactions contemplated hereby, except for legal, accounting and other
professional fees payable by Buyer in connection with the Acquisition.
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4.5 FINANCING. The Buyer has, and will have on the Closing Date,
available to it capital and cash sufficient to fulfill its obligations
hereunder.
4.6 REGULATORY APPROVAL. The Buyer is not aware of any reason why the
condition set forth in Section 6.1(a) would not be satisfied on or before
June 1, 1997.
4.7 AGREEMENTS WITH BANKING AUTHORITIES. The Buyer is not a party to any
commitment, letter, written agreement, memorandum of understanding or order to
cease and desist with any federal or state governmental entity charged with the
supervision or regulation of banks or bank holding companies or engaged in the
insurance of bank deposits, which would prohibit the Buyer from entering into
this Agreement or consummating the Acquisition or otherwise require the consent
of such governmental entity prior to the consummation of the Acquisition, and
the Buyer has not received written notification from any such federal or state
governmental entity that it may be requested to enter into, or otherwise be
subject to, any such commitment, letter, written agreement, memorandum of
understanding or cease and desist order.
4.8 NON-DISTRIBUTIVE INTENT. Buyer is acquiring the Stock for its own
account and not for the account of others for investment purposes and not with a
view to the resale or distribution thereof. Buyer will not sell or dispose of
any of the shares of the Stock without, prior thereto, registration under the
Securities Act of 1933, as amended, or establishing an exception therefrom.
Notwithstanding the foregoing, Buyer shall not be prohibited from transferring
the Stock, at any time after the Closing Date, to another affiliate of Buyer.
ARTICLE 5
COVENANTS
5.1 APPLICATIONS. As promptly as practicable, and in any event not later
than twenty (20) days after the date hereof, the Buyer shall submit all
requisite applications for prior approval of the transactions contemplated by
this Agreement to the Federal Reserve Board and any other appropriate bank
regulatory agency, and in addition thereto, each of the parties hereto shall,
and they shall cause their respective Subsidiaries to, as promptly as
practicable, submit any other applications, notices or other filings to any
other state or federal government agency, department or body, which is required
for consummation of the Acquisition (including for consummation of any of the
actions contemplated by Schedule 5.3 hereto). The Buyer and the Seller each
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represents and warrants to the other that all information concerning it and any
of its Subsidiaries, directors, officers and shareholders included (or submitted
for inclusion) in any application, notice or filing contemplated under this
Section 5.1 shall be true, correct and complete in all respects.
5.2 EFFORTS. The Buyer and the Seller shall each use all reasonable
efforts in good faith to (a) furnish as promptly as practicable such information
as may be required in connection with the preparation of the applications,
notices or other filings referred to in Section 5.1 above, (b) take or cause to
be taken all action necessary or desirable on its part so as to permit
consummation of the Acquisition at the earliest reasonable date, including,
without limitation, using all reasonable efforts to obtain all permits,
authorizations, consents, waivers and approvals from third parties or
governmental authorities required for the consummation of the transactions
contemplated hereby, and (c) obtain all necessary approvals for a reduction in
the shareholders' equity of the Bank through normal or special dividends, a
reduction in surplus or any other permitted reduction in shareholders' equity.
The Buyer shall use all reasonable efforts to lift or rescind any injunction,
restraining order or other order adversely affecting the abilities of the
parties to consummate the transactions contemplated hereby. In case at any time
after the Closing any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and directors of each party to
this Agreement shall take all such necessary or desirable action.
Notwithstanding the foregoing, Buyer agrees to use its best efforts to obtain
all necessary regulatory approvals in connection with the Acquisition,
including, without limitation, the approval of the Board of Governors of the
Federal Reserve System under the Bank Holding Company Act, and to take all
necessary steps to raise common equity capital to the extent necessary or
required to obtain such regulatory approvals.
5.3 CONDUCT OF BUSINESS OF THE BANK PENDING CLOSING. (a) During the
period from the date of this Agreement to the Closing Date, except with the
consent of Buyer (which consent shall be deemed to have been given upon the
passage of five (5) business days following written notice from the Seller to
the Buyer of the proposed action or inaction by the Bank unless the Buyer shall
object in writing to the Seller within such five (5)-day period), the Seller
will cause the Bank to:
(i) maintain its corporate existence and good standing, except
where any failure to maintain such good standing does not or would not
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have a Material Adverse Effect on the Bank;
(ii) conduct its business and engage in transactions only in the
ordinary course and consistent with prior practice, except that the
Bank may transfer the Retained Assets and Liabilities in accordance
with the terms of this Agreement and carry out the transactions
described in Schedule 5.3 hereto;
(iii) use all reasonable efforts to maintain and keep its
properties in as good repair and condition in all respects as they
presently exist, except for ordinary wear and tear and damage due to
casualty;
(iv) use all reasonable efforts to maintain in full force and
effect insurance generally comparable in amount and in scope of
coverage to that now maintained by it (with the exception of any
insurance policies which are listed on Schedule 1 hereto), and to
timely notify the Buyer prior to any termination of any such insurance
(other than on the Closing Date as contemplated by Section 3.16);
(v) comply with and perform in all respects its obligations and
duties (A) under contracts, leases and documents relating to or
affecting its assets, properties and business and (B) imposed upon it
by all federal, state and local laws and all rules, regulations and
orders imposed by federal, state or local governmental authorities,
judicial orders, judgments, decrees and similar determinations;
(vi) maintain or establish immediately prior to the Closing a
reserve for loan and lease losses in an amount not less than
$7,500,000 after continuing to administer Loans in conformity with
Bank policy and past practices; and
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(vii) use all reasonable efforts to continue to conduct the
business of the Bank with its business organization substantially
intact (except with regard to the transfer of Retained Assets and
Liabilities in accordance with the terms of this Agreement) and to
preserve the goodwill of those having business relationships with the
Bank; PROVIDED, HOWEVER, that Seller shall not be obligated to pay
retention bonuses to employees unless the Buyer shall have requested
or approved the payment of such bonuses and reimbursed the Seller for
such payments.
(b) The Seller agrees that from the date of this Agreement to the
Closing Date, except as otherwise permitted or required by this Agreement
(including as set forth on Schedule 5.3 hereto and in connection with the
transfer of the Retained Assets and Liabilities in accordance with the terms of
this Agreement), or consented to by the Buyer which consent shall be deemed to
have been given upon the passage of five (5) business days (or, in case the Bank
proposes to undertake or enter into any commitment to do any of the things
prohibited without the consent of the Buyer in the parenthetical set forth in
paragraph (x) below, three (3) business days) following written notice from the
Seller to the Buyer of the proposed action by the Bank unless the Buyer shall
object in writing to the Seller within such five-day or three-day period, the
Seller will prevent the Bank from:
(i) changing any provision of its Charter or by-laws;
(ii) changing the number of shares of its authorized or issued
Stock;
(iii) issuing any shares of capital stock of the Bank or any of
the Bank's Subsidiaries or any securities convertible into shares of
such capital stock or granting any Rights relating to the authorized
or issued capital stock of the Bank or any securities convertible into
shares of such capital stock;
(iv) splitting, combining or reclassifying any shares of its
Stock;
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(v) purchasing, redeeming, retiring or otherwise acquiring, or
hypothecating, pledging or otherwise encumbering, any shares of its
Stock;
(vi) granting any severance, reduction in force, separation or
termination pay (other than pursuant to agreements or policies of the
Bank in effect on the date of this Agreement), or entering into any
agreement which would grant severance, reduction in force, separation
or termination pay, employment agreement or plan or deferred
compensation, noncompetition, bonus, stock option, profit-sharing,
retirement or incentive plan or any other similar plan with, any of
its officers or directors, or, except as required by applicable law or
regulation, renewing, amending or modifying any such agreement,
arrangement or plan now in existence (including but not limited to any
Plan) or increasing the compensation payable to or granting bonuses to
any of its directors, officers or other employees other than merit
increases in accordance with past practices and general increases to
employees as a class in accordance with past practice or as required
by law;
(vii) making any capital expenditures in excess of $100,000 per
project or $500,000 in the aggregate;
(viii) issuing any notes or other evidence of funded
indebtedness with a maturity of more than ninety (90) days from the
date of issuance;
(ix) making application for the opening or closing of any branch
offices;
(x) except as otherwise expressly permitted under this
Agreement, undertaking or entering into any contract or other
commitment to (i) make any new loan to any
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borrower, or repurchase, or enter into any agreement to repurchase, all or
any portion of any loan or commitment from any other financial institution
except such loans and commitments for loans which are individually less
than or equal to $500,000 in principal if fully secured and unclassified,
or $250,000 in principal if an agribusiness relationship loan, or $100,000
in principal if not fully secured, or $50,000 in principal if criticized or
classified as nonaccrual, in accordance with Bank policies and procedures,
or (ii) renew any existing loan (other than outstanding lines of credit) in
excess of the then current outstanding principal balance except in
compliance with the limitations set forth in part (i), above;
(xi) merging with or into, consolidating with, affiliating with,
or purchasing or acquiring, any other Person, or, except to realize
upon collateral and except for purchases or sales of loans in the
ordinary course of its business or as otherwise expressly permitted
under this Agreement, acquiring all or any portion of the assets of
any other Person, or selling all or any portion of its assets;
(xii) making any change in its accounting methods or practices,
other than changes in accordance with generally accepted accounting
principles, regulatory accounting principles generally applicable to
depository institutions such as the Bank, or as required by law or
regulation;
(xiii) seeking or accepting deposits other than in the ordinary
course of business or engaging in any brokered deposit transactions;
or
(xiv) agreeing to do or announcing an intention to agree to do
any of the foregoing.
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5.4 CURRENT INFORMATION. (a) During the period from the date of this
Agreement to the Closing Date, the Seller will cause one or more of its or the
Bank's designated representatives to confer on a regular basis with
representatives of the Buyer and to report to the Buyer the general status of
the ongoing operations of the Bank and will, or will cause the Bank to, provide
to Buyer copies of any Call Reports and internally generated management reports
produced, within five (5) business days of the production of such reports.
(b) The Buyer and the Seller will each promptly notify the other after
senior management of the Buyer or the Seller, as the case may be, receives
notice of any condition or event which would constitute a violation of the terms
and conditions of this Agreement.
(c) In the event that either the Buyer or the Seller determines that a
condition to its obligations to complete the Acquisition cannot be fulfilled and
that it will not waive that condition, it will promptly notify the other party.
5.5 ACCESS TO PROPERTIES AND RECORDS. The Seller shall, and shall cause
the Bank to, permit the officers, attorneys, accountants and other
representatives of the Buyer reasonable access (during normal business hours and
following reasonable notice to Seller) during the period prior to the Closing
Date to the properties of the Bank, and shall disclose and make available to the
Buyer all books, papers and records relating to the Seller's ownership or
control of the Stock, or the Bank's properties, operations, employees,
obligations and liabilities, including, but not limited to, all of the Bank's
books of account (including the general ledger), tax records, minute books of
directors' and stockholders' meetings, Charter, by-laws, contracts and
agreements, filings with any regulatory authority, litigation files, plans
affecting employees of the Bank, and any other business activities of the Bank.
Further, the Seller shall, and shall cause the Bank to, at the Buyer's request
and expense, use all reasonable efforts to cooperate with the Buyer with respect
to the preparation for the combination and integration of the businesses,
systems and operations of the Buyer and the Bank, and shall confer on a regular
and frequent basis with one or more representatives of the Buyer to report on
operational and related matters. Notwithstanding the foregoing, the Seller
shall, and shall cause the Bank to, provide such information as is reasonably
requested by the Buyer about the data processing systems used in the operation
of the Bank's business in order to enable the Buyer to prepare for the
conversion of the Bank's systems to the Buyer's systems and shall provide the
Buyer with such access as is reasonably requested by the Buyer to the Bank's
system in order to enable the Buyer
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to run and balance trial conversions (PROVIDED that the Seller and the Buyer
shall have agreed upon reasonable measures for protecting the security of the
Bank's systems). The Seller shall not be required to provide access to or to
disclose information which does not relate to the Bank or where Seller
reasonably believes that such access or disclosure could or would violate or
prejudice the rights or business interests or confidences of any customer or
other Person, jeopardize the attorney-client privilege of the Seller or the
Bank, or contravene any law, rule, regulation, order, judgment, decree or
binding agreement. All information disclosed by the Seller to the Buyer
pursuant to this Section 5.5 shall be subject to the Confidentiality Agreement.
5.6 EMPLOYMENT AND EMPLOYEE BENEFITS AFTER THE CLOSING. Certain terms and
conditions regarding the parties' respective obligations with respect to
employment and employee benefit matters under this Agreement, and the
corresponding rights of employees of the Bank hereunder, are set forth in
Schedule 5.6 hereto, the terms of which are incorporated herein by this
reference and made a part hereof.
5.7 NO SOLICITATION. Unless and until this Agreement shall have been
terminated by either party pursuant to Section 7.1 hereof, neither the Seller
nor the Bank shall, except to the extent required by the fiduciary obligations
of its respective board of directors, directly or indirectly, encourage,
solicit, initiate or participate in any discussions or negotiations with, or
provide any information to, any Person (other than the Buyer or any of its
affiliates or representatives) concerning any merger involving the Bank, sale of
all or substantially all of the Bank's assets, sale of shares of Stock issued by
the Bank or similar transaction involving the Bank (an "Acquisition
Transaction"). The Seller will promptly communicate to the Buyer the terms of
any proposal, discussion, negotiation or inquiry relating to an Acquisition
Transaction and the identity of the Person making such proposal or inquiry which
it may receive in respect of any such transaction.
5.8 PUBLIC ANNOUNCEMENTS. Except as otherwise required by law or the
rules of the New York Stock Exchange, the Seller and the Buyer will cooperate
with each other in the development and distribution of all news releases and
other public information disclosures with respect to this Agreement or any of
the transactions contemplated hereby.
5.9 DIVESTITURE. If the Buyer shall determine that it is necessary or
advisable, in order to resolve or minimize objections that may be asserted with
respect to the Acquisition by the Federal Reserve Board, the United States
Department of Justice, any state or
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federal banking authority or any other governmental entity, that the Buyer not
acquire (directly or indirectly) from the Seller certain assets or deposit
liabilities of the Bank or the Bank's Subsidiaries, the Buyer shall so notify
the Seller and shall identify those assets and deposit liabilities, if any,
which the Buyer proposes that it should not acquire. The Buyer and the Seller
shall thereafter cooperate in an assessment of which assets and deposit
liabilities should be disposed of, and the Seller agrees to use all reasonable
efforts and to cause the Bank to use all reasonable efforts to assist the Buyer
in arranging such divestitures. No such objection by any governmental entity,
nor any failure by the Seller to perform its obligations under this Section 5.9,
shall affect the obligation of the Buyer to consummate the Acquisition. Buyer
shall be responsible for paying Seller, and Seller shall be entitled to receive
from Buyer, any costs or expenses incurred directly by Seller in complying with
its obligations under Section 5.5 as to any buyer of any assets or deposit
liabilities involved in any such divestiture.
5.10 COVENANT NOT TO COMPETE. (a) For a period of three (3) years after
the Closing Date, the Seller shall not open, and shall not permit any of its
Subsidiaries to open, any office within the State of Wyoming for the provision
of Retail Public Branch Services (as defined below); provided, that this
Section 5.10(a) shall not require any disposition or closing of any branch
operated, prior to any such transaction, (i) by any institution that acquires
the Seller, (ii) by any institution resulting from any merger of the Seller with
or into any institution or (iii) by any institution that Seller acquires;
provided, however, that in connection with any transaction of the type described
in subsections (ii) or (iii) above, the provision of Retail Public Branch
Services in the State of Wyoming cannot be the predominant factor motivating
Seller to consummate the transaction.
(b) The Seller agrees that it will leave with the Bank, and not remove or
otherwise obtain, in any manner or in any form or medium, any list compiled for
purposes of identifying the customers of the Bank (each, a "Bank Customer
List"), and that it shall not, and shall not permit its Subsidiaries to, use for
any purpose (including any solicitation of business for itself or for any of its
Subsidiaries) at any time after the Closing Date any Bank Customer List.
Further, the Seller agrees that it shall not, nor shall it permit any of its
Subsidiaries to, use after the Closing Date for any purpose whatsoever,
including, without limitation, any solicitation or marketing efforts, any
proprietary information concerning any customers named on any Bank Customer
List; PROVIDED, HOWEVER, that the foregoing shall not preclude the Seller or any
of its affiliates from engaging in general
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promotions to the public at large or to customers of Seller or any of its
affiliates to generate new business, provided that such solicitations are not
specifically generated from any Bank Customer List and PROVIDED, FURTHER, that
nothing in this Section 5.10(b) shall obligate Seller to remove the name of a
customer of the Bank, or any additional information relating to such customer,
from any other listing or database not compiled for purposes of identifying the
customers of the Bank.
(c) "Retail Public Branch Services" shall mean retail banking services
provided to the public from any branch or other physical facility, including
automated teller machines, including, without limitation, the taking of deposits
of any type, and the origination of direct residential (including home equity)
mortgage loans, commercial mortgage loans, and direct home improvement, auto and
other such consumer loans.
(d) Except as specifically set forth in this Section 5.10 (a) and (b),
Seller shall not be prohibited from competing with Buyer.
5.11 USE OF NAME "KEY". Effective upon the Closing, Buyer shall change
the name of the Bank so that the word "Key" shall no longer appear in its name.
From and after the Closing Date, the Buyer shall not, and shall cause its
affiliates not to, use the name "Key" or any derivative thereof and shall, at
the request of the Seller, execute and deliver to the Seller or Seller's
designee any instrument that is necessary or desirable to transfer to the Seller
or Seller's designee all of its right, title and interest in and to that name.
Within twenty (20) days following the Closing, Buyer shall have ceased using any
documentation or other materials which include or reference the name "Key" or
any derivative thereof and shall have destroyed all such documentation and
materials; provided, however, that Buyer shall continue to accept and honor any
checks or other documentation held by customers of the Bank as of the Closing
Date which include or reference the name "Key" or any derivative thereof.
5.12 TRANSFER OF RETAINED ASSETS AND LIABILITIES PRIOR TO THE CLOSING.
Prior to the Closing, Seller will use its reasonable efforts to cause the
transfer at book value, whether by sale, dividend or other disposition, of the
Retained Assets and Liabilities from the Bank to another affiliate of Seller.
In the event that the transfer of the Retained Assets and Liabilities to another
affiliate of Seller is not completed prior to the Closing, Buyer shall cooperate
with Seller to complete the transfer at book value of the Retained Assets and
Liabilities as soon as practicable following the Closing, including, without
limitation, the execution and delivery, at any time following the Closing, of
any and all proper
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assignments, conveyances, and assurances by the officers and/or directors of the
Bank and the taking of all acts necessary or desirable to vest, perfect, or
confirm title to any Retained Assets and Liabilities in Seller (or its designee)
and to otherwise carry out the provisions of this Section 5.12.
5.13 ENVIRONMENTAL REMEDIATION.
(a) PHASE I ENVIRONMENTAL AUDIT. For all Properties Owned as to which a
Phase I Environmental Audit (as defined in Section 5.13(e)) meeting the
requirements of this Section 5.13(a) was not previously provided to Buyer, Buyer
may commission, at its sole expense, a Phase I Environmental Audit by one or
more qualified independent environmental engineers or consultants reasonably
acceptable to Seller. The Environmental Audit Reports (as defined in
Section 5.13(e)) relating to the Phase I Environmental Audit shall be made
available to Seller as soon as is practicable and, in any event, no later than
10 days following the date of completion of the Phase I Environmental Audit.
(b) PHASE II ENVIRONMENTAL AUDIT AND ENVIRONMENTAL AUDIT RESPONSE. Within
ten (10) business days after either Buyer's receipt of the Environmental Audit
Report relating to any Environmental Audit or within ten (10) business days
after Buyer's receipt of any Environmental Occurrence Notification (as defined
in Section 5.13(c)), Buyer shall, with respect to each parcel of the Properties
Owned, provide Seller with an Environmental Audit Response (as defined in
Section 5.13(e)). If the Environmental Audit Response requests an initial or
additional Phase II Environmental Audit (as defined in Section 5.13(e)), Buyer
may commission a Phase II Environmental Audit by the environmental engineer or
consultant who performed the Phase I Environmental Audit or by such other
qualified environmental engineer or consultant reasonably acceptable to Seller.
The cost of each such Phase II Environmental Audit shall be paid by Buyer. Such
Phase II Environmental Audit shall be completed as soon as is practicable and,
in any event, no later than 30 days following the date of the delivery of the
Environmental Audit Response to Seller. Buyer shall, promptly after receipt of
the Environmental Audit Report relating to the Phase II Environmental Audit,
deliver a copy of such report to Seller.
(c) ENVIRONMENTAL OCCURRENCE NOTIFICATION. In the event that Seller
either receives notice from any governmental entity, or Seller has knowledge at
any time after the date of this Agreement and prior to the Closing Date that
there are any Environmental Action Items (as defined in Section 5.13(e))
emanating from, occurring on, or in any way related to, the Properties Owned,
which
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Environmental Action Items are not fully disclosed in the Phase I Environmental
Audit Report or, if applicable, the Phase II Environmental Audit Report, Seller
shall provide Buyer with notice setting forth the details thereof (the
"ENVIRONMENTAL OCCURRENCE NOTIFICATION") as soon as is reasonably practicable,
but in no event later than the earlier of seven (7) business days after becoming
aware of such Environmental Action Item or at the Closing Date.
(d) REMEDIATION; ALLOCATION OF REMEDIATION COSTS; TERMINATION OF
AGREEMENT. Seller and Buyer agree that, subject to the provisions hereof,
Seller shall remediate or cause to be remediated any Environmental Action Items
to the extent required by any governmental authority having requisite
jurisdiction. The cost of any remediation undertaken or caused to be undertaken
by Seller shall be paid as provided in the following sentence; provided,
however, that Buyer may remediate or cause to be remediated any such
Environmental Action Item so long as Seller, notwithstanding any other provision
of this Agreement to the contrary, has no responsibility for any of the costs
related thereto. The cost of any remediation undertaken or caused to be
undertaken by Seller shall be paid as follows (the aggregate amount of such
costs shall be referred to herein as the "REMEDIATION COSTS"): (i) the Buyer
shall pay the first $1,000,000 of Remediation Costs, and (ii) the Seller shall
pay the portion of Remediation Costs exceeding $1,000,000; provided, however,
that if the Remediation Costs shall exceed $3,500,000, Seller shall have the
right to declare this Agreement null and void with no obligations of one party
to the other thereafter by giving written notice to that effect to Buyer. For
purposes of this Section 5.13(d), the Remediation Costs shall be determined
using the estimate of the environmental engineer/consultant who performed the
Phase II Environmental Audits ("REMEDIAL COST ESTIMATE"), subject to Seller's
right in its sole discretion to request a second estimate from an environmental
engineer/consultant selected by it. If the difference between the estimates is
10% or less of the amount of the first estimate, then the Remedial Cost Estimate
shall be deemed conclusive and shall be binding. If the difference between the
two estimates is more than 10% of the amount of the first estimate and the
parties cannot reach agreement, then the two environmental engineers/consultants
shall select a third environmental engineer/consultant to produce a third
estimate, and the aggregate cost of the remediation shall be the amount of the
third estimate. In the event that the first two environmental engineers/
consultants are unable to agree upon a third, then the third environmental
engineer/consultant shall be selected from a list of names prepared by the first
two environmental engineers/consultants with the parties striking names in order
with the party striking first to be determined by the flip of a coin. The cost
of the second environmental engineer/consultant shall be paid
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by Seller and the cost of the third environmental engineer/consultant shall be
paid one-half by Seller and one-half by Buyer.
(e) DEFINITIONS. Except as otherwise defined in this Section 5.13 or
in this Agreement:
(i) "PHASE I ENVIRONMENTAL AUDIT" means an inspection,
investigation and audit of the Properties Owned with respect to all
Environmental Laws and Environmental Action Items which shall include
a view of the Properties Owned, inquiry into present and past uses of
the Properties Owned to the extent necessary to enable Buyer to avail
itself of the so-called "Innocent Purchaser" defense contained in
Section 101(35) of the Comprehensive Environmental Response,
Compensation and Liability Act, review of records of the United States
Environmental Protection Agency and applicable state or local
environmental protection agencies, field observations, review of
applicable air and water discharge permits, solid and hazardous waste
disposal permits, if any, the status thereof and all requirements
associated therewith, and such additional investigations (without
physical sampling or analysis) as Buyer and the applicable
environmental engineer or consultant shall determine are appropriate;
provided, however, that at a minimum, the Phase I Environmental Audit
shall be conducted in accordance with the 1993 ASTM standard
promulgated therefor.
(ii) "PHASE II ENVIRONMENTAL AUDIT" means such additional
investigation and analysis, including physical sampling and analysis,
as Buyer and the applicable environmental engineer or consultant shall
determine are appropriate.
(iii) "ENVIRONMENTAL AUDIT RESPONSE" means the written
notification to be provided to Seller
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by Buyer based upon the results of the applicable Environmental Audit, such
notification to either (A) state that there are no events or conditions
which require further investigation or constitute Environmental Action
Items; or (B) specifically identify and describe, referring to relevant
portions from the applicable Environmental Audit Report, any events or
conditions identified in the Environmental Audit Report which, in the
reasonable judgment of Buyer, require further investigation or constitute
an Environmental Action Item.
(iv) "ENVIRONMENTAL ACTION ITEM" means any condition or
circumstance which violates, is not in compliance with, or is not
consistent with any Appropriate Governmental Standard without regard
to whether any such condition or circumstance otherwise would or would
not be required to be reported pursuant to any applicable
Environmental Laws and without regard to whether any such condition or
circumstance would or would not be a violation of, or a condition
required to be addressed or remediated by, any applicable
Environmental Law.
(v) "APPROPRIATE GOVERNMENTAL STANDARD" means the following, in
each case as in effect at the time the relevant task pursuant to this
Agreement is being performed: (A) with respect to the presence of any
hazardous, toxic or other pollutants, contaminants, chemicals or
materials regulated by Environmental Laws in any environmental medium
or media, the relevant clean-up or remediation standards that would be
applied by the applicable governmental authority having jurisdiction
over the Properties Owned; and, (B) with respect to all other
conditions or circumstances, any applicable Environmental Law.
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(vi) "ENVIRONMENTAL AUDIT REPORT" means the written report of
the applicable environmental engineer or consultant with respect to
the Phase I Environmental Audit or the Phase II Environmental Audit,
as the case may be. Any Phase II Environmental Audit Report shall
either state the applicable environmental engineer or consultant's
opinion as to the actions to be taken in order to remediate any
Environmental Action Item to the extent necessary so that such
conditions or circumstances would no longer constitute Environmental
Action Items, or specify the additional work necessary to render such
opinion. Any Phase II Environmental Audit Report shall, on the basis
of actual bids or otherwise, estimate the cost to remediate
Environmental Action Items as specified above.
5.14 VACATION POLICY. Seller shall cooperate with Buyer to generally
encourage employees of the Bank to take their pro rata portion of vacation time
consistent with Seller's vacation policy currently in effect, as appropriate.
ARTICLE 6
CONDITIONS TO CLOSING
6.1 CONDITIONS TO CLOSING - THE SELLER AND THE BUYER. The respective
obligations of the Seller and the Buyer to effect the Acquisition shall be
subject to satisfaction of the following conditions at or prior to the Closing
Date, neither of which may be waived by the parties hereto:
(a) All necessary material approvals, authorizations and consents of
all governmental agencies or authorities required to consummate the Acquisition
and the other transactions contemplated by this Agreement (including by
Schedule 5.3 hereto) shall have been obtained and shall remain in full force and
effect, and all waiting periods relating to such approvals, authorizations or
consents shall have expired; no such approval may be deemed by Buyer to not have
been obtained by reason of any divestiture or holding separate required in any
approval or consent of the Federal Reserve Board or the United States
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Department of Justice or pursuant to the order of a court of competent
jurisdiction; and
(b) Neither the Seller nor the Buyer nor any of their Subsidiaries
shall be subject to any order, decree or injunction of any court or agency of
competent jurisdiction which enjoins or prohibits consummation of the
transactions contemplated by this Agreement.
6.2 CONDITIONS TO CLOSING - THE BUYER. The obligations of the Buyer
to effect the Acquisition shall be subject to satisfaction of the following
additional conditions on or prior to the Closing Date unless waived by the Buyer
pursuant to Section 7.4 hereof:
(a) The representations and warranties of the Seller set forth in
Article 3 hereof, as supplemented by the Seller as contemplated by the following
sentence, shall be true and correct, in all material respects, as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date (or on the date when made in the case of any representation and
warranty which specifically relates to an earlier date)(PROVIDED, that where any
such representation and warranty already includes a Material Adverse Effect or
materiality exception, no further materiality exception is to be permitted by
this clause), except (i) as otherwise contemplated by this Agreement or
consented to in writing by the Buyer and (ii) for any breach of any
representation or warranty of Seller which breach relates to or arises out of
any of the Retained Assets and Liabilities. The Seller shall have provided to
the Buyer, no later than five days prior to the Closing Date, supplements to
each Schedule attached hereto or other information so that such Schedule shall
set forth, as of the Closing Date, all the information contemplated by the
representation of Seller to which it relates;
(b) The Seller and the Bank shall have in all material respects
performed all of the obligations and complied with all covenants required by
this Agreement; PROVIDED, that where any such covenant already includes a
Material Adverse Effect or materiality exception, no further materiality
exception is to be permitted by this clause;
(c) The Seller shall have delivered to the Buyer a certificate, dated
the Closing Date and signed by either its Chief Operating Officer, Chief Banking
Officer or Chief Financial Officer to the effect that the conditions set forth
in this Section 6.2 have been satisfied;
(d) The Seller shall have executed and delivered to the Buyer a Tax
Agreement substantially in the
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form of Exhibit A hereto (the "Tax Agreement"), and such Tax Agreement shall be
in full force and effect;
(e) The Bank and its Subsidiaries shall have received the
resignations of any of their respective directors not selected by the Buyer to
serve as directors after the Closing Date; and
(f) The certificate(s) for the Stock shall have been received in
accordance with Section 2.4(b)(ii) hereof.
6.3 CONDITIONS TO CLOSING - THE SELLER. The obligations of the
Seller to effect the Acquisition shall be subject to satisfaction of the
following additional conditions on or prior to the Closing Date unless waived by
the Seller pursuant to Section 7.4 hereof.
(a) The representations and warranties of the Buyer set forth in
Article 4 hereof shall be true and correct, in all material respects, as of the
date of this Agreement and as of the Closing Date as though made on and as of
the Closing Date (or on the date when made in the case of any representation and
warranty which specifically relates to an earlier date)(PROVIDED, that where any
such representation and warranty already includes a Material Adverse Effect or
materiality exception, no further materiality exception is to be permitted by
this clause), except as otherwise contemplated by this Agreement or consented to
in writing by the Seller or except where such inaccuracy would not, individually
or in the aggregate, materially adversely affect the Buyer's ability to
consummate the transactions contemplated by this Agreement;
(b) The Buyer shall have in all material respects performed all
obligations and complied with all covenants required by this Agreement;
PROVIDED, that where any such covenant already includes a Material Adverse
Effect or materiality exception, no further materiality exception is to be
permitted by this clause;
(c) The Buyer shall have delivered to the Seller a certificate, dated
as of the Closing Date and signed by its Chairman or President to the effect
that the conditions set forth in this Section 6.3 have been satisfied;
(d) The Buyer shall have executed and delivered to the Seller the Tax
Agreement, and the Tax Agreement shall be in full force and effect; and
(e) The Purchase Price shall have been paid in accordance with
Section 2.2 above.
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ARTICLE 7
TERMINATION, INDEMNIFICATION, WAIVER AND AMENDMENT
7.1 TERMINATION. This Agreement may be terminated:
(a) at any time on or prior to the Closing Date, by the mutual
consent in writing of the parties hereto;
(b) at any time on or prior to the Closing Date, by either party
hereto in writing, if (i) the other party has, in any material respect, breached
any covenant or agreement contained herein(PROVIDED, that where any such
covenant already includes a Material Adverse Effect or materiality exception, no
further materiality exception is to be permitted by this clause) or (ii) any
representation or warranty of the other party contained herein is or becomes
inaccurate or misleading in any material respect (PROVIDED; that where any such
representation and warranty already includes a Material Adverse Effect or
materiality exception, no further materiality exception is to be permitted by
this clause), and in either case if such breach or inaccuracy has not been cured
or otherwise corrected within forty-five (45) days after the date on which
written notice of such breach or inaccuracy is given to the party committing
such breach and, in the reasonable judgment of the party terminating this
Agreement, cannot be cured or otherwise corrected by the close of business on
October 1, 1997;
(c) by either party hereto in writing, if any of the applications for
prior approval referred to in Section 5.1 hereof is denied, and the time period
for appeals and requests for reconsideration has run;
(d) by Seller in writing, pursuant to Section 5.13(d) hereof; or
(e) by either party hereto in writing, if the Closing Date has not
occurred by the close of business on October 1, 1997.
7.2 EFFECT OF TERMINATION. In the event this Agreement is terminated
pursuant to Section 7.1 hereof, this Agreement shall become null and void and
have no further force or effect, except that the provisions relating to
confidentiality and expenses set forth in Sections 5.5 and 8.1, respectively,
shall survive any such termination.
7.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS;
INDEMNIFICATION. (a) Except as otherwise specifically provided in this
Agreement, all
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representations, warranties, covenants and other agreements in this Agreement or
in any instrument delivered pursuant hereto shall survive the Closing and any
investigation or inquiry made by the Seller or the Buyer, as the case may be,
provided that any claim for a breach of any such representation, warranty,
covenant or other agreement must be made within the following periods:
(i) with respect to the matters addressed in Section 3.18, prior
to the lapse of time within which federal, state or local taxing
authorities are entitled to assert any tax liability on the part of
the Bank for tax periods ending at or prior to the Closing Date; and
(ii) with respect to all representations, warranties, covenants
and agreements not specified in clause (i) above, within one (1) year
after the Closing Date.
(b) The Seller agrees to indemnify the Buyer (and its directors,
officers, agents and employees) against, and the Buyer agrees to indemnify the
Seller (and its directors, officers, agents and employees) against, and each of
them agrees to protect, to defend and to hold harmless the other (and the
other's directors, officers, agents and employees) from all Damages in excess of
$1,000,000 arising out of or resulting from any inaccuracy in, or breach of, any
of the representations, warranties, covenants or other agreements of each of
them contained herein or in any certificate or instrument delivered in
connection herewith (except, in the case of a breach of the representation
contained in Section 3.20, for Remediation Costs as to which the provisions
relating to indemnification herein shall be inapplicable and which shall be paid
solely as provided for in Section 5.13 hereof), which inaccuracy or breach is
asserted and a claim for indemnification with respect thereto is made within the
survival period set forth in Section 7.3(a), provided, however, that neither
party's individual liability under this Section 7.3(b) shall exceed in the
aggregate $15,000,000. Notwithstanding anything to the contrary herein, from
and after the Closing Date, subject to the terms and conditions of this
Agreement, Seller shall indemnify and protect, defend and hold harmless Buyer
(and its directors, officers, agents and employees) from and against all Damages
arising out of or resulting from (a) the Retained Assets and Liabilities, (b)
the transfer of the Retained Assets and Liabilities from the Bank to another
affiliate of KeyCorp and (c) that certain lawsuit entitled KAAREN WOOTTEN V.
KEYCORP, ET.AL., currently pending in the U.S. District Court of the Northern
District
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of New York, as to which the Bank is a defendant. Notwithstanding the provisions
of Section 7.3(a)(ii) or any other provisions to the contrary herein, the Buyer
shall indemnify and protect, defend and hold harmless Seller and Holding Company
(and their respective directors, officers, agents and employees) from and
against all Damages arising out of or resulting from any failure on the part of
Buyer or any of its affiliates to perform under any leases or subleases,
including, without limitation, those Damages which arise under that certain
Guaranty or Guaranties to which the Holding Company is a party as guarantor and
which relate to those leases or subleases, provided that such failure to perform
is asserted, and a claim for indemnification with respect thereto is made,
during the term of such leases or subleases, as the same may be extended from
time to time, plus any applicable statute of limitations period.
(c) In the event that the Buyer seeks indemnification from the Seller
pursuant to Section 7.3(b) with respect to any environmental claim,
(i) notwithstanding anything to the contrary set forth in paragraph (d) below,
the Seller shall have the right to control any remediation of such real property
which may be required by any federal, state or local governmental agency or
authority, and, in the event of a suit, shall assume the primary defense of and
shall have the authority to negotiate, compromise and settle such claim. In the
event the Seller elects to assume control over any remediation, it will, at the
request of the Buyer, proceed expeditiously with the remediation, with a view
both to the cost of the efficient completion of the remediation and the time
constraints of the Buyer. The Buyer shall retain the right to employ its own
counsel and to participate in the defense of any such claim, but shall be solely
responsible for its own costs and expenses in connection with such
participation. The Buyer agrees to cooperate with the Seller in the
investigation of any such claim.
(d) In any case under this Agreement where one party may be required
to indemnify the other against any claim or legal action, other than
indemnification under the Tax Agreement, which shall be governed in accordance
with the terms and conditions of the Tax Agreement, indemnification shall be
provided in accordance with the procedure outlined below:
(i) Provided that prompt notice is given of a claim or suit for
which indemnification might be claimed, unless the failure to provide
such notice does not materially prejudice the interests of the party
to whom such notice is to be provided, the indemnifying party
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promptly will defend, contest, or otherwise protect against any such claim
or suit at its own cost and expense.
(ii) The indemnified party may, but will not be obligated to,
participate at its own expense in a defense thereof by counsel of its
own choosing, but the indemnifying party shall be entitled to control
the defense unless the indemnified party has relieved the indemnifying
party from liability with respect to the particular matter; PROVIDED
that the indemnifying party may only settle or compromise the matter
subject to indemnification without the consent of the indemnified
party if such settlement includes a complete release of all
indemnified parties as to the matters in dispute; and PROVIDED FURTHER
that the indemnified party will not unreasonably withhold or delay
consent to any settlement or compromise that requires its consent.
(iii) In the event the indemnifying party fails to timely
defend, contest or otherwise protect against any such claim or suit,
the indemnified party may, but will not be obligated to, defend,
contest or otherwise protect against the same, and make any compromise
or settlement thereof and recover the entire costs thereof from the
indemnifying party, including reasonable attorneys' fees,
disbursements and all amounts paid as a result of such claim or suit
or the compromise or settlement thereof; PROVIDED, HOWEVER, that if
the indemnifying party undertakes the defense of such matter, the
indemnified party shall not thereafter be entitled to recover from the
indemnifying party for its costs incurred in the defense thereof other
than the reasonable costs of investigation undertaken by the
indemnified party and reasonable costs of providing assistance.
(iv) The indemnified party shall cooperate and provide such
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assistance as the indemnifying party may reasonably request in connection
with the defense of the matter subject to indemnification and in connection
with recovering from any third parties amounts that the indemnifying party
may pay or be required to pay by way of indemnification hereunder, PROVIDED
that the indemnified party shall not be required to file a claim with its
insurers as to any matter subject to indemnification. The indemnified
party shall protect its position with respect to any matter that may be the
subject of indemnification hereunder in the same manner as it would any
similar matter where no indemnification is available.
7.4 WAIVER. Except with respect to any required regulatory approval,
each party hereto, by written instrument signed by an executive officer of such
party, may at any time extend the time for the performance of any of the
obligations or other acts of the other party hereto and may waive (a) any
inaccuracies of the other party in the representations or warranties contained
in this Agreement or any document delivered pursuant hereto, (b) compliance with
any of the covenants, undertakings or agreements of the other party, or
satisfaction of any of the conditions precedent to its obligations (other than
those conditions set forth in Section 6.1(a)), contained herein or (c) the
performance by the other party of any of its obligations set out herein.
7.5 AMENDMENT OR SUPPLEMENT. This Agreement may be amended or
supplemented at any time by mutual written agreement of the Buyer and the
Seller.
ARTICLE 8
MISCELLANEOUS
8.1 EXPENSES. Except as provided by Section 5.13, or otherwise
agreed to herein or in writing by the parties hereto, each party hereto shall
bear and pay all costs and expenses incurred by it in connection with the
transactions contemplated in this Agreement, including fees and expenses of its
own financial consultants, accountants and counsel.
8.2 ENTIRE AGREEMENT, ETC. (a) This Agreement, the Confidentiality
Agreement and the Tax Agreement contain the entire agreement between the parties
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with respect to the transactions contemplated hereunder and supersede all prior
arrangements or understandings with respect thereto, written or oral.
(b) The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors. Nothing in this Agreement is intended to confer any rights,
remedies, obligations or liabilities upon any party other than the parties
hereto and their respective successors and permitted assigns.
8.3 NO ASSIGNMENT. Neither of the parties hereto may assign any of
its rights or obligations under this Agreement to any other person, except that
the Buyer may assign its rights hereunder to an affiliate of the Buyer with
prior notice to the Seller, PROVIDED that such assignment shall not, in the
Seller's reasonable judgment, be likely to cause any undue delay, expense or
burden in completing the transactions contemplated by this Agreement and
PROVIDED FURTHER that such designation shall not relieve the Buyer of any of its
obligations under this Agreement.
8.4 NOTICES. All notices or other communications which are required
or permitted hereunder shall be in writing and sufficient if delivered
personally or sent by telecopy, telex, cable or telegram, by overnight express
or by registered or certified mail, postage prepaid, addressed as follows:
If to the Seller:
KeyCorp
127 Public Square
Cleveland, Ohio 44114
Attention: Kent E. Allen,
Vice President
Telephone No.: (216) 689-5534
Facsimile No.: (216) 689-3610
With a required copy to:
KeyCorp
127 Public Square
Cleveland, Ohio 44114
Attention: Daniel R. Stolzer, Esq., Senior
Vice President and Senior
Managing Counsel
Telephone No.: (216) 689-4110
Facsimile No.: (216) 689-4121
-44-
<PAGE>
If to the Buyer:
Community First Bankshares, Inc.
520 Main Avenue
Fargo, North Dakota 58124
Attention: Donald R. Mengedoth, President
Facsimile No.: (701) 237-4517
With a required copy to:
Lindquist & Vennum P.L.L.P.
4200 IDS Center
Minneapolis, MN 55402
Attention: Steven J. Johnson, Esq.
Facsimile No.: (612) 321-3207
A party may change its address for notice purposes by written notice
to the other party hereto.
8.5 CAPTIONS. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
8.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
8.7 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Ohio applicable to agreements made
and entirely to be performed within such jurisdiction except to the extent
federal law may be applicable.
8.8 EFFECT OF INVESTIGATIONS. No investigation by the parties hereto
made heretofore or hereafter, whether pursuant to this Agreement or otherwise,
shall affect the representations and warranties of the parties which are
contained herein and each such representation and warranty shall survive such
investigation, subject, however, to Section 7.3(a) hereof.
8.9 SEVERABILITY. In the event that any one or more provisions of
this Agreement shall for any reason be held invalid, illegal or unenforceable in
any respect, by any court of competent jurisdiction, such invalidity, illegality
or unenforceability shall not affect any other provisions of this Agreement and
the parties hereto shall use their best efforts to substitute a valid, legal and
enforceable provision which, insofar as practicable, implements the purposes and
intents of this Agreement.
-45-
<PAGE>
8.10 SPECIFIC ENFORCEABILITY. The parties hereto recognize and
hereby acknowledge that it is impossible to measure in money the damages that
would result to a party by reason of the failure of either of the parties to
perform any of the obligations imposed on it by this Agreement. Accordingly, if
any party should institute an action or proceeding seeking specific enforcement
of the provisions hereof, each party against which such action or proceeding is
brought hereby waives the claim or defense that the party instituting such
action or proceeding has an adequate remedy at law and hereby agrees not to
assert in any such action or proceeding the claim or defense that such a remedy
at law exists.
-46-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as a sealed instrument by their duly authorized officers as of the
day and year first above written.
KEYCORP
By: /s/ Kent E. Allen
----------------------------------
Name: Kent E. Allen
Title: Vice President
COMMUNITY FIRST BANKSHARES, INC.
By: /s/ Donald R. Mengedoth
----------------------------------
Name: Donald R. Mengedoth
Title: President
-47-
<PAGE>
KEY BANK OF THE ROCKY MOUNTAINS,
INC.
By: /s/ Kent E. Allen
----------------------------------
Name: Kent E. Allen
Title: Authorized Official
<PAGE>
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
COMMUNITY FIRST BANKSHARES, INC.
ARTICLE I
NAME
The name of the corporation is Community First Bankshares, Inc.
ARTICLE II
REGISTERED OFFICE
The address of the corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, in
the County of New Castle. The name of its registered agent at such address is
The Corporation Trust Company.
ARTICLE III
PURPOSES
The nature of the business or purposes to be conducted or promoted by the
corporation shall include any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
ARTICLE IV
CAPITAL STOCK
4.1) AUTHORIZED CAPITAL STOCK. The total number of shares of stock which
the corporation shall have authority to issue is Thirty-Two Million (32,000,000)
shares, divided into Thirty Million (30,000,000) shares of Common Stock, $.01
par value per share ("Common Stock"), and Two Million (2,000,000) shares of
Preferred Stock, $.01 par value per share ("Preferred Stock"). The designations
and the powers, preferences, and rights, and the qualifications, limitations, or
restrictions of the shares of each class of capital stock shall be as provided
in this Article IV and by applicable law.
4.2) GENERAL.
<PAGE>
a) PREEMPTIVE RIGHTS. Unless otherwise provided by the Board of
Directors, no holder of capital stock of the corporation shall have any
preferential, preemptive, or other rights of subscription to any shares of any
class of capital stock of the corporation allotted or sold or to be allotted or
sold now or hereafter authorized, or to any obligations convertible into the
capital stock of the corporation of any class, or any right of subscription to
any part thereof.
b) STOCK RIGHTS AND OPTIONS. The Board of Directors shall have the
power to create and issue rights, warrants, or options entitling the holders
thereof to purchase from the corporation any shares of its capital stock of any
class or series, upon such terms and conditions and at such times and prices as
the Board of Directors may provide, which terms and conditions shall be
incorporated in instrument or instruments evidencing such rights.
4.3) COMMON STOCK. Subject to all of the rights of the Preferred Stock,
and except as may be expressly provided herein with respect to the Preferred
Stock, by applicable law or by the Board of Directors pursuant to this Article
IV:
a) VOTING RIGHTS GENERALLY. Each holder of record of the Common
Stock shall be entitled to one vote for each share of Common Stock held by him
or her at each meeting of the shareholders with respect to any matter, other
than the election of directors, on which such shareholders have a right to vote.
The right to vote provided herein shall be subject to the provisions of the
Bylaws of the corporation in effect from time to time with respect to closing
the transfer books and fixing a record date for the determination of shares
entitled to vote.
b) CUMULATIVE VOTING FOR DIRECTORS. At all elections of directors,
each holder of record of the Common Stock shall be entitled to as many votes as
shall equal the number of votes which (except for this provision as to
cumulative voting) he or she would be entitled to cast for the election f
directors with respect to his or her shares of Common Stock multiplied by the
number of directors to be elected, and such holder may cast all of such votes
for a single director candidate or may distribute them among any number of such
candidates.
c) DIVIDENDS. Each holder of record of Common Stock of the
corporation shall be entitled to receive when as declared by the Board of
Directors, out of earnings or surplus legally available therefor, dividends,
payable either in cash, in property, or ins hares of the capital stock of the
corporation.
4.4) PREFERRED STOCK. The Preferred Stock may be issued from time to time
by the Board of Directors as shares of one or more class or series. Subject to
the provisions hereof and the limitations prescribed by law, the Board of
Directors is expressly authorized by adopting resolutions providing for the
issuance of shares of any particular series and, if and to the extent from time
to time required by law, by filing with the Secretary of State of the State of
Delaware a statement with respect to the adoption of the resolutions pursuant to
the Delaware General Corporation Law (or other law hereafter in effect relating
to the same or substantially similar subject matter), to establish the number of
shares to be included in each class or series and to fix
2
<PAGE>
the designation and relative powers, preferences and rights and the
qualifications and limitations or restrictions thereof relating to the shares f
each such class or series. The authority of the Board of Directors with respect
to each series shall include, but not be limited to, determination of the
following:
(a) the distinctive serial designation of such class or series and
the number of shares constituting such class or series, provided that the
aggregate number of shares constituting all classes or series of Preferred
Stock shall not exceed nine hundred thousand (900,000);
(b) the annual dividend rate on shares of such class or series, if
any, whether dividends shall be cumulative and, if so, from which date or
dates;
(c) whether the shares of such class or series shall be redeemable
and, if so, the terms and conditions of such redemption, including the date
or dates upon and after which such shares shall be redeemable, and the
amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption date;
(d) the obligations, if any, of the corporation to retire shares of
such class or series pursuant to a sinking fund;
(e) whether shares or such class or series shall be convertible into,
or exchangeable for, shares of stock of any other class or classes and, if
so, the terms and conditions of such conversion or exchange, including the
price or prices or the rate or rates of conversion or exchange and the
terms of adjustment, if any;
(f) whether the shares of such class or series shall have voting
rights provided by law, and, if so, the terms of such voting rights;
(g) the rights of the shares of such class or series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
corporation; and
(h) any other relative rights, powers, preferences, qualifications,
limitations or restrictions thereof relating to such class or series.
The shares of Preferred Stock of any one class or series shall be identical
with each other in all respects except as to the dates from and after which
dividends thereon shall cumulate, if cumulative.
ARTICLE V
EXISTENCE
3
<PAGE>
The corporation is to have perpetual existence.
ARTICLE VI
STOCKHOLDER MEETING AND BOOKS
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to applicable law) outside the State of Delaware at such place or
places as may be designated from time to time by the Board of Directors or in
the Bylaws of the corporation.
ARTICLE VII
DIRECTORS
7.1) In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter or repeal
the Bylaws of the corporation.
7.2) Elections of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
ARTICLE VIII
DIRECTOR LIABILITY
8.1) A director of the corporation shall not be liable to the corporation
or the stockholders of the corporation for monetary damages for a breach of the
fiduciary duty of care as a director, except to the extent such exception from
liability or limitation thereof is not permitted under the Delaware General
Corporation Law as the same currently exists or hereafter is amended.
8.2) The provisions of this Article shall not be deemed to limit or
preclude indemnification of a director by the corporation for any liability of a
director which has not been eliminated by the provisions of this Article.
4
<PAGE>
ARTICLE IX
AMENDMENT OF CERTIFICATE
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
5
<PAGE>
EXHIBIT 10.1
COMMUNITY FIRST BANKSHARES, INC.
ANNUAL INCENTIVE PLAN
1996
<PAGE>
1996 AIP
GROUP TARGET INCENTIVE MAXIMUM
I CEO 40% 80%
II EVP'S 30% 60%
III SVP'S 20% 40%
IV VP'S 10% 20%
SPLIT 60% INTERNAL & 40% EXTERNAL
TARGET INTERNAL EXTERNAL
I 40% 24% 16%
II 30% 18% 12%
III 20% 12% 8%
IV 10% 6% 4%
<PAGE>
INTERNAL AWARD CALCULATION
Based on performance versus plan EPS as target.
No award if less than 90% of plan.
Double internal amount @ 115% of plan (see schedule).
Round up at .5 (plan) and down at .5.
Fully Diluted AWARD % OF BASE SALARY
% OF PLAN EPS I II III IV
Under 90 1.86 0 0 0 0
91 1.88 2.4 1.8 1.2 .6
92 1.90 4.8 3.6 2.4 1.2
93 1.93 7.2 5.4 3.6 1.8
94 1.95 9.6 7.2 4.8 2.4
95 1.97 12.0 9.0 6.0 3.0
96 1.99 14.4 10.8 7.2 3.6
97 2.01 16.8 12.6 8.4 4.2
98 2.03 19.2 14.4 9.6 4.8
99 2.05 21.6 16.2 10.8 5.4
100 2.07 24.0 18.0 12.0 6.0
101 2.09 25.6 19.2 12.8 6.9
102 2.11 27.2 20.4 13.6 6.8
103 2.13 28.8 21.6 14.4 7.2
104 2.15 30.4 22.8 15.2 7.6
105 2.17 32.0 24.0 16.0 8.0
106 2.19 33.6 25.2 16.8 8.4
107 2.21 35.2 26.4 17.6 8.8
108 2.24 36.8 27.6 18.4 9.2
109 2.26 38.4 28.8 19.2 9.6
110 2.28 40.0 30.0 20.0 10.0
111 2.30 41.6 31.2 20.8 10.4
112 2.32 43.2 32.4 21.6 10.8
113 2.34 44.8 33.6 22.4 11.2
114 2.36 46.4 34.8 23.2 11.6
115+ 2.38 48.0 36.0 24.0 12.0
COMPENSATION COMMITTEE RESERVED RIGHT TO ADJUST FOR FDIC PREMIUM REDUCTION
VARIANCE FROM APPROVED PLAN (4CENTS PER 100).
2
<PAGE>
EXTERNAL AWARD CALCULATION
SNL peer group (20 banks) for CURRENT PERFORMANCE YEAR based on group as of
December 31, 1995.
Combines incentive for ROE and growth (see matrix).
SNL 20 BANK GROUP
Percentile 75th or higher 100% 150% 200%
ROE 50th 50% 100% 150%
49th or lower 0% 50% 100%
49th or lower 50th 75th or higher
Percentile asset growth rate
External award calculation:
% OF SALARY AT PERFORMANCE LEVEL
TARGET 50% 100% 150% 200%
I 16% 8% 16% 24% 32%
II 12% 6% 12% 18% 24%
III 8% 4% 8% 12% 16%
IV 4% 2% 4% 6% 8%
The SELECTED PEER GROUP reflects our selection of the NINETEEN OTHER
INSTITUTIONS most like the subject institution to be used as a peer group in
comparing relative compensation levels. For banks with assets of less than $5
billion, the automated process searches in sequence for:
1. Banks in the same state within 40% of total assets.
2. Banks in the same region within 40% of total assets.
3. Banks in the same state within 80% of total assets.
4. Banks in the same region within 80% of total assets.
5. Any bank within 40% of total assets.
6. Any bank within 80% of total assets.
7. Banks closest in asset size.
If at any point in the sequence nineteen banks are found, the sequence stops and
those banks form the Selected Peer Group. If step six is reached and there are
still not nineteen other banks, the banks closest in asset size anywhere in the
country are chosen to round out the peer group.
3
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings
Total interest income. . . . . . . . . . . . . . . . $ 229,426 $192,868 $143,237 $121,146 $115,309
Total interest expense . . . . . . . . . . . . . . . 95,234 82,891 53,468 47,271 50,870
Net interest income. . . . . . . . . . . . . . . . . 134,192 109,977 89,769 73,875 64,439
Net income . . . . . . . . . . . . . . . . . . . . . 32,510 29,953 22,729 18,614 15,108
- --------------------------------------------------------------------------------------------------------------------------------
PER COMMON AND COMMON EQUIVALENT SHARE
- --------------------------------------------------------------------------------------------------------------------------------
Primary earnings per share . . . . . . . . . . . . . . $1.85 $ 1.82 $ 1.48 $ 1.32 $ 1.07
Fully diluted earnings per share . . . . . . . . . . . 1.79 1.74 1.42 1.30 1.07
Net book value . . . . . . . . . . . . . . . . . . . . 12.92 12.01 9.69 9.10 7.96
Dividends paid . . . . . . . . . . . . . . . . . . . . .58 .48 .44 .40 .34
- --------------------------------------------------------------------------------------------------------------------------------
AT YEAR-END
- --------------------------------------------------------------------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 3,116,398 $ 2,769,976 $ 2,130,619 $ 1,883,794 $ 1,576,275
Total loans. . . . . . . . . . . . . . . . . . . . . . 2,064,108 1,767,193 1,330,146 1,037,666 813,550
Allowance for loan losses. . . . . . . . . . . . . . . 26,215 22,712 17,333 14,332 11,196
Total deposits . . . . . . . . . . . . . . . . . . . . 2,537,440 2,359,716 1,794,565 1,627,989 1,374,859
Common equity. . . . . . . . . . . . . . . . . . . . . 221,583 181,004 134,701 125,071 103,911
- --------------------------------------------------------------------------------------------------------------------------------
KEY PERFORMANCE RATIOS
- --------------------------------------------------------------------------------------------------------------------------------
Return on average common equity. . . . . . . . . . . . 15.69% 18.19% 16.77% 16.64% 15.10%
Return on average assets . . . . . . . . . . . . . . . 1.13% 1.24% 1.13% 1.10% 1.04%
Net interest margin. . . . . . . . . . . . . . . . . . 5.32% 5.06% 4.95% 4.74% 4.85%
Dividend payout ratio. . . . . . . . . . . . . . . . . 32.40% 27.59% 30.99% 30.77% 31.78%
Average common equity to average assets. . . . . . . . 6.87% 6.43% 6.43% 6.59% 6.86%
Nonperforming assets to period-end loans and OREO. . . 0.70% 0.31% 0.34% 0.62% 1.13%
Allowance for loan losses to period-end loans. . . . . 1.27% 1.29% 1.30% 1.38% 1.38%
Allowance for loan losses to nonperforming loans . . . 200.68% 608.09% 537.12% 295.99% 224.05%
Net charge-offs to average loans . . . . . . . . . . . 0.22% 0.17% -0.00% 0.08% 0.33%
Tier 1 capital . . . . . . . . . . . . . . . . . . . . 8.88% 8.51% 10.64% 10.16% 10.97%
Total risk-based capital . . . . . . . . . . . . . . . 11.10% 11.18% 13.46% 13.44% 12.47%
Leverage ratio . . . . . . . . . . . . . . . . . . . . 6.62% 6.10% 7.12% 6.12% 6.40%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The following represents management's discussion and analysis of Community First
Bankshares, Inc.'s (the "Company") financial condition as of December 31, 1996
and 1995, and its results of operations for the years ended December 31, 1996,
1995, and 1994. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes and the five year
summary of selected financial data. The information has been restated to reflect
mergers accounted for as a pooling-of-interests as if they had occurred at the
beginning of the first period presented. Purchases have been reflected in the
Company's results of operations for all periods following the acquisition and
are reflected in the Company's financial condition at all dates subsequent to
the acquisition.
MERGER AND ACQUISITION ACTIVITY
- --------------------------------------------------------------------------------
The Company has made a number of acquisitions during these periods. Each of
these acquisitions has had an effect upon the Company's results of operations
and financial condition.
On December 18, 1996, the Company issued approximately 5.2 million shares
of common stock to acquire Mountain Parks Financial Corporation ("Mountain
Parks"), a one-bank holding company headquartered in Denver, Colorado. At
acquisition, Mountain Parks had approximately $600 million in assets at
seventeen banking offices located in Colorado. On February 22, 1995, the Company
issued approximately 2.4 million shares of common stock to acquire Minowa
Bancshares, Inc. ("Minowa"), a three-bank holding company headquartered in
Decorah, Iowa. At acquisition, Minowa had approximately $224 million in assets
at three banks located in Iowa and Minnesota. On July 3, 1995, the Company
issued approximately 1.2 million shares to acquire First Community Bankshares,
Inc. ("First Community"), a five-bank holding company headquartered in Fort
Morgan, Colorado. At acquisition, First Community had total assets of $153
million at its five Colorado banks. All three acquisitions were accounted for
using the pooling of interests method.
Also during the periods presented, the Company made the following
acquisitions of banks (or associated holding companies), each of which were
accounted for as a purchase, except Trinidad, Colorado, which was accounted for
as an immaterial pooling of interests.
- ---------------------------------------------------------------------------
Acquisition Location of Bank or Total Assets at Date of
Month and Year Name of Acquired Entity Acquisition (In Millions)
- ---------------------------------------------------------------------------
October 1996 Trinidad, Colorado $ 70
July 1996 Kiowa, Colorado $ 58
July 1996 Englewood, Colorado $ 19
October 1995 Beach, North Dakota $ 44
September 1995 Aurora, Colorado $ 41
July 1995 Louisville, Colorado $ 36
July 1995 Boulder, Colorado $ 60
May 1995 Alliance, Nebraska $293
May 1994 Denver, Colorado $ 37
April 1994 Fraser, Colorado $ 21
April 1994 Ada, Minnesota $ 17
April 1994 Spooner, Wisconsin $ 83
On February 18, 1997, the Company signed a definitive purchase agreement
with KeyCorp, of Cleveland, Ohio to acquire KeyBank N.A. (Wyoming) for a
purchase price of $135 million. As of December 31, 1996, KeyBank Wyoming had
total assets of $1.2 billion and banking offices in 24 communities in Wyoming.
The transaction, which will be accounted for as a purchase, will result in the
recognition of goodwill of approximately $60 million. The purchase price is
expected to be funded through a combination of the proceeds from the Company's
January 1997 issue of $60 million 8-7/8% Cumulative Capital Securities, portions
of bank lines of credit, net income received prior to closing and the proceeds
of any possible further sales of subordinated debt or equity securities prior to
the closing of the transaction. The transaction is subject to regulatory
approval and is anticipated to close during the third quarter of 1997.
OVERVIEW
- --------------------------------------------------------------------------------
For the year ended December 31, 1996, the Company reported record net income of
$32.5 million, an increase of $2.5 million, or 8.3%, from the $30.0 million
earned during 1995. Fully diluted earnings per share were $1.79, compared to
$1.74 in 1995 and $1.42 in 1994. Return on average assets was 1.13% for 1996,
compared with 1.24% for 1995. Return on average common shareholders' equity for
1996 and 1995 was 15.69% and 18.19%, respectively. Factors contributing to these
changes included approximately $1.4 million of incremental net income provided
by entities acquired during 1996 and 1995.
Operating results reflect expenses of $2.8 million, net of tax, or $.16 per
share on a fully-diluted basis, related to the Company's mergers with Mountain
Parks and Financial Bancorp, including a $560,000 write-down to reflect the
permanent impairment of the Company's investment in an unconsolidated
subsidiary, which is being divested to satisfy regulators' competitive issues.
In addition, the Company incurred a total of $1.5 million, net of tax, or $.08
per share on a fully-diluted basis, of expenses and charges to integrate
Mountain Parks operations and to conform the loan portfolio of Mountain Parks to
the Company's credit policy. Included in these charges is the reversal of
$505,000 of accrued, but uncollected, interest at Mountain Park's specialty
lending subsidiary.
The following supplemental earnings per common share information represents
the estimated impact of merger-related charges and integration and conforming
adjustments on the Company's operating results, on a fully-diluted basis. See
additional discussion of the expenses under "Noninterest expense":
- ------------------------------------------------------------------------------
Community First Mountain The
Bankshares, Inc.(1) Parks(2) Company
- ------------------------------------------------------------------------------
Fully-diluted earnings per share . . . . . . $2.09 $.99 $1.79
Merger-related charges . . . . . . . . . . . .09 .32 .16
Integration and conforming adjustments . . . .00 .30 .08
----- ----- -----
Earnings per share (excluding merger-
related charges and integration
and conforming adjustments). . . . . . . $2.18 $1.61 $2.03
----- ----- -----
----- ----- -----
(1)The Company, excluding the operating results of Mountain Parks.
(2)Earnings per share calculated using number of shares issued.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
Total assets were $3,116 million and $2,770 million at December 31, 1996
and 1995, respectively. The increase of $346 million, or 12.5%, during 1996 was
principally due to the 1996 acquisitions of the banks in Englewood, Kiowa, and
Trinidad, as well as loan growth in the Company's subsidiary banks.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NET INTEREST INCOME
The principal source of the Company's earnings is net interest income, the
difference between total interest income on earning assets such as loans and
investments and interest paid on deposits and other interest-bearing
liabilities. The net interest margin is net interest income, on a tax-equivalent
basis, expressed as a percentage of average earning assets. The margin is
affected by volume and mix of earning assets and interest-bearing liabilities,
the level of interest free funding sources, interest rate environment, and
income tax rates. As discussed later, management actively monitors its interest
rate sensitivity and seeks to balance assets and liabilities to minimize the
impact of changes in the interest rate environment.
The following table presents the Company's average balance sheets, interest
earned or paid and the related yields and rates on major categories of the
Company's earning assets and interest-bearing liabilities on a tax equivalent
basis for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31 1996
- ---------------------------------------------------------------------------------------
Interest
Average Yields and
(Dollars in thousands) Balance Interest Rates
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Loans(1) (2) . . . . . . . . . . . . . . . . . $1,873,073 $185,005 9.88%
Investment securities(2) . . . . . . . . . . . 727,822 48,579 6.67%
Other earning assets . . . . . . . . . . . . . 17,324 960 5.47%
---------- -------- -----
Total earning assets. . . . . . . . . . . . 2,618,219 234,544 8.96%
Noninterest-earning assets . . . . . . . . . . 248,560
----------
Total assets. . . . . . . . . . . . . . . . $2,866,779
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing checking. . . . . . . . . . . $ 445,501 $ 8,702 1.95%
Savings deposits . . . . . . . . . . . . . . . 444,333 11,534 2.60%
Time deposits. . . . . . . . . . . . . . . . . 1,114,617 61,419 5.51%
Short-term borrowings. . . . . . . . . . . . . 168,311 9,247 5.49%
Long-term borrowings . . . . . . . . . . . . . 60,433 4,332 7.17%
---------- -------- -----
Total interest-bearing liabilities. . . . . 2,233,195 95,234 4.26%
Demand deposits. . . . . . . . . . . . . . . . 378,325
Noninterest-bearing liabilities. . . . . . . . 35,365
Preferred shareholders' equity . . . . . . . . 22,999
Common shareholders' equity. . . . . . . . . . 196,895
---------
633,584
---------
Total liabilities and shareholders' equity . . $2,866,779
---------
---------
Net interest income. . . . . . . . . . . . . . $139,310
-------
-------
Net interest spread. . . . . . . . . . . . . . 4.70%
------
------
Net interest margin. . . . . . . . . . . . . . 5.32%
------
------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
Balance Interest Rates Balance Interest Rates
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans(1) (2) . . . . . . . . . . . . . . . . . $1,545,497 $151,154 9.78% $1,171,925 $104,766 8.94%
Investment securities(2) . . . . . . . . . . . 656,435 43,009 6.55% 658,216 39,313 5.97%
Other earning assets . . . . . . . . . . . . . 29,369 1,710 5.82% 26,051 1,193 4.58%
--------- ------- ---- --------- ------- ----
Total earning assets. . . . . . . . . . . . 2,231,301 195,873 8.78% 1,856,192 145,272 7.83%
Noninterest-earning assets . . . . . . . . . . 192,912 149,626
--------- --------
Total assets. . . . . . . . . . . . . . . . $2,424,213 $2,005,818
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing checking. . . . . . . . . . . $406,080 $8,805 2.17% $388,466 $6,998 1.80%
Savings deposits . . . . . . . . . . . . . . . 349,522 9,748 2.79% 306,147 7,186 2.35%
Time deposits. . . . . . . . . . . . . . . . . 963,594 53,227 5.52% 749,027 32,376 4.32%
Short-term borrowings. . . . . . . . . . . . . 111,784 6,184 5.53% 83,563 4,029 4.82%
Long-term borrowings . . . . . . . . . . . . . 65,379 4,927 7.54% 42,544 2,879 6.77%
--------- ------- ---- --------- ------- ----
Total interest-bearing liabilities. . . . . 1,896,359 82,891 4.37% 1,569,747 53,468 3.41%
Demand deposits. . . . . . . . . . . . . . . . 317,806 272,245
Noninterest-bearing liabilities. . . . . . . . 31,189 20,224
Preferred shareholders' equity . . . . . . . . 23,000 14,594
Common shareholders' equity. . . . . . . . . . 155,859 129,008
--------- --------
527,954 436,071
--------- --------
Total liabilities and shareholders' equity . . $2,424,213 $2,005,818
--------- --------
--------- --------
Net interest income. . . . . . . . . . . . . . $112,982 $91,804
--------- --------
--------- --------
Net interest spread. . . . . . . . . . . . . . 4.41% 4.42%
---- ----
---- ----
Net interest margin. . . . . . . . . . . . . . 5.06% 4.95%
---- ----
---- ----
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Includes nonaccrual loans and loan fees.
(2)Interest yields on loans and investments are presented on a tax-equivalent
basis to reflect the tax exempt nature of certain assets. The incremental
tax rate applied was 35% in 1996, 1995, and 1994.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
The following table presents the components of changes in net interest
income by volume and rate on a tax-equivalent basis. The net change attributable
to the combined impact of volume and rate has been allocated solely to the
change in volume:
<TABLE>
<CAPTION>
1996 compared to 1995 1995 compared to 1994
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands) Volume Rate Total Volume Rate Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans(1) (2) . . . . . . . . . . . . . . . . . . . $32,038 $1,813 $33,851 $33,396 $12,992 $46,388
Investment securities(2) . . . . . . . . . . . . . 4,677 893 5,570 (106) 3,802 3,696
Other earning assets . . . . . . . . . . . . . . . (701) (62) (763) 152 365 517
------- ------ ------- ------- ------- -------
Total interest income. . . . . . . . . . . . . . . . 36,014 2,644 38,658 33,442 17,159 50,601
------- ------ ------- ------- ------- -------
Interest expense:
Savings deposits and interest-bearing checking . . 3,499 (1,816) 1,683 1,335 3,034 4,369
Time deposits. . . . . . . . . . . . . . . . . . . 8,342 (150) 8,192 9,275 11,576 20,851
Short-term borrowings. . . . . . . . . . . . . . . 3,127 (64) 3,063 1,361 794 2,155
Long-term borrowings . . . . . . . . . . . . . . . (373) (222) (595) 1,545 503 2,048
------- ------ ------- ------- ------- -------
Total interest expense. . . . . . . . . . . . . . . 14,595 (2,252) 12,343 13,516 15,907 29,423
------- ------ ------- ------- ------- -------
Increase (decrease) in net interest income . . . . . $21,419 $4,896 $26,315 $19,926 1,252 $21,178
------- ------ ------- ------- ------- -------
------- ------ ------- ------- ------- -------
</TABLE>
(1)Includes loan fees.
(2)Interest income is presented on a tax equivalent basis.
Net interest income on a tax equivalent basis in 1996 was $139.3 million, a
$26.3 million increase from 1995. The increase was primarily due to a 17.3%
increase in earning assets and a 26 basis point increase in the net interest
margin. The increase in earning assets was due to eight bank acquisitions
completed by the Company between the second quarter of 1995 and December 1996,
and loan growth in existing markets. Net interest income on a tax equivalent
basis in 1995 was $113.0 million, a $21.2 million increase from 1994. The
increase was primarily due to a 20.2% increase in earning assets and a 11 basis
point increase in the net interest margin. The increase was again driven by bank
acquisitions completed by the Company and loan growth in existing markets.
The net interest margin was 5.32%, 5.06% and 4.95% in 1996, 1995 and 1994,
respectively. This increase in margin was due to a 29 basis point increase in
the yield spread between 1995 and 1996, and a change in the mix of earning
assets to higher-yielding loans. Average loans to average earning assets
increased from 63.1% in 1994, to 69.3% in 1995, and 71.5% in 1996.
PROVISION FOR LOAN LOSSES
Annual fluctuations in the provision for loan losses result from management's
regular assessment of the adequacy of the allowance for loan losses. The
provision for loan losses for 1996 was $6.8 million, an increase of $4.1 million
or 151.9%, from the $2.7 million provision during 1995. The increased loan loss
provision was principally due to the Company's strong loan growth, and $1.8
million of additional provision recorded to integrate and conform the loan
portfolio of Mountain Park's non-prime mortgage subsidiary to the Company's
credit policy. The amount of the loan loss provision to be recorded in future
periods will depend on management's assessment of the adequacy of the allowance
for loan losses in relation to the entire loan portfolio. The provision for loan
losses for 1995 was $2.7 million, an increase of $872,000, or 47.4% from the
1994 provision of $1.8 million.
NONINTEREST INCOME In addition to net interest income, the Company continues
to expand noninterest income associated with the Company's community banking
operations. The primary sources of noninterest income consist of service
charges on deposit accounts, service fees on checking accounts, insurance
commissions and fees for trust services. Management regularly weighs
opportunities to increase noninterest income by considering the delivery of
financial products and services in its markets.
Noninterest income for 1996 was $27.4 million, an increase of $4.9 million,
or 21.8%, from the $22.5 million earned in 1995. The increase was principally
due to an increase in service charges on deposit accounts in 1996 to $12.3
million from the $10.1 million in 1995, an increase of $2.2 million, or 21.8%.
The increase is attributed to $353,000 in service charges on deposit accounts at
banks acquired during 1996 and $859,000 at banks acquired during 1995. Net
investment security gains were $93,000 in 1996. The sales of securities, which
resulted in gains due to liquidation of securities at a price in excess of the
securities' adjusted book values, were made primarily to provide liquidity
required by loan growth at subsidiary banks and to adjust portfolio duration.
Noninterest income for 1995 was $22.5 million, an increase of $3.5 million,
or 18.4%, from the $19.0 million earned in 1994. The increase was principally
due to an increase in service charges on deposit accounts in 1995 from $8.5
million earned during 1994 to $10.1 million earned in 1995, an increase of $1.6
million, or 18.8%. Net investment security gains decreased to $52,000 in 1995.
NONINTEREST EXPENSE
Noninterest expenses consist of salaries and benefits, occupancy, equipment and
other expenses such as legal and postage necessary for the operation of the
Company. Management is committed to improving the quality of service while
controlling such costs through improved efficiency and consolidation of certain
activities to achieve economies of scale.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
The following table presents the components of noninterest expense for the
periods indicated:
- -----------------------------------------------------------------------------
Years Ended December 31 (In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
Salaries and employee benefits . . . . . . . . $54,870 $42,796 $35,083
Net occupancy. . . . . . . . . . . . . . . . . 15,085 10,563 9,353
FDIC insurance . . . . . . . . . . . . . . . . 669 2,532 3,720
Legal and accounting . . . . . . . . . . . . . 1,989 1,311 1,403
Other professional service . . . . . . . . . . 1,892 2,700 2,054
Acquisition expenses . . . . . . . . . . . . . 2,928 768 908
Data processing and loan servicing fees. . . . 1,506 1,607 856
Permanent impairment of equity
method investment. . . . . . . . . . . . . 940 - -
Minority interest. . . . . . . . . . . . . . . 222 175 948
Intangibles. . . . . . . . . . . . . . . . . . 3,362 2,551 1,876
Other . . . . . . . . . . . . . . . . . . . . 20,825 17,590 14,040
------- ------- ------
Total noninterest expense. . . . . . . . . . $104,288 $82,593 $70,241
------- ------- ------
------- ------- ------
- -----------------------------------------------------------------------------
Noninterest expense increased $21.7 million to $104.3 million in 1996.
The increase was principally due to an increase in salaries and employee
benefits, net occupancy expense, and acquisition and related expenses. The $12.1
million increase in salaries and employee benefits reflects $4.6 million in
additional expenses related to acquisitions completed by the Company in 1995 and
1996. The $4.5 million increase in net occupancy is also due primarily to
acquisitions completed by the Company. Legal and accounting fees increased
$678,000, or 51.7%, from $1,311,000 to $1,989,000 during 1996. The Company
incurred acquisition expenses of $2.9 million in 1996 in connection with the
mergers with Mountain Parks and Financial Bancorp. These expenses relate to
legal, accounting and other professional services expenses incurred to complete
the mergers. In addition, the Company incurred noninterest expenses of $1.0
million to facilitate the integration of certain operating activities of
Mountain Parks into those of the Company. During 1996, the Company recorded a
$940,000 write-down in the value of its investment in an unconsolidated
subsidiary, which is being divested to satisfy regulators' competitive issues
related to the Mountain Parks merger. Intangible expense increased $811,000, or
31.8%, due to intangible assets, such as goodwill, noncompete agreements and
insurance agency customer policy expirations recorded in connection with the
Company's acquisitions. Other noninterest expense was $20.8 million, an increase
of $3.2 million, or 18.2%, from $17.6 million in 1995. Federal Deposit Insurance
Corporation ("FDIC") insurance expense decreased $1.9 million as a result of a
reduction in the insurance assessment rate paid by most affiliate banks from a
rate of $.23 per $100 to $.04 per $100 of qualifying deposits. This was
partially offset by increased deposits obtained through 1996 and 1995 bank
acquisitions and an increase in average deposits for 1996 to $2,383 million from
$2,037 million in 1995, an increase of $346 million, or 17.0%.
Noninterest expense for 1995 was $82.6 million, an increase of $12.4 million,
or 17.7%, from the level of $70.2 million during 1994. The increase was
principally due to an increase of $7.7 million, or 21.9%, in salaries and
employee benefits, of which $4.1 million was due to the 1995 acquisitions and
$712,000 was due to the banks acquired during 1994. Net occupancy expense
increased $1.2 million to $10.6 million, $1.4 million due to 1995 and 1994
acquisitions. FDIC insurance expense decreased $1.2 million to $2.5 million as a
result of a reduction in the insurance assessment rate paid by most affiliate
banks effective July 1, 1995, from $.23 per $100 to $.04 per $100 of qualifying
deposits. Acquisition expenses of $768,000 were incurred in 1995 in conjunction
with the acquisitions of Minowa and First Community. Intangible expense
increased $675,000, or 36.0%, due to the additional intangible assets recognized
in connection with the Company's acquisitions. Other noninterest expense was
$17.6 million, an increase of $3.6 million, or 25.7%, from $14.0 million during
1994. In January 1995, the Company consolidated certain of its bank
subsidiaries. At the time of this consolidation, the level of minority interest
was decreased. As a result, minority interest expense decreased by $773,000, or
81.5%, from $948,000 to $175,000 in 1995.
PROVISION FOR INCOME TAXES
The Company records a provision for income taxes currently payable and for taxes
payable in the future because of differences in the timing of recognition of
certain items for financial statement and income tax purposes. The effective
income tax rate differs from the statutory rate primarily due to tax-exempt
income from loans, and investments and state income taxes. The effective tax
rate was 35.6%, 36.4%, and 38.1% for 1996, 1995, and 1994, respectively.
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
INVESTMENT OF FUNDS
LOANS
At December 31, 1996, total loans were $2.1 billion, an increase of $297
million, or 16.7%, from the December 31, 1995, level of $1.8 billion. A
significant portion of this increase is attributable to in-market loan growth in
the Company's existing markets. In addition, the purchase of three banking
institutions in 1996 added $73 million in loans, while the Company's volume of
purchased loan assets increased $10 million.
The Company has continued to purchase commercial loan assets to enhance
earning asset yield performance. Many of such loan assets have been originated
by selected Midwestern regional banks and national leasing and finance companies
with whom the Company has ongoing relationships. The Company's portfolio of
purchased loan assets was $202 million at December 31, 1996, compared to $192
million at December 31, 1995. These assets are subject to the Company's standard
credit guidelines, as well as specific requirements for such assets, and bear
the credit risks attendant to commercial loans. It is anticipated that the
purchased loan asset volume will increase during 1997.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
The following table presents the Company's balance of each major category of
loans at the dates indicated:
<TABLE>
<CAPTION>
December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Total of Total of Total
(Dollars in thousands) Amount Loans Amount Loans Amount Loans
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loan category:
Real estate . . . . . . . . . . $ 871,432 42.22% $744,477 42.13% $544,809 40.96%
Commercial. . . . . . . . . . . 624,456 30.25% 527,620 29.86% 397,869 29.91%
Consumer and other. . . . . . . 346,139 16.77% 270,459 15.30% 225,256 16.93%
Agricultural. . . . . . . . . . 222,081 10.76% 224,637 12.71% 162,212 12.20%
-------- ------ --------- ------- --------- -------
Total loans. . . . . . . . . . . . 2,064,108 100.00% 1,767,193 100.00% 1,330,146 100.00%
----- ----- ------
----- ----- ------
Less allowance for loan losses . . (26,215) (22,712) (17,333)
-------- --------- ----------
Total. . . . . . . . . . . . . . . $2,037,893 $1,744,481 $1,312,813
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
1993 1992
- ---------------------------------------------------------------------------------------
Percent Percent
of Total of Total
Amount Loans Amount Loans
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan category:
Real estate . . . . . . . . . . $ 403,716 38.91% $305,851 37.59%
Commercial. . . . . . . . . . . 316,565 30.51% 252,361 31.02%
Consumer and other. . . . . . . 170,271 16.41% 138,139 16.98%
Agricultural. . . . . . . . . . 147,114 14.18% 117,199 14.41%
-------- ------- -------- -------
Total loans. . . . . . . . . . . . 1,037,666 100.00% 813,550 100.00%
------- -------
------- -------
Less allowance for loan losses . . (14,332) (11,196)
------- -------
Total. . . . . . . . . . . . . . . $1,023,334 $802,354
---------- --------
---------- --------
</TABLE>
- -----------------------------------------------------------------------------
GENERAL. The Company's loan mix remained relatively constant from 1995 to 1996.
Real estate loans continued to be the largest category of loans, representing
42.2% of the total loan portfolio.
REAL ESTATE LOANS. A significant portion of the Company's real estate loan
portfolio consists of residential real estate first mortgages that have been
underwritten and documented to meet secondary mortgage requirements.
Substantially all of the Company's real estate loans are based in the Company's
primary market area. As of December 31, 1996, $372 million, or 42.7%, of the
Company's real estate loan portfolio consisted of residential real estate loans,
$118 million, or 13.5%, were secured by farmland, $247 million, or 28.4%,
represented commercial and other real estate loans and $134 million, or 15.4%,
represented construction loans.
During 1996, in connection with the acquisition of Mountain Parks, the
Company acquired a residential mortgage subsidiary that specializes in providing
mortgage credit to borrowers with blemished or derogatory credit histories.
Loans made by this subsidiary are secured primarily by residential real estate
but, in some instances, may not have funded the original purchase of such real
estate. Although it is the Company's intent to obtain higher collateral than it
obtains with its conventional residential real estate loans, these loans
inherently represent a higher level of credit risk. At December 31, 1996, the
Company had $63.5 million of loans originated by this subsidiary, of which $4.6
million were considered non-performing at that date.
COMMERCIAL LOANS. Loans in this category include loans to retail, wholesale,
manufacturing and service businesses, including agricultural service businesses
and the Company's purchased loan asset portfolio. Commercial loans are
underwritten based on the financial strength and repayment ability of the
borrower, as well as the collateral securing the loans.
CONSUMER AND OTHER LOANS. Loans classified as consumer and other loans include
automobile, personal loans, consumer lines of credit and overdrafts. The
consumer loan portfolio also includes dealer-generated installment contracts for
consumer goods, including automobiles and major home appliances. The majority of
these indirect loans are installment loans with fixed interest rates.
AGRICULTURAL LOANS. Agricultural loans are made principally to farmers and
ranchers. The Company provides short-term credit for operating loans and
intermediate-term loans for machinery purchases and other improvements.
INVESTMENTS
Management augments the quality of the loan portfolio by maintaining a high
quality investment portfolio oriented toward U.S. Treasury, U.S. Government
agency and government guaranteed mortgage-backed securities. The investment
portfolio also provides the opportunity to structure maturities and repricing
timetables in a flexible manner and to meet applicable requirements for pledging
securities, which are principally adjustable rate, and collateralized mortgage
obligations, which are primarily floating rate securities, as tools in managing
its interest rate exposure and enhancing its net interest margin.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
The following table sets forth the composition of the Company's held-to-
maturity securities portfolio at amortized cost as of the dates indicated:
Book Value at December 31
- --------------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
U.S. Treasury. . . . . . . . . . . . . $ - $ - $72,519
U.S. Government agencies . . . . . . . 879 3,318 44,957
Mortgage-backed securities . . . . . . 86,506 106,429 185,753
Collateralized mortgage obligations. . - - 22,811
State and political securities . . . . 56,694 55,267 43,672
Other securities . . . . . . . . . . . 78,269 65,806 12,163
-------- ------- --------
Total. . . . . . . . . . . . . . . . . $222,348 $230,820 $381,875
-------- ------- --------
-------- ------- --------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES At December 31, 1996, Maturing in
- ----------------------------------------------------------------------------------------------------------------------------------
Over One Year Over 5 Years
One Year or Less Through 5 Years Through 10 Years Over 10 Years Total
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
(Dollars in thousands) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies . . . . . $ - - $ 90 7.63% $ - - $ 789 6.94% $ 879 7.01%
Mortgage-backed securities . . . . 1,088 7.97% 9,197 6.96% 40,559 6.10% 35,662 6.51% 86,506 6.38%
State and political securities . . 6,122 7.10% 11,728 7.38% 19,908 8.05% 18,936 8.24% 56,694 7.87%
Other. . . . . . . . . . . . . . . - - - - - - 78,269 7.37% 78,269 7.37%
------ ----- ------- ----- ------- ----- -------- ----- -------- -----
Total. . . . . . . . . . . . . . . $7,210 7.23% $21,015 7.20% $60,467 6.74% $133,656 7.26% $222,348 7.11%
------ ----- ------- ----- ------- ----- -------- ----- -------- -----
------ ----- ------- ----- ------- ----- -------- ----- -------- -----
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Interest yields on investments are presented on a tax equivalent basis to
reflect the tax exempt nature of current assets.
Yields are based on a 35% incremental tax rate and a 3.75% cost of funds.
The following table sets forth the composition of the Company's available-
for-sale securities portfolio at estimated fair value as of the dates indicated:
Book Value at December 31
- -----------------------------------------------------------------------------
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------
U.S. Treasury. . . . . . . . . . . . . $120,193 $154,508 $90,028
U.S. Government agencies . . . . . . . 85,311 121,588 33,353
Mortgage-backed securities . . . . . . 236,833 143,359 85,748
Collateralized mortgage obligations. . 43,259 58,053 14,361
State and political securities . . . . 15,122 1,443 -
Other . . . . . . . . . . . . . . . . 6,170 7,571 7,874
------- ------- --------
Total. . . . . . . . . . . . . . . . . $506,888 $486,522 $231,364
------- ------- --------
------- ------- --------
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES At December 31, 1996, Maturing in
- -----------------------------------------------------------------------------------------------------------------------------------
Over One Year Over 5 Years
One Year or Less Through 5 Years Through 10 Years Over 10 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
(Dollars in thousands) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury . . . . . . . . . . . $28,586 6.12% $ 91,607 6.04% $ - - $ - - $120,193 6.06%
U.S. Government agencies . . . . . . 13,187 6.56% 52,153 5.95% 18,994 7.04% 977 7.21% 85,311 6.30%
Mortgage-backed securities . . . . . 1,811 6.73% 10,840 6.31% 8,394 7.28% 215,788 6.75% 236,833 6.75%
Collateralized mortgage obligations. 5,436 5.39% 27,209 6.29% 4,933 6.11% 5,681 6.07% 43,259 6.13%
Municipal Bonds. . . . . . . . . . . 2,456 9.13% 4,393 6.83% 1,710 8.80% 6,563 6.74% 15,122 7.39%
Other. . . . . . . . . . . . . . . . 1,514 7.03% 3,072 8.25% 219 5.97% 1,365 6.22% 6,170 7.42%
------- ----- -------- ----- ------ ----- -------- ----- -------- -----
Total. . . . . . . . . . . . . . . . $52,990 6.34% $189,274 6.12% $34,250 7.05% $230,374 6.73% $506,888 6.48%
------- ----- -------- ----- ------ ----- -------- ----- -------- -----
------- ----- -------- ----- ------ ----- -------- ----- -------- -----
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Interest yields on investments are presented on a tax equivalent basis to
reflect the tax exempt nature of current assets.
Yields are based on a 35% incremental tax rate and a 3.75% cost of funds.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
The Company's investments, including available-for-sale and held-to-
maturity securities, increased $12 million, or 1.7%, to $729 million at
December 31, 1996, from $717 million at December 31, 1995. This increase was
due to the addition of $46 million of securities obtained through 1996 bank
acquisitions and offset by maturing securities which were not replaced, in
response to loan demand. At December 31, 1996, the Company's investments
represented 23.4% of total assets, compared to 25.9% at December 31, 1995.
CREDIT EXPERIENCE
The Company's lending activities are guided by the general loan policy
established by the Board of Directors. The Senior Credit Committee of the
Company has established loan approval limits for each region of the Company and
each subsidiary bank. The limits established for each bank range from $75,000 to
$250,000 per borrower (except for the Fargo bank, which has a $750,000 limit per
borrower). However, renewals of any criticized or classified loans have a limit
of $25,000. Amounts in excess of the individual bank lending authority are
presented to the regional credit officers. The regional credit officers for
Colorado, Iowa, Minnesota, Nebraska, Wisconsin and the Dakotas have lending
authority of $750,000 per nonclassified borrower when a second regional credit
officer or the respective regional managing officer concurs. Loans above
$1,500,000 per nonclassified borrower and $250,000 per classified borrower are
presented to the Senior Credit Committee for approval.
Although the Company has a diversified loan portfolio, the economic health
of the Company's primary trade area and the ability of many of the bank's
borrowers to repay their loans (including real estate and commercial loans, as
well as agricultural loans) is dependent to a large extent on the health of the
agricultural sector of the economy. The Company has identified and implemented
strategies to deal with these factors, including an emphasis on quality local
loan growth and the diversification and performance of its earning asset
portfolios.
NONPERFORMING ASSETS
The Company follows regulatory guidelines with respect to classifying loans on a
nonaccrual basis. Loans are placed on nonaccrual when they become past due over
90 days or when the collection of interest or principal is considered unlikely.
The Company does not return a loan to accrual status until it is brought current
with respect to both principal and interest and future principal payments are no
longer in doubt. When a loan is placed on nonaccrual status, any previously
accrued and uncollected interest is reversed. Interest income of $671,000 on
nonaccrual loans would have been recorded during 1996 if the loans had been
current in accordance with their original terms. During 1996, the Company
recorded interest income of $176,000 related to loans that were on nonaccrual
status as of December 31, 1996.
The Company considers nonperforming assets to include all nonaccrual loans,
restructured loans defined as troubled debt restructurings under SFAS No. 15 and
other real estate owned ("OREO").
Nonperforming assets of the Company are summarized in the following table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, (Dollars in thousands) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans:
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . $ 12,796 $ 3,252 $ 3,087 $ 3,742 $ 4,395
Restructured loans . . . . . . . . . . . . . . . . . . . . 267 483 140 1,100 602
--------- --------- --------- --------- ---------
Nonperforming loans. . . . . . . . . . . . . . . . . . . . 13,063 3,735 3,227 4,842 4,997
OREO 1,426 1,701 1,265 1,622 4,210
--------- --------- --------- --------- ---------
Nonperforming assets . . . . . . . . . . . . . . . . . . . $ 14,489 $ 5,436 $ 4,492 $ 6,464 $ 9,207
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Loans 90 days or more past due but still accruing. . . . . . . $ 1,956 $779 $722 $761 $ 1,228
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans as a percentage of total loans . . . . . . 0.63% 0.21% 0.24% 0.47% 0.61%
Nonperforming assets as a percentage of total assets . . . . . 0.46% 0.20% 0.21% 0.34% 0.58%
Nonperforming assets as a percentage of total loans and OREO . 0.70% 0.31% 0.34% 0.62% 1.13%
Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . $2,064,108 $1,767,193 $1,330,146 $1,037,666 $ 813,550
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $3,116,398 $2,769,976 $2,130,619 $1,883,794 $1,576,275
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming assets were $14.5 million at December 31, 1996, an increase
of $9.1 million, or 168.5% from $5.4 million at December 31, 1995. Nonperforming
loans increased by $9.3 million due principally to an increase in nonaccrual
loans at the former Mountain Parks Bank of $7.6 million, including $4.6 million
in the specialty lending area. The Company expects the volume of loans
originated in its specialty lending area to grow during 1997. However, it is
expected that modifications to the underwriting standards and the use of
secondary market facilities will enable the Company to improve credit quality
and transfer a substantial amount of risk associated with these credits to other
investors, thereby reducing the relative levels of nonperforming assets in this
area.
OREO decreased from $1,701,000 at December 31, 1995, to $1,426,000 at
December 31, 1996, a decrease of $275,000, or 16.2%. The ratio of nonperforming
assets to total assets at December 31, 1996, was .46%, compared to .20% at
December 31, 1995.
Nonperforming assets were $5.4 million at December 31, 1995, a decrease of
$944,000, or 21.0%, from $4.5 million at December 31, 1994. Nonperforming loans
increased by $508,000, resulting principally from a $343,000 increase in
restructured loans. OREO increased $436,000, or 34.5%, from $1.3 million at
December 31, 1994, to $1.7 million at December 31, 1995. The ratio of
nonperforming assets to total assets at December 31, 1995, was .20%, compared to
.21% at December 31, 1994.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
ALLOWANCE FOR LOAN LOSSES
The current level of the allowance for loan losses is a result of management's
assessment of the risks within the portfolio based on the information revealed
in credit reporting processes. The Company utilizes a risk-rating system on all
loans, including purchased loans, and a monthly credit review and reporting
process that results in the calculation of the guidelines reserves based on the
risk within the portfolio. This assessment of risk takes into account the
composition of the loan portfolio, previous loan experience, current economic
conditions and other factors that, in managements' judgment, deserve
recognition. Regulators have reviewed the Company's methodology for determining
allowance requirements and have made no recommendations for increases in the
allowances during the five-year period ended December 31, 1996.
The Company has historically maintained a positive variance from the
minimum estimated allowance for loan losses based on the analyses that are
conducted by bank management and corporate credit personnel. Management has
reviewed the allocations in the various classifications of loans and believes
the allowance was adequate at all times during the five-year period ended
December 31, 1996.
The following table sets forth the Company's allowance for loan losses as
of the dates indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
December 31, (Dollars in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year . . . . . . . . . $ 22,712 $ 17,333 $ 14,332 $ 11,196 $ 10,502
Allowance of acquired companies. . . . . . . . 784 5,230 1,153 1,714 724
Charge-offs:
Real estate. . . . . . . . . . . . . . . . . 1,087 303 109 303 691
Commercial . . . . . . . . . . . . . . . . . 1,176 1,285 484 617 1,514
Consumer and other . . . . . . . . . . . . . 2,265 1,502 584 461 714
Agricultural . . . . . . . . . . . . . . . . 443 373 38 58 88
------ ------ ------ ------ ------
Total charge-offs. . . . . . . . . . . . . . 4,971 3,463 1,215 1,439 3,007
Recoveries:
Real estate. . . . . . . . . . . . . . . . . 269 63 549 162 69
Commercial . . . . . . . . . . . . . . . . . 225 245 247 325 221
Consumer and other . . . . . . . . . . . . . 361 536 218 188 227
Agricultural . . . . . . . . . . . . . . . . 78 57 210 37 27
------ ------ ------ ------ ------
Total recoveries . . . . . . . . . . . . . . 933 901 1,224 712 544
------ ------ ------ ------ ------
Net charge-offs. . . . . . . . . . . . . . . . 4,038 2,562 (9) 727 2,463
Provision charged to operations. . . . . . . . 6,757 2,711 1,839 2,149 2,433
------ ------ ------ ------ ------
Balance at end of year . . . . . . . . . . . . $ 26,215 $ 22,712 $ 17,333 $ 14,332 $ 11,196
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Allowance as a percentage of total loans . . . 1.27% 1.29% 1.30% 1.38% 1.38%
Net charge-offs to average loans outstanding . 0.22% 0.17% -0.00% 0.08% 0.33%
Total loans. . . . . . . . . . . . . . . . . . $2,064,108 $1,767,193 $1,330,146 $1,037,666 $813,550
Average loans. . . . . . . . . . . . . . . . . $1,873,073 $1,545,497 $1,171,925 $ 909,890 $745,984
- -------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1996, the allowance for loan losses was $26.2 million, an
increase of $3.5 million from the December 31, 1995, level of $22.7 million. The
Company's 1996 acquisitions accounted for $784,000 of the increase, with the
remaining increase due to maintaining an adequate reserve in recognition of the
Company's loan growth during 1996. At December 31, 1996, the allowance for loan
losses as a percentage of total loans was 1.27%, as compared to 1.29% at
December 31, 1995. This decrease is attributed to strong loan growth and
improvement in loan portfolio credit quality at the Company's bank subsidiaries.
At December 31, 1995, the allowance for loan losses was $22.7 million, an
increase of $5.4 million from the December 31, 1994, level of $17.3 million. The
Company's 1995 acquisitions accounted for $5.2 million of the increase,
with the remaining increase due to maintaining an adequate reserve in
recognition of the Company's loan growth and the increase in net charge-offs
during 1995. At December 31, 1995, the allowance for loan losses as a percentage
of total loans was 1.29%, as compared to 1.30% at December 31, 1994.
During 1996, net charge-offs were $4.0 million, an increase of $1.4 million
from the $2.6 million during 1995. The increase included an increase of $938,000
in consumer and other loan net charge-offs and a $578,000 increase in real
estate loan net charge-offs. The Company's provision for loan loss increased
from $2.7 million in 1995 to $6.8 million in 1996.
During 1995, net charge-offs were $2.6 million, an increase of $2.6 million
from the net recoveries of $9,000 in 1994. The principal causes for the increase
were the increase of real estate net charge-offs of $680,000; the increase in
commercial net charge-offs of $803,000; the increase in agricultural net
charge-offs of $488,000; and an increase in Consumer and other net charge-
offs of $603,000. The Company's provision for loan loss was $2.7 million in
1995 and $1.8 million in 1994.
22
<PAGE>
The following table sets forth the allocation of the allowance for loan
losses to various loan categories, as well as the allocation as a percentage of
loans outstanding in each category, as of the dates indicated:
<TABLE>
<CAPTION>
Allowance as a Percent of Loans Outstanding
Allowance for Loan Losses at December 31, by Category at December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate. . . . . . . . . $ 4,059 $ 4,208 $ 3,252 $ 2,801 $ 2,235 0.47% .57% 0.60% 0.69% 0.73%
Commercial . . . . . . . . . 4,781 4,400 3,605 3,509 2,858 0.77% .83% 0.91% 1.11% 1.13%
Consumer and other . . . . . 1,997 1,690 1,614 1,346 1,031 0.58% .62% 0.72% 0.79% 0.75%
Agricultural . . . . . . . . 2,056 1,615 1,737 1,529 1,245 0.93% .72% 1.07% 1.04% 1.06%
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total Allocated Allowance. . 12,893 11,913 10,208 9,185 7,369 0.62% 0.67% 0.77% 0.89% 0.91%
Total Unallocated Allowance. 13,322 10,799 7,125 5,147 3,827 0.65% 0.62% 0.53% 0.49% 0.47%
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total Allowance. . . . . . . $26,215 $22,712 $17,333 $14,332 $11,196 1.27% 1.29% 1.30% 1.38% 1.38%
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
</TABLE>
SOURCE OF FUNDS
DEPOSITS
The Company's major source of funds is provided by core deposits from
individuals, businesses and local government units. Core deposits consist of all
noninterest-bearing deposits, interest-bearing savings and checking accounts and
time deposits of less than $100,000.
The following table sets forth a summary of the deposits of the Company at
the dates indicated:
- --------------------------------------------------------------------------------
December 31, (In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Noninterest-bearing. . . . . . . . . . . . $ 431,078 $ 398,314 $ 315,667
Interest-bearing:
Savings and checking accounts. . . . . . 964,829 $ 73,025 699,412
Time accounts less than $100,000 . . . . 907,658 $ 85,857 664,434
Time accounts greater than $100,000. . . 233,875 202,520 115,052
---------- ---------- ----------
Total deposits . . . . . . . . . . . . . . $2,537,440 $2,359,716 $1,794,565
---------- ---------- ----------
---------- ---------- ----------
Total deposits at December 31, 1996, were $2,537 million, an increase of $177
million, or 7.5%, from $2,360 million at December 31, 1995. The Company's core
deposits as a percentage of total deposits were 90.8% and 91.8% as of December
31, 1996, and December 31, 1995, respectively. The increase in total deposits
was primarily due to the 1996 bank acquisitions, with aggregate total deposits
of $128 million as of the respective acquisition dates.
At December 31, 1996, $234 million, or 9.2% of total deposits were in time
accounts greater than $100,000. The increase of $31 million, or 15.3%, from $203
million at December 31, 1995, was due to $20 million of deposits obtained
through the institutions acquired during 1996. Management believes virtually all
the deposits in excess of $100,000 are with persons or entities that hold other
deposit relationships with the banks. Maturities of deposits in excess of
$100,000 at December 31, 1996, were (in thousands):
Maturing in less than three months...... $ 112,912
Maturing in three to six months......... 49,882
Maturing in six to twelve months........ 46,117
Maturing in over twelve months.......... 24,964
----------
Total deposits in excess of $100,000.... $ 233,875
----------
----------
In addition to the availability of core deposits, management has determined
it may, in the future employ a brokered deposit program in an effort to attract
lower cost sources of funds. The Company intends to continue to expand its core
deposit base through acquisitions.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
SHORT-TERM BORROWINGS
Short-term borrowings include securities sold under agreements to repurchase,
commercial paper, Federal Home Loan Bank advances and federal funds
purchased. These funds are used to fund the growth in loans and securities
and manage the Company's rate sensitivity risk. They are subject to
short-term price swings as the Company's needs change or the overall market
rates for short-term investment funds change.
The Company's subsidiary banks had arrangements with the Federal Home
Loan Bank that provide for borrowing up to $233 million. As of December 31,
1996, $4,829,000 long-term and $152,000,000 short-term advances were
outstanding. The Company also had a $14 million balance outstanding on its
$15 million short-term commercial paper arrangement at December 31, 1996. The
$157 million increase in short-term borrowings from December 31, 1995, is due
to strong loan demand at the Company's bank subsidiaries and reflects a
transfer of long-term debt to lower rate short-term borrowing facilities.
The following table sets forth a summary of the short-term borrowings of
the Company during 1996, 1995 and 1994, and as of the end of each such period:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Average Maximum Weighted Average
Daily Outstanding Average Interest
Outstanding Amount at any Interest Rate at
(Dollars in thousands) at Year-End Outstanding Month-End Rate Year-End
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Federal funds purchased and securities
sold under agreements to repurchase. . . $ 78,369 $ 56,356 $ 83,451 4.75% 5.55%
Commercial paper . . . . . . . . . . . . . 14,062 12,643 14,965 5.72% 5.63%
FHLB advances. . . . . . . . . . . . . . . 152,000 96,130 182,000 5.91% 6.30%
Other. . . . . . . . . . . . . . . . . . . 3,203 3,182 4,140 5.58% 5.95%
--------- ---------
Total . . . . . . . . . . . . . . . . $ 247,634 $ 168,311 $ 272,895 5.49% 6.01%
--------- ---------
--------- ---------
1995
Federal funds purchased and securities
sold under agreements to repurchase. . . $ 50,102 $ 67,421 $ 100,627 5.59% 4.69%
Commercial paper . . . . . . . . . . . . . 10,000 6,352 10,000 6.11% 5.91%
FHLB advances. . . . . . . . . . . . . . . 28,775 36,345 61,975 6.07% 5.88%
Other. . . . . . . . . . . . . . . . . . . 2,004 1,666 2,917 5.70% 6.05%
--------- ---------
Total . . . . . . . . . . . . . . . . $ 90,881 $ 111,784 $ 152,523 5.78% 5.23%
--------- ---------
--------- ---------
1994
Federal funds purchased and securities
sold under agreements to repurchase. . . $ 74,319 $ 65,123 $ 95,854 4.51% 4.99%
Commercial paper . . . . . . . . . . . . . - 1,231 4,988 3.86% -
FHLB advances. . . . . . . . . . . . . . . 38,400 13,000 44,084 5.22% 6.07%
Other. . . . . . . . . . . . . . . . . . . 750 4,209 4,822 3.90% 5.35%
--------- ---------
Total . . . . . . . . . . . . . . . . $ 113,469 $ 83,563 $ 130,491 4.58% 5.36%
--------- ---------
--------- ---------
- --------------------------------------------------------------------------------------------------------
</TABLE>
LONG TERM DEBT
Long-term debt of the Company was $47 million as of December 31, 1996, and $81
million as of December 31, 1995. Long-term debt includes $23 million of
unsecured subordinated notes issued in April 1993 and $12 million of
exchangeable subordinated notes maturing August 15, 2005. The decrease in long-
term debt reflects a transfer to lower rate short-term borrowings.
On February 28, 1997, the Company issued notice of redemption to the
holders of its $23 million in aggregate principal amount of 7.75% Subordinated
Notes due 2000 (the "7.75% Notes"). The 7.75% Notes will be redeemed at par plus
accrued interest.
SHAREHOLDERS' EQUITY
Total shareholders' equity increased $40.6 million, or 19.9%, to $244.6 million
at December 31, 1996, from $204.0 million at December 31, 1995, as a result of
the retention of a majority of earnings, the conversion of debentures and the
issuance of common stock. During 1996 the equivalent of 842,253 shares of common
stock were issued resulting in an increase in shareholders' equity of $15.0
million.
In 1996, the Company increased the number of authorized common shares from
20,000,000 to 30,000,000. The number of authorized preferred shares remained at
2,000,000. The increases are expected to provide the Company greater ability to
utilize common and preferred stock in connection with raising additional
capital, expanding its business through acquisitions and other general purposes.
On February 28, 1997, the Company issued notice of redemption to the
holders of its Depositary Shares, which represent ownership of one-quarter share
of 7% Cumulative Convertible Preferred Stock (approximately $23 million in
stated value). The redemption price is $26.40 (plus accrued and unpaid
dividends) for each Depositary Share with a stated value of $25.00 per share.
Holders of the Depositary Shares have the right to convert their investment into
Common Stock, prior to redemption, at a rate of 1.569 shares of Common Stock for
each Depositary Share. The Company expects that virtually all of such holders
will elect to convert prior to redemption, which would result in the issuance of
up to approximately 1,443,000 shares of Common Stock.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
LIQUIDITY MANAGEMENT
Liquidity management is an effort of management to provide a continuing flow of
funds to meet its financial commitments, customer borrowings needs and deposit
withdrawal requirements. The liquidity position of the Company and its
subsidiary banks is monitored by the Asset/Liability Management Committee of the
Company. The largest category of assets representing a ready source of liquidity
for the Company is its short-term financial instruments, which include federal
funds sold, interest-bearing deposits at other financial institutions, U.S.
Treasury securities and other securities maturing within one year. Liquidity is
also provided through the regularly scheduled maturities of assets. The
investment portfolio contains a number of high quality issues with varying
maturities and regular principal payments. Maturities in the loan portfolio also
provide a steady flow of funds, and strict adherence to the credit policies of
the Company helps ensure the collectibility of these loans. The liquidity
position of the Company is also greatly enhanced by its significant base of core
deposits.
The liquidity ratio is one measure of a bank's ability to meet its current
obligations and is defined as the percentage of liquid assets to deposits.
Liquid assets include cash and due from banks, unpledged investment securities
with maturities of less than one year and federal funds sold. At year-end 1996,
1995 and 1994, the liquidity ratio was 7.77%, 8.96% and 7.37%, respectively. The
level of loans maturing within one year greatly added to the Company's liquidity
position in 1996. Including loans maturing within one year, the liquidity ratio
was 34.41%, 40.23% and 34.57%, respectively, for the same periods.
The Company has a revolving line of credit with its primary lender, which
provides for borrowing up to $26 million. This line would be utilized to finance
acquisitions which may be completed in 1997. The balance outstanding on this
line of credit at December 31, 1996, was $4.1 million.
The Company also maintains available lines of federal funds borrowings, as
well as seasonal borrowing privileges, at the Federal Reserve Bank of
Minneapolis. The Company's subsidiary banks have the ability to borrow an
aggregate of $108 million in federal funds from eight nonaffiliated financial
institutions.
Additionally, most of the Company's subsidiary banks have joined the
Federal Home Loan Bank ("FHLB") System. As part of membership, the Company's
subsidiary banks purchased a modest amount of stock of FHLB and obtained advance
lines of credit which represent an aggregate of $233 million in additional
funding capacity.
INTEREST RATE SENSITIVITY
Interest rate sensitivity indicates the exposure of a financial institution's
earnings to future fluctuations in interest rates. Management of interest rate
sensitivity is accomplished through the composition of loans and investments and
by adjusting the maturities on earning assets and interest-bearing liabilities.
Rate sensitivity and liquidity are related since both are affected by maturing
assets and liabilities. However, interest rate sensitivity also takes into
consideration those assets and liabilities with interest rates that are subject
to change prior to maturity.
The Company's Asset and Liability Management Committee ("ALCO") attempts to
structure the Company's balance sheet to provide for an approximately equal
amount of rate sensitive assets and rate sensitive liabilities. In addition to
facilitating liquidity needs, this strategy assists management in maintaining
relative stability in net interest income despite unexpected fluctuations in
interest rates. ALCO uses three methods for measuring and managing interest rate
risk: Interest Rate Sensitivity Analysis, Net Interest Income Simulation
Modeling, Equity Fair Value Modeling.
INTEREST RATE SENSITIVITY ANALYSIS - Management performs an Interest Rate
Sensitivity Analysis which represents a point in time net position of assets,
liabilities and off-balance sheet instruments subject to repricing in specified
time periods. Guidelines established by ALCO, and approved by the Company's
Board of Directors, limit the impact on net interest income to five percent
given a 100 basis point change in interest rates over one year. However,
management believes Interest Rate Sensitivity Analysis alone does not accurately
measure the magnitude of changes in net interest income since changes in
interest rate do not impact all categories of assets, liabilities and off-
balance sheet instruments equally or simultaneously. A summary of the Interest
Rate Sensitivity Analysis is presented on page 26.
NET INTEREST INCOME SIMULATION MODELING - Net Interest Income Simulation
Modeling allows management to analyze the impact of short-term (less than 12
months) interest rate fluctuations using projected balance sheet information.
The balance sheet changes are based on forecasted repayments of loans and
securities, growth in loans and deposits, and historical pricing spreads.
Management uses the model to simulate the impact of immediate and longer-term
shifts in the yield curve. The results of these models are reviewed by ALCO and
used to develop the Company's strategies. Guidelines established by ALCO limit
the impact on net interest income to five percent given a 100 basis point change
in interest rates. As of December 31, 1996, the impact of such a change in
interest rate would be approximately 1.24 percent.
EQUITY FAIR VALUE MODELING - Because Net Interest Income Simulation Modeling is
dependent on accurate forecasts, its usefulness is limited to periods exceeding
two years. As a result, the Company uses the Equity Fair Value Modeling to
measure long-term interest rate exposure. The method estimates the impact of
interest rate changes on the estimated discounted future cash flows of the
Company's current assets, liabilities, and off-balance sheet instruments.
Guidelines established by ALCO limit the change in fair value to 15 percent
given a 100 basis point change in interest rates. As of December 31, 1996, the
impact of such a change in interest rate would be approximately 6.85 percent.
Based on each of these methods of measuring interest rate risk, management
believes the Company is slightly asset sensitive as of December 31, 1996.
The Company does not engage in the speculative use of derivative financial
instruments.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc.
The following table sets forth the Company's interest rate sensitivity
analysis by contractual repricing or maturity at December 31, 1996:
<TABLE>
<CAPTION>
Repricing or Maturing in
- -----------------------------------------------------------------------------------------------
1 Year Over 1 Over 5
(In thousands) or Less to 5 Years Years Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rate sensitive assets:
Loans. . . . . . . . . . . . . . . . . $ 1,100,161 $ 818,947 $ 145,000 $ 2,064,108
Held-to-maturity securities. . . . . . 81,583 20,764 120,001 222,348
Available-for-sale securities. . . . . 164,572 247,520 94,796 506,888
Other interest-bearing assets. . . . . 7,100 98 - 7,198
----------- ----------- ----------- -----------
Total rate sensitive assets. . . . . . $ 1,353,416 $ 1,087,329 $ 359,797 $ 2,800,542
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Rate sensitive liabilities:
Savings deposits and
Interest-bearing checking. . . . . . . $ 964,829 $ - $ - $ 964,829
Time deposits. . . . . . . . . . . . . 901,798 239,065 670 1,141,533
Short-term borrowings. . . . . . . . . 248,065 273 - 248,338
Long-term borrowings . . . . . . . . . 534 33,222 15,648 49,404
----------- ----------- ----------- -----------
Total rate sensitive liabilities . . . $ 2,115,226 $ 272,560 $ 16,318 $ 2,404,104
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Rate sensitive gap . . . . . . . . . . . $ (761,810) $ 814,769 $ 343,479 $ 396,438
Cumulative rate sensitive gap. . . . . . $ (761,810) $ 52,959 $ 396,438 $ 396,438
- -----------------------------------------------------------------------------------------------
</TABLE>
The following sets forth the Company's interest rate sensitivity analysis
at December 31, 1996, with respect to the individual categories of loans and
provides separate analyses with respect to fixed interest rate loans and
floating interest rate loans:
<TABLE>
<CAPTION>
Repricing or Maturing in
- -----------------------------------------------------------------------------------------------
1 Year Over 1 Over 5
(In thousands) or Less to 5 Years Years Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan category:
Real estate. . . . . . . . . . . . . . $ 450,660 $ 355,283 $ 65,489 $ 871,432
Agricultural . . . . . . . . . . . . . 178,170 40,320 3,591 222,081
Commercial . . . . . . . . . . . . . . 418,166 166,713 39,577 624,456
Consumer and other . . . . . . . . . . 53,165 256,631 36,343 346,139
----------- ----------- ----------- -----------
Total loans. . . . . . . . . . . . . . $ 1,100,161 $ 818,947 $ 145,000 $ 2,064,108
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fixed interest rate loans. . . . . . . . $ 369,102 $ 724,360 $ 141,895 $ 1,235,357
Floating interest rate loans . . . . . . 731,059 94,587 3,105 828,751
----------- ----------- ----------- -----------
Total loans. . . . . . . . . . . . . . $ 1,100,161 $ 818,947 $ 145,000 $ 2,064,108
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- -----------------------------------------------------------------------------------------------
</TABLE>
CAPITAL MANAGEMENT
Risk-based guidelines established by regulatory agencies require the Company to
maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted
assets, and of Tier 1 capital to average assets.
As of December 31, 1996, the Company is considered well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-
based, Tier 1 leverage ratios as set forth in the table.
- --------------------------------------------------------------------------------
REGULATORY CAPITAL REQUIREMENTS:
- --------------------------------------------------------------------------------
Tier 1 Total Risk- Total Risk-
(Dollars in thousands) Capital Based Capital Leverage Based Assets
- --------------------------------------------------------------------------------
Minimum. . . . . . . . . . . . 4.00% 8.00% 3.00% N/A
Well-Capitalized . . . . . . . 6.00% 10.00% 5.00% N/A
----- ------ ----- ------
COMMUNITY FIRST BANKSHARES, INC.
December 31, 1996. . . . . . . 8.88% 11.10% 6.62% $2,312,632
December 31, 1995. . . . . . . 8.51% 11.18% 6.10% 1,974,179
- --------------------------------------------------------------------------------
Due to the Company's level of Tier 1 capital and substantial level of
earning assets invested in low risk government agency and mortgage-backed
securities, the Company's risk-based capital ratios significantly exceed the
regulatory minimums. The Company conducts an ongoing assessment of its capital
needs in order to maintain an adequate level of capital to support business
growth, to ensure depositor protection and to facilitate corporate expansion.
Management continues to explore steps to increase its capital levels to permit
it to make future acquisitions. Portions of the subordinated debt financing
referred to under "Borrowings," above, are treated as Tier 2 capital.
This Annual Report contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. Factors that could
cause actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to: risks related to the Company's
acquisition strategy, including risks of adversely changing results of
operations and possible factors affecting the Company's ability to consummate
further acquisitions; risks of loans and investments, including dependance on
local economic conditions; competition for the Company's customers from other
providers of financial services; possible adverse effects of changes in interest
rates; and other risks detailed in the Company's filings with the Securities and
Exchange Commission, which risks are difficult to predict and many of which are
beyond the control of the Company.
26
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Community First Bankshares, Inc.
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
December 31 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 175,732 $ 137,551
Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . 3,600 25,965
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,598 3,213
Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506,888 486,522
Held-to-maturity securities (Fair Value: 1996 - $223,200, 1995 - $231,704) . . . . . . . . . . 222,348 230,820
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,064,108 1,767,193
Less: Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,215) (22,712)
---------- ----------
Net Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,037,893 1,744,481
Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,705 51,534
Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,233 28,347
Intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,182 34,898
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,219 26,645
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,116,398 $2,769,976
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 431,078 $ 398,314
Interest-bearing:
Savings and NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964,829 873,025
Time accounts over $100,000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233,875 202,520
Other time accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 907,658 885,857
---------- ----------
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,537,440 2,359,716
Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . 78,369 50,102
Other short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,265 40,779
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,750 81,288
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,027 15,978
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,665 17,153
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,870,516 2,565,016
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,311 956
Shareholders' equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,988 23,000
Common stock, par value $.01 per share:
Authorized Shares - 30,000,000
Issued Shares - 17,202,684 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 162
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,029 64,776
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,239 115,154
Unrealized gain on available-for-sale securities, net of tax. . . . . . . . . . . . . . . . 1,368 1,976
Less cost of common stock in treasury - 1996 - 50,810 shares; 1995 - 78,624 shares. . . . . (1,225) (1,064)
---------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,571 204,004
---------- ----------
---------- ----------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . $3,116,398 $2,769,976
---------- ----------
---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
27
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME Community First Bankshares, Inc.
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,530 $ 150,948 $ 104,012
Investment securities . . . . . . . . . . . . . . . . . . 44,936 40,210 38,032
Interest-bearing deposits . . . . . . . . . . . . . . . . 163 366 638
Federal funds sold and resale agreements. . . . . . . . . 797 1,344 555
---------- ---------- ----------
Total interest income. . . . . . . . . . . . . . . . . . . . 229,426 192,868 143,237
INTEREST EXPENSE:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . 81,655 71,780 46,560
Short-term and other borrowings . . . . . . . . . . . . . 9,247 6,184 4,029
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 4,332 4,927 2,879
---------- ---------- ----------
Total interest expense . . . . . . . . . . . . . . . . . . . 95,234 82,891 53,468
---------- ---------- ----------
Net interest income. . . . . . . . . . . . . . . . . . . . . 134,192 109,977 89,769
Provision for loan losses. . . . . . . . . . . . . . . . . . 6,757 2,711 1,839
---------- ---------- ----------
Net interest income after provision for loan losses. . . . . 127,435 107,266 87,930
NONINTEREST INCOME:
Service charges on deposit accounts . . . . . . . . . . . 12,328 10,116 8,467
Insurance commissions . . . . . . . . . . . . . . . . . . 5,213 4,283 3,777
Fees from fiduciary activities. . . . . . . . . . . . . . 3,332 2,718 2,157
Net gains on sales of securities. . . . . . . . . . . . . 93 52 99
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,404 5,319 4,492
---------- ---------- ----------
Total noninterest income . . . . . . . . . . . . . . . . . . 27,370 22,488 18,992
NONINTEREST EXPENSE:
Salaries and employee benefits. . . . . . . . . . . . . . 54,870 42,796 35,083
Net occupancy . . . . . . . . . . . . . . . . . . . . . . 15,085 10,563 9,353
FDIC insurance. . . . . . . . . . . . . . . . . . . . . . 669 2,532 3,720
Legal and accounting. . . . . . . . . . . . . . . . . . . 1,989 1,311 1,403
Other professional service. . . . . . . . . . . . . . . . 1,892 2,700 2,054
Acquisition expense . . . . . . . . . . . . . . . . . . . 2,928 768 908
Data processing . . . . . . . . . . . . . . . . . . . . . 1,506 1,607 856
Amortization of intangibles . . . . . . . . . . . . . . . 3,362 2,551 1,876
Permanent impairment of equity method investment. . . . . 940 - -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 21,047 17,765 14,988
---------- ---------- ----------
Total noninterest expense. . . . . . . . . . . . . . . . . . 104,288 82,593 70,241
---------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . 50,517 47,161 36,681
Provision for income taxes . . . . . . . . . . . . . . . . . 18,007 17,208 13,952
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729
---------- ---------- ----------
---------- ---------- ----------
Net income applicable to common equity . . . . . . . . . . . $ 30,900 $ 28,343 $ 21,638
---------- ---------- ----------
---------- ---------- ----------
Earnings per common and common equivalent share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.85 $ 1.82 $ 1.48
Fully diluted . . . . . . . . . . . . . . . . . . . . . . $ 1.79 $ 1.74 $ 1.42
Average common and common equivalent shares outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . 16,699,021 15,543,129 14,580,309
Fully diluted . . . . . . . . . . . . . . . . . . . . . . 18,154,966 17,276,050 16,136,433
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
28
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Community First Bankshares, Inc.
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
--------------- --------------- Capital Retained
Shares Amount Shares Amount Surplus Earnings
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 . . . . . . - $ - 14,522,630 $145 $47,943 $ 77,390
Net income . . . . . . . . . . . . . . . - - - - - 22,729
Preferred stock dividends
($4.74 per share) . . . . . . . . . . - - - - - (1,091)
Common stock dividends
($.44 per share). . . . . . . . . . . - - - - - (3,794)
Purchases of common stock for
treasury at cost. . . . . . . . . . . - - - - - -
Sales of treasury stock to employee
benefit plans . . . . . . . . . . . . - - - - 26 -
Issuance of preferred stock. . . . . . . 230,000 23,000 - - (1,048) -
Exercise of options, net of stock
tendered in payment . . . . . . . . . - - 10,200 - 14 (377)
Exercise of warrants, net of stock
tendered in payment . . . . . . . . . - - - - - (2,102)
Conversion of debentures . . . . . . . . - - 212,089 3 1,980 -
Change in unrealized gain on
available for sale securities,
net of income tax benefit of
$4,537. . . . . . . . . . . . . . . . - - - - - -
- --------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 . . . . . . 230,000 23,000 14,744,919 148 48,915 92,755
Net income . . . . . . . . . . . . . . . - - - - - 29,953
Preferred stock dividends
($7.00 per share) . . . . . . . . . . - - - - - (1,610)
Common stock dividends
($0.48 per share) . . . . . . . . . . - - - - - (5,279)
Issuance of common stock . . . . . . . . - - 891,863 9 11,568 -
Purchases of common stock for
treasury at cost. . . . . . . . . . . - - - - - -
Sales of treasury stock to
employee benefit plans. . . . . . . . - - - - 22 -
Exercise of options, net of stock
tendered in payment . . . . . . . . . - - 20,635 - 156 (209)
Exercise of warrants, net of stock
tendered in payment . . . . . . . . . - - 21,602 - - -
Conversion of debentures . . . . . . . . - - 485,338 5 3,915 -
Liquidation of investment in
subsidiary to shareholders. . . . . . - - - - - (456)
Termination of ESOP loan guarantee
upon satisfaction of debt . . . . . . - - - - 200 -
Change in unrealized loss on
available-for-sale securities,
net of income taxes of $4,219 . . . . - - - - - -
- --------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 . . . . . . 230,000 23,000 16,164,357 162 64,776 115,154
Net income . . . . . . . . . . . . . . . - - - - - 32,510
Preferred stock dividends
($7.00 per share) . . . . . . . . . . - - - - - (1,610)
Common stock dividends
($0.58 per share) . . . . . . . . . . - - - - - (6,714)
Issuance of common stock . . . . . . . . - - 842,253 8 9,810 5,226
Retirement of common stock . . . . . . . - - (19,125) - (349) -
Purchases of common stock for
treasury at cost. . . . . . . . . . . - - - - - -
Sales of treasury stock to
employee benefit plans. . . . . . . . - - - - 162 -
Exercise of options, net of stock
tendered in payment . . . . . . . . . - - 215,199 2 2,630 (322)
Conversion of convertible preferred
stock . . . . . . . . . . . . . . . . (125) (12) - - - (5)
Change in unrealized loss on
available-for-sale securities,
net of income tax benefit of $336 . . - - - - - -
- --------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 . . . . . . 229,875 $22,988 17,202,684 $172 $77,029 $144,239
------- ------- ---------- ---- ------- --------
------- ------- ---------- ---- ------- --------
- --------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------
Treasury Stock
Unrealized ------------------
Gain(Loss) Shares Amount Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 . . . . . . $3,042 272,765 $(3,449) $125,071
Net income . . . . . . . . . . . . . . . - - - 22,729
Preferred stock dividends
($4.74 per share) . . . . . . . . . . - - - (1,091)
Common stock dividends
($.44 per share). . . . . . . . . . . - - - (3,794)
Purchases of common stock for
treasury at cost. . . . . . . . . . . - 102,000 (1,384) (1,384)
Sales of treasury stock to employee
benefit plans . . . . . . . . . . . . - (19,650) 243 269
Issuance of preferred stock. . . . . . . - - - 21,952
Exercise of options, net of stock
tendered in payment . . . . . . . . . - (40,176) 502 139
Exercise of warrants, net of stock
tendered in payment . . . . . . . . . - (170,595) 2,153 51
Conversion of debentures . . . . . . . . - - 1,983
Change in unrealized gain on
available for sale securities,
net of income tax benefit of
$4,537. . . . . . . . . . . . . . . . (8,224) - - (8,224)
- ----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 . . . . . . (5,182) 144,344 (1,935) 157,701
Net income . . . . . . . . . . . . . . . - - - 29,953
Preferred stock dividends
($7.00 per share) . . . . . . . . . . - - - (1,610)
Common stock dividends
($0.48 per share) . . . . . . . . . . - - - (5,279)
Issuance of common stock . . . . . . . . - - - 11,577
Purchases of common stock for
treasury at cost. . . . . . . . . . . - 4,000 (56) (56)
Sales of treasury stock to
employee benefit plans. . . . . . . . - (18,194) 237 259
Exercise of options, net of stock
tendered in payment . . . . . . . . . - (51,526) 690 637
Exercise of warrants, net of stock
tendered in payment . . . . . . . . . - - - -
Conversion of debentures . . . . . . . . - - - 3,920
Liquidation of investment in
subsidiary to shareholders. . . . . . - - - (456)
Termination of ESOP loan guarantee
upon satisfaction of debt . . . . . . - - - 200
Change in unrealized loss on
available-for-sale securities,
net of income taxes of $4,219 . . . . 7,158 - - 7,158
- ----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 . . . . . . 1,976 78,624 (1,064) 204,004
Net income . . . . . . . . . . . . . . . - - - 32,510
Preferred stock dividends
($7.00 per share) . . . . . . . . . . - - - (1,610)
Common stock dividends
($0.58 per share) . . . . . . . . . . - - - (6,714)
Issuance of common stock . . . . . . . . - - - 15,044
Retirement of common stock . . . . . . . - - - (349)
Purchases of common stock for
treasury at cost. . . . . . . . . . . - 64,900 (1,535) (1,535)
Sales of treasury stock to
employee benefit plans. . . . . . . . - (22,582) 307 469
Exercise of options, net of stock
tendered in payment . . . . . . . . . - (69,349) 1,050 3,360
Conversion of convertible preferred
stock . . . . . . . . . . . . . . . . - (783) 17 -
Change in unrealized loss on
available-for-sale securities,
net of income tax benefit of $336 . . (608) - - (608)
- ----------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 . . . . . . $1,368 50,810 $(1,225) $244,571
------ ------ ------- --------
------ ------ ------- --------
- ----------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS Community First Bankshares, Inc.
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Years ended December 31 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . . . . 6,757 2,711 1,839
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 6,974 5,373 4,447
Amortization of intangibles. . . . . . . . . . . . . . . . . 3,362 2,551 1,876
Net amortization of premiums and discounts on securities . . 1,867 1,946 2,545
Deferred income tax benefit. . . . . . . . . . . . . . . . . (3,906) (4,009) (1,031)
Decrease (increase) in interest receivable . . . . . . . . . 422 (2,309) (2,676)
Increase in interest payable . . . . . . . . . . . . . . . . 282 4,746 856
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (4,236) (6,066) 6,470
-------- -------- --------
Net cash provided by operating activities. . . . . . . . . . . . 44,032 34,896 37,055
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . 14,026 35,667 2,410
Net (decrease) increase in interest-bearing deposits . . . . . . (158) (462) 2,442
Purchases of available-for-sale securities . . . . . . . . . . . (218,601) (86,629) (54,206)
Maturities of available-for-sale securities. . . . . . . . . . . 217,771 75,262 78,613
Sales of securities, net of gains. . . . . . . . . . . . . . . . 29,720 50,530 61,607
Purchases of held-to-maturity securities . . . . . . . . . . . . (23,344) (75,871) (94,639)
Maturities of held-to-maturity securities. . . . . . . . . . . . 30,986 54,990 85,901
Net increase in loans. . . . . . . . . . . . . . . . . . . . . . (237,802) (139,434) (214,463)
Net increase in bank premises and equipment. . . . . . . . . . . (18,194) (10,438) (9,782)
Net (decrease) increase in minority interest . . . . . . . . . . 355 (4,828) 235
-------- -------- --------
Net cash used in investing activities. . . . . . . . . . . . . . (205,241) (101,213) (141,882)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits, NOW
accounts and savings accounts. . . . . . . . . . . . . . . . . 51,952 (44,603) (26,468)
Net (decrease) increase in time accounts . . . . . . . . . . . . (5,807) 141,005 54,234
Net increase (decrease) in short-term and other
borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 156,753 (23,088) 50,525
Proceeds from issuance of long-term debt . . . . . . . . . . . . - 56,624 -
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . (34,538) (10,000) (6,450)
Net proceeds from issuance of common stock . . . . . . . . . . . 15,044 11,577 66
Net proceeds from issuance of preferred stock. . . . . . . . . . - - 21,952
Purchase of common stock held in treasury. . . . . . . . . . . . (1,535) (56) (1,384)
Sale of common stock held in treasury. . . . . . . . . . . . . . 3,829 896 451
Retirement of common stock . . . . . . . . . . . . . . . . . . . (349) - -
Preferred stock dividends paid . . . . . . . . . . . . . . . . . (1,610) (1,610) (1,091)
Common stock dividends paid. . . . . . . . . . . . . . . . . . . (6,714) (5,279) (3,794)
-------- -------- --------
Net cash provided by financing activities. . . . . . . . . . . . 177,025 125,466 88,041
-------- -------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . 15,816 59,149 (16,786)
Cash and cash equivalents at beginning of year . . . . . . . . . 163,516 104,367 121,153
-------- -------- --------
Cash and cash equivalents at end of year . . . . . . . . . . . . $179,332 $163,516 $104,367
-------- -------- --------
-------- -------- --------
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
December 31, 1996, 1995 and 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Community First Bankshares, Inc. (the "Company") is a multi-bank holding company
which, at the end of 1996, served 79 communities in Colorado, Iowa, Minnesota,
Nebraska, North Dakota, South Dakota and Wisconsin. The Company's community
banks provide a full range of banking services, primarily in small and medium-
sized communities and the surrounding communities. In addition to its primary
emphasis on commercial and consumer banking services, the Company offers trust,
insurance and nondeposit investment products and services.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Community First
Bankshares, Inc., its wholly-owned data processing, credit origination and
insurance agency subsidiaries and its fourteen majority-owned subsidiary banks.
Minority interest is reflected in consolidation and is the portion of the
subsidiary banks (ranging from 0.00% to 1.29% at December 31, 1996, and from
0.00% to 2.87% and 0.00% to 18.93% at December 31, 1995 and 1994, respectively)
that is not owned by the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain amounts in prior
periods have been reclassified to conform to the current presentation.
As discussed in Note 2, the Company acquired Mountain Parks Financial
Corporation ("Mountain Parks"), on December 18, 1996, Minowa Bancshares, Inc.
("Minowa"), on February 22, 1995, and First Community Bankshares, Inc. ("FCB"),
on July 3, 1995. These acquisitions were accounted for using the pooling of
interests method. Accordingly, the consolidated financial information has been
restated to reflect the results of operations of the four companies on a
combined basis for all periods presented.
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.
HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES
Management determines the classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a component of retained
earnings in shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity or, in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and accretion is included as
an adjustment to interest income from investments. Realized gains and losses and
declines in value judged to be other-than-temporary are included in net
securities gains (losses). The cost of securities sold is based on the specific
identification method.
LOANS
Loans are stated at their principal balance outstanding, less the allowance for
loan losses. Interest on loans is recognized on an accrual basis. Loans are
placed on nonaccrual when they become past due over 90 days, or earlier, if the
collection of interest or principal is considered unlikely. Thereafter, no
interest income is recognized unless received in cash and until such time as the
borrower demonstrates the ability to pay interest and principal.
LOAN FEE INCOME
The Company recognizes loan fees and certain direct origination costs as a yield
adjustment over the estimated life of the loan, utilizing a method that results
in a constant rate of return.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through charges to expense at an
amount that will provide for estimated loan losses. These estimates are based
principally on a continual review of the loan portfolio, loan charge-off
experience, economic conditions and industry guidelines. Ultimate losses may
vary from current estimates, and as adjustments become necessary, the allowance
for loan losses is adjusted in the periods in which such losses become known or
fail to occur. Actual loan charge-offs and subsequent recoveries are deducted
from and added to the allowance, respectively.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is provided on the straight-line
method over the estimated lives of the assets and includes amortization of
assets recorded under capital leases. Estimated lives range from three to twenty
and twenty-five to forty years for equipment and premises, respectively.
Accelerated depreciation methods are used for income tax reporting purposes.
INTANGIBLE ASSETS
Goodwill, the excess cost over net assets acquired, of banking subsidiaries is
amortized over a period of fifteen years. At December 31, 1996, goodwill totaled
$33,396,000, net of accumulated amortization of $6,765,000. Other intangible
assets, principally deposit base intangibles, unexpired premium lists and
noncompetition agreements, totaled $5,786,000, net of accumulated amortization
of $4,154,000, and are amortized over their estimated useful lives ranging from
three to twenty-five years.
INCOME TAXES
The Company provides for income taxes based on income reported for financial
statement purposes, rather than amounts currently payable under statutory tax
laws. Deferred taxes are recorded to reflect the tax consequences on future
years' differences between the tax bases of assets and liabilities and the
financial reporting of amounts at each year-end.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
EARNINGS PER SHARE
Primary earnings per common share is calculated by dividing net income adjusted
for preferred stock dividends declared by the sum of the weighted average number
of shares of common stock outstanding and the number of shares of common stock
that would be issued assuming the exercise of stock options and warrants during
each period.
Fully diluted earnings per common share is based on net income before
considering the preferred stock dividends declared and interest expense, net of
tax, paid on convertible exchangeable redeemable subordinated debentures (the
"Debentures"). Interest expense on the Debentures, net of tax, was $0, $86,000
and $261,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The weighted average number of shares of common stock outstanding is increased
by the assumed conversion of convertible preferred stock outstanding and the
Debentures outstanding from the beginning of the period or date of issuance, if
later, and the number of shares of common stock that would be issued assuming
the exercise of stock options and warrants during each period. Such adjustments
to the weighted average number of shares of common stock outstanding are made
only when such adjustments dilute earnings per share.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is defined as cash and due from banks, federal funds
sold and securities purchased under agreements to resell.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants. See Footnotes 4 and 14.
2. BUSINESS COMBINATIONS
- --------------------------------------------------------------------------------
On December 18, 1996, the Company issued 5,176,672 shares of common stock to
complete its merger with Mountain Parks, a one bank holding company with
seventeen offices in Colorado. The merger was accounted for using the pooling of
interests method. Operating results of the Company and Mountain Parks for the
years ended December 31, 1995 and 1994 and the nine months ended September 30,
1996, prior to restatement were:
- --------------------------------------------------------------------------------
The Mountain
(In thousands, except per share data) Company Parks Combined
- --------------------------------------------------------------------------------
Nine months ended September 30, 1996 (unaudited):
Net interest income. . . . . . . . . . . . . . . . $75,240 $23,148 $ 98,388
Net income . . . . . . . . . . . . . . . . . . . . 21,070 5,392 26,462
Net income applicable to common equity . . . . . . 19,862 5,392 25,254
Earnings per common and common
equivalent share:
Primary. . . . . . . . . . . . . . . . . . . . $1.71 $1.40 $1.53
Fully diluted. . . . . . . . . . . . . . . . . $1.61 $1.40 $1.47
Year ended December 31, 1995:
Net interest income. . . . . . . . . . . . . . . . $88,148 $21,829 $109,977
Net income . . . . . . . . . . . . . . . . . . . . 22,819 7,134 29,953
Net income applicable to common equity . . . . . . 21,209 7,134 28,343
Earnings per common and common
equivalent share:
Primary. . . . . . . . . . . . . . . . . . . . $1.85 $2.24 $1.82
Fully diluted. . . . . . . . . . . . . . . . . $1.75 $2.17 $1.74
Year ended December 31, 1994:
Net interest income. . . . . . . . . . . . . . . . $73,778 $15,991 $ 89,769
Net income . . . . . . . . . . . . . . . . . . . . 16,940 5,789 22,729
Net income applicable to common equity . . . . . . 15,849 5,789 21,638
Earnings per common and common
equivalent share:
Primary. . . . . . . . . . . . . . . . . . . . $1.39 $2.32 $1.48
Fully diluted. . . . . . . . . . . . . . . . . $1.37 $2.03 $1.42
- --------------------------------------------------------------------------------
(Operating results of the Company have been restated to reflect the Minowa
Bancshares, Inc. and First Community Bankshares, Inc. acquisitions.)
(No material adjustments were required to restate combined results of
operations.)
On July 3, 1995, the Company issued 1,196,445 shares of common stock to
acquire First Community Bankshares, Inc. ("FCB"), a five-bank holding company
headquartered in Fort Morgan, Colorado. At acquisition, FCB had approximately
$153 million in assets and $131 million in deposits at five banks located in
Burlington, Englewood, Fort Morgan, Holyoke, and Sterling, Colorado. The Company
used the pooling of interests method to account for the transaction.
On May 11, 1995, the Company acquired Abbott Bank Group, Inc. ("Abbott"),
with offices in Alliance, Nebraska, and ten other central and western Nebraska
locations. In the transaction, which was accounted for as a purchase, the
Company paid approximately $34,000,000 for 100% of the Abbott common stock. The
transaction resulted in the recognition of goodwill of approximately $6,100,000.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
The following unaudited pro forma consolidated financial information for
the year ended December 31, 1995, reflects the results of operations as if the
acquisition of Abbott had occurred on January 1, 1995. Such unaudited pro forma
consolidated financial information may not be indicative of the results of
future operations or as they might have been had the acquisitions been effected
on the assumed date.
- ---------------------------------------------------------------------------
Year Ended
(In thousands, except per share data) December 31, 1995
- ---------------------------------------------------------------------------
Net Interest Income. . . . . . . . . . . . . . . . . . . . . $113,158
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . 29,211
Primary earnings per share . . . . . . . . . . . . . . . . . 1.78
Fully diluted earnings per share . . . . . . . . . . . . . . 1.70
- ---------------------------------------------------------------------------
On February 22, 1995, the Company issued 2,400,568 shares of common stock
to acquire Minowa, a three-bank holding company headquartered in Decorah, Iowa.
At acquisition, Minowa had approximately $224 million in assets and $197 million
in deposits at three banks located in Decorah, Iowa; Caledonia, Minnesota; and
Mabel, Minnesota. The Company used the pooling of interests method to account
for the transaction.
During 1996 and 1995, the Company completed the acquisition of several
smaller financial institutions in its existing markets. These acquisitions,
except as described below, were accounted for using the purchase method and were
not material to the financial condition or operating results of the Company.
On October 1, 1996, the Company acquired Financial Bancorp, Inc.
("Financial"), a holding company with one bank in Trinidad, Colorado. In the
transaction, which was accounted for using the pooling of interests method, the
Company issued 538,803 shares of common stock in exchange for 100% of Financial
common stock. This merger was not material to the Company's financial condition
or operating results. Accordingly, the Company's consolidated financial
information has not been restated to reflect this merger. The operating results
of Financial are included in the Company's consolidated financial statements
subsequent to the date of the merger.
On July 31, 1996, the Company acquired High Plains Bancorp, Inc. ("High
Plains"), with offices in Kiowa, Elizabeth, and Parker, Colorado. The company
paid approximately $7,100,000 for 100% of High Plains common stock. The
transaction resulted in the recognition of goodwill of approximately $3,448,000.
On July 3, 1996, the Company acquired Charter Bancorporation ("Charter"),
Englewood, Colorado. The Company paid approximately $4,600,000 for 100% of
Charter common stock. The transaction resulted in the recognition of goodwill of
approximately $2,723,000. The equivalent of approximately 232,050 shares of
common stock were issued in the transaction.
On October 2, 1995, the Company acquired the Farmers & Merchants Bank,
Beach, North Dakota ("Beach"), with two offices in Beach and Medora, North
Dakota. The Company paid approximately $4,300,000 for 100% of the Beach common
stock. The transaction resulted in the recognition of goodwill of approximately
$1,100,000.
On September 15, 1995, the Company, through a wholly-owned subsidiary,
acquired People's Bank and Trust Company, Aurora Colorado ("People's") from
Midwest Investment Company. The Company paid approximately $5,596,000 for 100%
of the People's common stock. The transaction resulted in the recognition of
goodwill of approximately $2,340,000.
On July 7, 1995, the Company acquired Financial Holdings, Inc. ("Financial
Holdings"), with offices in Boulder and Louisville, Colorado. The Company paid
approximately $12,725,000 for 100% of Financial Holdings common stock. The
transaction resulted in the recognition of goodwill of approximately $6,137,000.
The operating results of all of the companies acquired in purchase
transactions subsequent to the dates of acquisition are included in the
Company's consolidated financial statements for the years ended December 31,
1996, 1995 and 1994.
3. SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On February 28, 1997, the Company announced it would redeem its 7% Cumulative
Convertible Preferred Stock ("Preferred Stock"). Holders of the Company's
Depositary Shares (stated value of $25 per share), which represent ownership of
one-quarter share of the Preferred Stock, may elect 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 receive
the redemption value of $26.40, plus accrued and unpaid dividends.
On February 28, 1997, the Company issued notice of redemption to the
holders of its $23 million in aggregate principal amount of 7.75% Subordinated
Notes due 2000 (the "7.75% Notes"). The 7.75% Notes will be redeemed at par plus
accrued interest.
On February 18, 1997, the Company signed a definitive purchase agreement
with KeyCorp, of Cleveland, Ohio to acquire KeyBank N.A. (Wyoming) with offices
in 24 communities throughout the state of Wyoming. The transaction is expected
to result in the addition of approximately $1.2 billion in assets and $1.0
billion in deposits. The transaction is subject to regulatory approvals and is
expected to be completed during the third quarter of 1997.
On January 31, 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. Proceeds of the offering will be used for general corporate
purposes, which may include without limitation possible future acquisitions,
funding investments in, or extension of credit to, the Company's subsidiaries,
repayment of maturing obligations and redemption of securities.
4. ACCOUNTING CHANGES
- --------------------------------------------------------------------------------
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
is not recoverable. The Company's adoption of SFAS No. 121 did not have a
material impact on the Company's financial position. During December 1996, the
Company recorded a $940,000 writedown in the value of its investment in an
unconsolidated subsidiary, which is being divested to satisfy regulators'
competitive issues related to the merger with Mountain Parks. The amount of
impairment is based on the estimated net proceeds from the sale of the
investment, expected to be completed in early 1997.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a new
fair value-based accounting method for stock-based compensation plans. As
permitted by SFAS No. 123, management has elected to measure compensation costs
as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Note 14 includes the required pro forma disclosures reflecting the impact on net
income and earnings per share as if the Company had recorded compensation
expense based on the fair value method described in SFAS No. 123.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," addresses whether the transfer of financial
assets should be accounted for as a sale and removed from the balance sheet, or
as a financing recognized as a borrowing. SFAS No. 125 uses a "financial
components" approach to determine the accounting results of the transfers of
financial assets and focuses on control to determine whether assets have been
sold. If the entity has surrendered control over the transferred assets, the
transaction is considered a sale. Control is considered surrendered only if the
seller has no legal right to the assets, even in bankruptcy; the buyer has the
right to pledge or exchange the assets; and the seller does not maintain
effective control over the assets through an agreement to repurchase or redeem
them. SFAS No. 125 is effective on a prospective basis for all transactions
occurring after December 31, 1996. The Company regularly uses participations of
loans to manage its asset/liability mix. The accounting for such transactions is
included in SFAS No. 125. However, the adoption of SFAS No. 125 is not expected
to have a material effect on the Company's operations or financial position.
5. SECURITIES
- --------------------------------------------------------------------------------
The following is a summary of available-for-sale securities and held-to-
maturity securities at December 31, 1996 (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 . . . . . . . . $ 119,601 $ 1,014 $ 422 $ 120,193
United States Government agencies. . . 85,827 214 730 85,311
Mortgage-backed securities . . . . . . 234,782 2,690 639 236,833
Collateralized mortgage obligations. . 43,320 184 245 43,259
State and political securities . . . . 14,913 215 6 15,122
Other securities . . . . . . . . . . . 6,178 92 100 6,170
--------- ---------- ---------- ---------
Total. . . . . . . . . . . . . . . . . $ 504,621 $ 4,409 $ 2,142 $ 506,888
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
- ---------------------------------------------------------------------------------------
<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. . . $ 879 $ 468 $ 20 $ 1,327
Mortgage-backed securities . . . . . . 86,506 525 1,162 85,869
State and political securities . . . . 56,694 1,149 104 57,739
Other securities . . . . . . . . . . . 78,269 - 4 78,265
--------- ---------- ---------- ---------
Total. . . . . . . . . . . . . . . . . $ 222,348 $ 2,142 $ 1,290 $ 223,200
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
- ---------------------------------------------------------------------------------------
</TABLE>
The following is a summary of available-for-sale securities and held-to-
maturity securities at December 31, 1995 (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 . . . . . . . . $ 152,890 $ 1,704 $ 86 $ 154,508
United States Government agencies. . . 121,274 991 677 121,588
Mortgage-backed securities . . . . . . 142,234 1,476 351 143,359
Collateralized mortgage obligations. . 57,887 400 234 58,053
State and political securities . . . . 1,417 26 - 1,443
Other securities . . . . . . . . . . . 7,560 87 76 7,571
--------- ---------- ---------- ---------
Total . . . . . . . . . . . . . . . . $ 483,262 $ 4,684 $ 1,424 $ 486,522
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
- ---------------------------------------------------------------------------------------
<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. . . $ 3,318 $ 27 $ 12 $ 3,333
Mortgage-backed securities . . . . . . 106,429 830 935 106,324
State and political securities . . . . 55,267 1,063 116 56,214
Other securities . . . . . . . . . . . 65,806 27 - 65,833
--------- ---------- ---------- ---------
Total. . . . . . . . . . . . . . . . . $ 230,820 $ 1,947 $ 1,063 $ 231,704
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
- ---------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
Proceeds from the sale of available-for-sale securities during the years
ended December 31, 1996, 1995 and 1994, were $29,812,000, $50,596,000 and
$61,638,000, respectively. Gross gains of $195,000, $633,000 and $428,000 and
gross losses of $103,000, $567,000 and $397,000 were realized on those sales
during 1996, 1995 and 1994, respectively. The tax effect on the net gains during
1996, 1995 and 1994 was approximately $32,000, $22,000 and $11,000,
respectively. There were no sales of held-to-maturity securities during 1996,
1995 or 1994.
The amortized cost and estimated fair value of debt securities at
December 31, 1996, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
- ----------------------------------------------------------------------
Amortized Estimated
Available-for-Sale (In thousands) Cost Fair Value
- ----------------------------------------------------------------------
Due in one year or less. . . . . . . . . . . . $ 41,050 $ 41,189
Due after one year through five years. . . . . 155,030 155,195
Due after five years through ten years . . . . 21,508 21,500
Due after ten years. . . . . . . . . . . . . . 8,931 8,912
--------- ---------
226,519 226,796
Mortgage-backed securities . . . . . . . . . . 234,782 236,833
Collateralized mortgage obligations. . . . . . 43,320 43,259
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . $ 504,621 $ 506,888
--------- ---------
--------- ---------
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Amortized Estimated
Held-to-Maturity (In thousands) Cost Fair Value
- ----------------------------------------------------------------------
Due in one year or less. . . . . . . . . . . . $ 5,659 $ 5,695
Due after one year through five years. . . . . 12,280 12,408
Due after five years through ten years . . . . 19,908 20,473
Due after ten years. . . . . . . . . . . . . . 97,995 98,755
--------- ---------
135,842 137,331
Mortgage-backed securities . . . . . . . . . . 86,506 85,869
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . $ 222,348 $ 223,200
--------- ---------
--------- ---------
- ----------------------------------------------------------------------
At December 31, 1996, the Company held no collateralized mortgage
obligations that exceeded 10% of total shareholders' equity.
Available-for-sale and held-to-maturity securities carried at $452,478,000
and $398,637,000 at December 31, 1996 and 1995, respectively, were pledged to
secure borrowings, public and trust deposits and for other purposes required by
law. Securities sold under agreement to repurchase were collateralized by
available-for-sale and held-to-maturity securities with an aggregate carrying
value of $38,856,000 and $24,222,000 at December 31, 1996 and 1995,
respectively.
In October 1995, the FASB approved a one-time opportunity for companies to
reevaluate the classifications of their investment portfolio and transfer
securities from their held-to-maturity account to available-for-sale without
consequences to the classification of securities not transferred. The Company
utilized this opportunity to transfer $187 million of securities, based on
amortized cost from held-to-maturity to available-for-sale. The unrealized
losses on these securities at the time of transfer was $758,000.
6. LOANS
The composition of the loan portfolio at December 31 was as follows (in
thousands):
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Real estate. . . . . . . . . . . . . . . . . . . . . $ 871,432 $ 744,477
Commercial . . . . . . . . . . . . . . . . . . . . . 624,456 527,620
Consumer and other . . . . . . . . . . . . . . . . . 346,139 270,459
Agriculture. . . . . . . . . . . . . . . . . . . . . 222,081 224,637
----------- -----------
2,064,108 1,767,193
Less allowance for loan losses . . . . . . . . . . . (26,215) (22,712)
----------- -----------
Net Loans. . . . . . . . . . . . . . . . . . . . . . $2,037,893 $ 1,744,481
----------- -----------
----------- -----------
- -------------------------------------------------------------------------------
At December 31, 1996, real estate loans totaling $289,000,000 were pledged
to secure borrowings.
7. ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
Activity in the allowance was as follows (in thousands):
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Balance at beginning of year . . . . . . . $ 22,712 $ 17,333 $ 14,332
Allowance of acquired companies(1) . . . . 784 5,230 1,153
Provision charged to operating expense . . 6,757 2,711 1,839
Loans charged off. . . . . . . . . . . . . (4,971) (3,463) (1,215)
Recoveries of loans charged off. . . . . . 933 901 1,224
--------- --------- ---------
Balance at end of year . . . . . . . . . . $ 26,215 $ 22,712 $ 17,333
--------- --------- ---------
--------- --------- ---------
- -------------------------------------------------------------------------------
(1)includes only acquisitions of companies accounted for as purchases.
Nonaccrual loans totaled $12,796,000, $3,252,000 and $3,087,000 at
December 31, 1996, 1995 and 1994, respectively. The Company includes all loans
considered impaired under SFAS No. 114 in nonaccrual loans. The amount of
impaired loans was not material at December 31, 1996. Interest income of
$671,000 on nonaccrual loans would have been recorded during 1996 if the loans
had been current in accordance with their original terms. During 1996, the
Company recorded interest income of $176,000 related to loans that were on
nonaccrual status as of December 31, 1996.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Due to the nature of its business and the financing needs of its customers, the
Company is involved with a large number of financial instruments, the majority
for which an active market does not exist. Accordingly, the Company has used
various valuation techniques to estimate the fair value of its financial
instruments. These techniques are significantly affected by the assumptions
used, including the discount rate, the estimated timing and amount of cash flows
and the aggregation methods used to value similar instruments. In this regard,
the resulting fair value estimates cannot be substantiated by comparison to
independent markets and, in a majority of cases, could not be realized by the
immediate sale or settlement of the
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
instrument. Also, the estimates reflect a point in time valuation that could
change significantly based on changes in outside economic factors, such as the
general level of interest rates. The required disclosures exclude the estimated
values of nonfinancial instrument cash flows and are not intended to provide or
estimate a market value of the Company. The following assumptions were used by
the Company in estimating the fair value of the specific financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the statement of financial condition
approximate fair values for these items that have no interest rate or credit
risk.
FEDERAL FUNDS PURCHASED AND SHORT-TERM BORROWED FUNDS
The carrying amount approximates fair value due to the short maturity of the
instruments and floating interest rates which are tied to market conditions.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
Fair values for these items are based on available market quotes. If market
quotes are not available, fair values are based on market quotes of comparable
securities.
INTEREST-BEARING DEPOSITS
The fair value of interest-bearing deposits is estimated using a discounted cash
flow analysis using current market rates of interest-bearing deposits with
similar maturities to discount the future cash flows.
LOANS
The loan portfolio consists of both variable and fixed rate loans. The carrying
amounts of variable rate loans, a majority of which reprice within the next
three months and for which there has been no significant change in credit risk,
are assumed to approximate fair values. The fair values for fixed rate loans are
estimated using discounted cash flow analyses. The discount rates applied are
based on the current interest rates for loans with similar terms to borrowers of
similar credit quality.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and certain money market
deposits is defined by SFAS No. 107 to be equal to the amount payable on demand
at the date of the financial statements. Fair values for fixed rate certificates
of deposits are estimated using a discounted cash flow analyses that used the
interest rates currently being offered on certificates of deposit to discount
the aggregated expected monthly maturities.
SHORT-TERM BORROWINGS
Federal funds purchased, borrowings under repurchase agreements and other short-
term borrowings are at variable rates or have short-term maturities and their
fair value is assumed to approximate their carrying amount.
LONG-TERM DEBT
The fair value of long-term debt is estimated using a discounted cash flow
analysis using current market rates of debt with similar maturities to discount
the future cash flows.
LOAN COMMITMENTS AND LETTERS OF CREDIT
The majority of the Company's commitments have variable rates and do not expose
the Company to interest rate risk. The Company's commitments for fixed rate
loans are evaluated and it is estimated the probability of additional loans
being issued under these commitments is not significant and there is not a fair
value liability.
The estimated fair values of the Company's financial instruments at
December 31 are shown in the table below (in thousands):
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks. . . . . . $ 175,732 $ 175,732 $ 137,551 $ 137,551
Federal funds sold and resale
agreements . . . . . . . . . . . 3,600 3,600 25,965 25,965
Interest-bearing deposits. . . . . 3,598 3,605 3,213 3,254
Available-for-sale securities. . . 506,888 506,888 486,522 486,522
Held-to-maturity securities. . . . 222,348 223,200 230,820 231,704
Loans. . . . . . . . . . . . . . . 2,064,108 2,054,714 1,767,193 1,778,381
Allowance for loan losses. . . . . (26,215) (26,215) (22,712) (22,712)
--------- --------- --------- ---------
Net loans. . . . . . . . . . . . . 2,037,893 2,028,499 1,744,481 1,755,669
Financial liabilities:
Deposits:
Noninterest-bearing. . . . . . . $ 431,078 $ 431,078 $ 398,314 $ 398,314
Interest-bearing:
Savings and NOW. . . . . . . . 964,829 964,829 873,025 873,025
Time accounts over
$100,000 . . . . . . . . . . 233,875 234,248 202,520 202,875
Other time accounts. . . . . . 907,658 907,723 885,857 893,140
--------- --------- --------- ---------
Total deposits . . . . . . . . . . 2,537,440 2,537,878 2,359,716 2,367,354
Federal funds purchased and
repurchase agreements. . . . . . 78,369 78,369 50,102 50,102
Other short-term borrowings. . . . 169,265 169,265 40,779 40,779
Long-term debt . . . . . . . . . . 46,750 48,003 81,288 82,583
- -------------------------------------------------------------------------------------
</TABLE>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
In the normal course of business, the Company is party to financial instruments
with off-balance-sheet risk. These transactions enable customers to meet their
financing needs and enable the Company 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
December 31 were as follows (in thousands):
- ------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------
Commitments to extend credit . . . . . . . . . . . . . $389,604 $295,735
Standby letters of credit. . . . . . . . . . . . . . . 14,683 14,239
Commercial letters of credit . . . . . . . . . . . . . 990 1,149
- ------------------------------------------------------------------------------
Commitments to extend credit are legally binding and have fixed expiration
dates or other termination clauses. The Company's exposure to credit loss on
commitments to extend credit, in the event of nonperformance by the
counterparty, is represented by the contrac-
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
tual amounts of the commitments. The Company monitors its credit risk for
commitments to extend credit by applying the same credit policies in making
commitments as it does for loans and by obtaining collateral to secure
commitments based on management's credit assessment of the counterparty.
Collateral held varies, but may include marketable securities, receivables,
inventory, agricultural commodities, equipment and real estate. Because many of
the commitments are expected to expire without being drawn upon, total
commitment amounts do not necessarily represent the Company's future liquidity
requirements. In addition, the Company also offers various consumer credit line
products to its customers that are cancelable upon notification by the Company,
which are included above in commitments to extend credit.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the financial performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements.
Commercial letters of credit are issued by the Company on behalf of
customers to ensure payments of amounts owed or collection of amounts receivable
in connection with trade transactions. The Com-pany's exposure to credit loss in
the event of nonperformance by the counterparty is the contractual amount of the
letter of credit and represents the same exposure as that involved in extending
loans.
The amount of collateral obtained to support letters of credit is based on
a credit assessment of the counterparty. Collateral held may include marketable
securities, receivables, inventory, agricultural commodities, equipment and real
estate. Because the conditions under which the Company is required to fund
letters of credit may not materialize, the liquidity requirements of letters of
credit are expected to be less than the total outstanding commitments.
The Company's bank subsidiaries grant real estate, agricultural,
commercial, consumer and other loans and commitments and letters of credit to
customers throughout Colorado, Iowa, Minnesota, Nebraska, North Dakota, South
Dakota and Wisconsin. Although the Company has a diversified loan portfolio, the
ability of a significant portion of its debtors to honor their contracts is
dependent upon the agricultural economic sector. The maximum exposure to
accounting loss that could occur, if the borrowers fail to perform according to
the loan agreements and the underlying collateral proved to be of no value, is
the total loan portfolio balances and commitments and letters of credit.
10. BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31 consisted of the following (in
thousands):
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,031 $ 8,757
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . 59,359 47,953
Furniture, fixtures and equipment. . . . . . . . . . . . . 44,139 36,117
Leased property under capital lease obligations. . . . . . 5,932 4,500
-------- --------
119,461 97,327
Less accumulated depreciation. . . . . . . . . . . . . . . 53,756 45,793
-------- --------
$ 65,705 $ 51,534
-------- --------
-------- --------
- -------------------------------------------------------------------------------
11. SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
As of December 31, 1996, the Company's subsidiary banks had $152,000,000 in
Federal Home Loan Bank ("FHLB") borrowings, which are collateralized by various
investment securities and real estate loans. The interest rates on FHLB
borrowings are variable rates based on short-term market conditions and the term
of the advance, ranging from 5.33% to 7.15% at December 31, 1996. The Company's
subsidiaries had additional short-term borrowings of $3,203,000 outstanding at
December 31, 1996.
The Company has a short-term line of credit bearing interest at the Federal
Funds rate plus 2% that provides for borrowing up to $3,000,000 through
December 31, 1997, with a commitment fee of 0.2% on the unused amount. As of
December 31, 1996, the Company had no balance outstanding under this line of
credit. The Company has entered into an agreement that allows for its designated
agent to underwrite up to $15,000,000 in commercial paper and has obtained lines
of credit to support these borrowings. As of December 31, 1996, there was a
$14,062,000 commercial paper balance outstanding with a blended rate of 5.63%.
The terms of the lines of credit include certain covenants with which the
Company must comply. At December 31, 1996, the Company was in compliance with
all covenants pertaining to the lines of credit.
12. LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consisted of the following at December 31:
- -------------------------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
Parent Company:
Subordinated notes payable, interest at 7.75%,
payable monthly, maturing April 15, 2000,
unsecured. . . . . . . . . . . . . . . . . . . . . . $ 23,000 $ 23,000
Exchangeable subordinated notes payable,
interest at 9.00% payable quarterly, maturing
August 15, 2005, unsecured . . . . . . . . . . . . . 11,500 11,500
Term note payable to bank, interest at bank's base
rate (8.25% and 8.75% at December 31, 1996 and
1995, respectively), payable quarterly, principal
payments of $100,000 due annually through
October 1, 1999, unsecured . . . . . . . . . . . . . 400 400
Term note payable to bank, interest at Federal
Funds rate plus 2% (7.31% at December 31,
1996), payable quarterly, principal payments
equal to 6.25% of the amortized balance,
semi-annually through July 1, 2003 . . . . . . . . . 4,106 10,002
Subsidiaries:
Federal Home Loan Bank advances, interest
rates ranging from 5.06% to 8.33%, payable
quarterly, with maturities ranging from April 1,
1997 to March 10, 2010 . . . . . . . . . . . . . . . 4,829 36,386
Term Note payable to bank, interest at Reserve
Adjusted Eurodollar Rate plus 1.90% (7.40%
at December 31, 1996), payable quarterly,
principal payments of $75,000 due quarterly
through March 1, 2001, with remaining
balance due June 1, 2001 . . . . . . . . . . . . . . 2,850 -
Other Notes Payable . . . . . . . . . . . . . . . . . . 65 -
-------- --------
$ 46,750 $ 81,288
-------- --------
-------- --------
- -------------------------------------------------------------------------------
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
The 7.75% subordinated notes payable are redeemable, in whole or in part,
at the option of the Company at par plus accrued interest to the date of
redemption. These notes, of which 60% of the balance qualifies as Tier 2 capital
under the Federal Reserve Board guidelines, are direct obligations of the
Company and are subordinated to all other indebtedness of the Company. The terms
of the subordinated notes payable include certain covenants with which the
Company must comply. At December 31, 1996, the Company was in compliance with
all covenants pertaining to the subordinated notes payable.
In July 1995, the Company issued the exchangeable subordinated notes
("Exchangeable Notes") to retire acquisition related debt, support the Company's
growth strategy and for general corporate purposes. One hundred percent of the
balance of Exchangeable Notes qualify as Tier 2 Capital under Federal Reserve
Board guidelines. On any interest payment date beginning August 15, 1996, the
Company may require the holder to exchange all, but not part, of the
Exchangeable Notes for shares of the Company's cumulative perpetual preferred
stock (the "Exchange Stock"), at the rate of one share of Exchange Stock for
each $25 in principal amount of Exchangeable Notes. The Exchange Stock would
accrue cumulative dividends, payable quarterly, at a rate equal to the interest
rate on the Exchangeable Notes. The Exchangeable Notes are, and the Exchange
Stock would be, redeemable in whole or in part at any time after August 15, 1998
at the option of the Company at the declining redemption amounts set forth below
plus accrued interest or dividends:
If redeemed during the 12-month Percentage of
period beginning August 15 principal amount
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.0%
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.5%
2000 and thereafter . . . . . . . . . . . . . . . . . . . . . . 100.0%
- --------------------------------------------------------------------------------
Maturities of long-term debt outstanding, primarily of the parent company,
at December 31, 1996, were (in thousands):
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,052
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,639
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 784
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,072
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,947
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,256
---------
$ 46,750
---------
---------
13. SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
COMMON STOCK
In 1995, the Company extended its common stock market repurchase program
established in 1992, which provided for the systematic acquisition of up to
600,000 shares of the Company's common stock. In addition, the Company adopted a
new common stock market repurchase program providing for a systematic repurchase
of up to 600,000 additional shares. The shares acquired are used primarily for
the issuance of common stock upon exercise of stock options, issuance of common
stock under compensation plans, which include contributions directly to
employees or to an employee stock ownership plan, for preferred stock
conversion, and issuance of common stock for purposes that do not include
business combinations.
PREFERRED STOCK
On May 11, 1994, the Company completed an offering of 230,000 shares of
preferred stock, represented by 920,000 depositary shares. Each depositary share
represents ownership of one-quarter of a share of 7% cumulative convertible
preferred stock with a stated value of $100 and carries no voting rights. The
depositary shares are convertible into common stock at a conversion price of
$15.934 per share of common stock, which is equivalent to a rate of 1.569 shares
of common stock per depositary share. A total of 1,442,696 shares of authorized
common stock at December 31, 1996, was reserved for issuance upon the conversion
of the preferred stock. At December 31, 1996, the Company had 1,770,000 shares
of undesignated preferred stock with a par value of $.01 per share authorized,
but not outstanding.
SHAREHOLDERS' RIGHTS PLAN
The Company adopted a shareholders' rights plan in January 1995 that attached
one right to each share of common stock outstanding on January 19, 1995. Each
right entitles the holder to purchase one one-hundredth of a share of a new
series of junior participating preferred stock of the Company, which has an
initial exercise price of $63. The rights become exercisable only upon the
acquisition of 15% or more of the Company's voting stock, or an announcement of
a tender offer or exchange offer to acquire an interest of 15% or more by a
person or group, without the prior consent of the Company. If exercised, or if
the Company is acquired, each right entitles the holder to purchase, at the
exercise price, common stock with a market value equal to two times the exercise
price. The rights, which may be redeemed by the Company in certain
circumstances, expire January 5, 2005.
CAPITAL REQUIREMENTS
The Company 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
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company'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 Company to maintain minimum amounts and ratios of total and Tier 1
capital to risk-weighted assets, and of Tier 1 capital to average assets.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
As of December 31, 1996, the Company is considered well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-
based, and Tier 1 leverage ratios as set forth in the following table:
<TABLE>
<CAPTION>
At December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
Tier 1 Total Risk- Total Risk-
REGULATORY CAPITAL REQUIREMENTS: (Dollars in thousands) Capital Based Capital Leverage Based Assets
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum. . . . . . . . . . . . . . . . . . . . . . . . . . 4.00% 8.00% 3.00% N/A
Well-Capitalized . . . . . . . . . . . . . . . . . . . . . 6.00% 10.00% 5.00% N/A
- -----------------------------------------------------------------------------------------------------------------------
Community First Bankshares, Inc. . . . . . . . . . . . . . 8.88% 11.10% 6.62% $ 2,312,632
Bank Subsidiaries:
Community First National Bank, Worthington . . . . . . . . 9.21% 10.31% 6.87% $ 255,997
Community First National Bank, Little Falls. . . . . . . . 9.74% 10.96% 7.32% 178,583
Community First National Bank, Fergus Falls. . . . . . . . 9.22% 10.42% 6.82% 133,913
Community First National Bank, Fargo . . . . . . . . . . . 9.76% 10.94% 7.39% 287,776
Community First National Bank, Dickinson . . . . . . . . . 9.21% 10.40% 6.86% 109,775
Community First State Bank, Vermillion . . . . . . . . . . 9.54% 10.72% 6.98% 96,061
Community First State Bank, Redfield . . . . . . . . . . . 10.77% 11.87% 7.56% 120,170
Community First State Bank, Decorah. . . . . . . . . . . . 12.07% 13.32% 7.45% 101,980
Community First State Bank, Alliance . . . . . . . . . . . 9.53% 10.73% 7.84% 259,254
Community First State Bank, Spooner. . . . . . . . . . . . 10.48% 11.56% 7.64% 70,406
Colorado Community First National Bank, Fort Morgan. . . . 11.08% 12.27% 7.76% 118,233
Colorado Community First State Bank, Steamboat Springs . . 9.64% 10.81% 7.10% 86,821
Colorado Community First National Bank, Trinidad . . . . . 20.83% 21.76% 10.45% 36,368
Colorado Community First State Bank of Denver. . . . . . . 10.35% 11.33% 7.62% 438,967
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
Tier 1 Total Risk- Total Risk-
REGULATORY CAPITAL REQUIREMENTS: (Dollars in thousands) Capital Based Capital Leverage Based Assets
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum. . . . . . . . . . . . . . . . . . . . . . . . . . 4.00% 8.00% 3.00% N/A
Well-Capitalized . . . . . . . . . . . . . . . . . . . . . 6.00% 10.00% 5.00% N/A
- -----------------------------------------------------------------------------------------------------------------------
Community First Bankshares, Inc. . . . . . . . . . . . . . 8.51% 11.18% 6.10% $ 1,974,179
Bank Subsidiaries:
Community First National Bank, Worthington . . . . . . . . 9.50% 10.75% 6.58% $ 218,760
Community First National Bank, Little Falls. . . . . . . . 9.44% 10.61% 7.04% 175,964
Community First National Bank, Fergus Falls. . . . . . . . 8.75% 9.92% 6.52% 124,622
Community First National Bank, Fargo . . . . . . . . . . . 8.95% 10.16% 6.67% 266,701
Community First National Bank, Dickinson . . . . . . . . . 8.95% 10.08% 6.06% 67,568
Community First National Bank, Beach(1). . . . . . . . . . 11.70% 12.13% 7.27% 27,754
Community First State Bank, Vermillion . . . . . . . . . . 10.30% 11.47% 7.36% 89,499
Community First State Bank, Redfield . . . . . . . . . . . 11.41% 12.55% 7.95% 114,206
Community First State Bank, Decorah. . . . . . . . . . . . 14.80% 16.05% 9.57% 106,367
Community First State Bank, Alliance . . . . . . . . . . . 9.57% 10.81% 7.14% 232,426
Community First State Bank, Spooner. . . . . . . . . . . . 12.04% 13.25% 8.17% 59,414
Colorado Community First National Bank, Fort Morgan. . . . 11.98% 13.17% 7.87% 108,852
Colorado Community First State Bank, Steamboat Springs . . 10.33% 10.87% 7.08% 58,826
Colorado Community First National Bank, Fraser(2). . . . . 9.86% 11.02% 7.03% 18,976
Mountain Parks Bank - East(3). . . . . . . . . . . . . . . 12.42% 12.99% 9.07% 120,405
Mountain Parks Bank - West(3). . . . . . . . . . . . . . . 13.65% 14.82% 9.28% 107,410
Boulder Valley Bank and Trust(3) . . . . . . . . . . . . . 9.33% 10.59% 10.62% 80,454
The Bank of Louisville(3). . . . . . . . . . . . . . . . . 13.86% 15.11% 14.44% 43,137
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Merged into Community First National Bank, Dickinson in January, 1996.
(2)Merged into Colorado Community First State Bank, Steamboat Springs in April,
1996.
(3)Merged and renamed, Colorado Community First State Bank of Denver in
December, 1996.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
14. EMPLOYEE BENEFIT PLANS
- --------------------------------------------------------------------------------
Stock Option Plan - During 1996, the Company approved the 1996 Stock Option Plan
under which an additional 2,000,000 shares of the Company's common stock will be
reserved for granting of future stock options. Similar to the 1987 Stock Option
Plan, the Company may grant key employees incentive or nonqualified options to
purchase common stock of the Company at fair market value on the date of the
grant, as determined by the Company. The options vest ratably over a three-year
period and are exercisable over a five-year term starting one year after the
date of grant. Stock options outstanding under the plans are as follows:
1996 1995
- --------------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Price Per Options Price Per
Outstanding Share Outstanding Share
- --------------------------------------------------------------------------------
Beginning of Year. . . . . . . 499,777 $ 13.66 398,986 $ 12.78
Options Granted . . . . . . 165,388 21.42 169,207 14.55
Options Exercised . . . . . (75,905) 11.68 (51,284) 9.60
Options Forfeited . . . . . (25,605) 18.31 (17,132) 14.23
-------- --------- -------- ---------
End of Year. . . . . . . . . . 563,655 $ 16.02 499,777 $ 13.66
-------- --------- -------- ---------
-------- --------- -------- ---------
Exercisable at end of year . . 281,463 $ 14.10 206,846 $ 12.84
Weighted average fair
value of options granted. . $3.94 $3.27
- --------------------------------------------------------------------------------
The range of exercise prices and the weighted average remaining contractual
life of the options outstanding at December 31, 1996, were as follows:
- --------------------------------------------------------------------------------
Options Weighted Weighted
Outstanding at Average Average
Range of Exercise December 31, Exercise Price Remaining
Prices Per Share 1996 Per Share Contractual Life
- --------------------------------------------------------------------------------
$21.25 to $23.38 . . . . . . . 154,388 $ 21.37 4.1 years
$12.50 to $14.75 . . . . . . . 409,267 14.04 2.1 years
- --------------------------------------------------------------------------------
At December 31, 1996, a total of 2,576,760 shares of authorized common
stock was reserved for exercise of options granted under the 1996 and 1987 Stock
Option Plans.
As described in Note 4, the Company has elected to measure compensation
costs as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, does not recognize compensation expense. SFAS No.
123 requires the Company to disclose pro forma information reflecting net income
and earnings per share had the Company elected to record compensation expense
based on the fair market value method described in SFAS 123. The fair value of
the options was estimated at the grant date using a Black-Sholes option pricing
model. Option valuation models require the input of highly subjective
assumptions. Because the Company's employee stock options have characteristics
significantly different from traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The following weighted-average assumptions were used in the valuation
model: risk-free interest rates of 5.15 percent and 7.45 percent in 1996 and
1995; dividend yield of 2.50 in both 1996 and 1995; stock price volatility
factors of .20 in both 1996 and 1995; and expected life of options of four years
in both 1996 and 1995.
The pro forma disclosures, listed below, include options granted in 1996
and 1995 and are not likely to be representative of the pro forma disclosures
for future years. The estimated fair value of the options is amortized to
expense over the options' vesting period.
- --------------------------------------------------------------------------------
(In thousands, except per share data) 1996 1995
- --------------------------------------------------------------------------------
Pro forma net income . . . . . . . . . . . . . . . . . . . $ 30,662 $ 28,231
Pro forma net income (fully diluted) . . . . . . . . . . . 32,272 29,841
Pro forma earnings per share:
Primary. . . . . . . . . . . . . . . . . . . . . . . . $ 1.84 $ 1.82
Fully diluted. . . . . . . . . . . . . . . . . . . . . 1.78 1.73
- --------------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan ("ESOP") that is a defined
contribution plan covering all employees who are 21 years of age with more than
one year of service. Contributions are calculated using a formula based on the
Company's return on average assets on a yearly basis. The contribution expense
was $859,000, $444,000 and $267,000 in 1996, 1995 and 1994, respectively.
PROFIT-SHARING PLAN
The Company offers a contributory profit-sharing and thrift plan that qualifies
under section 401(k) of the Internal Revenue Code. The plan covers all employees
who are 21 years of age with more than one year of service. The plan provides
for an employer-matching contribution of 50% based on each participant's
eligible contribution for each plan year, subject to a limitation of the lesser
of 6% of the participant's annual compensation or the maximum amount prescribed
by the Internal Revenue Code. The Company's contribution was $727,000, $712,000
and $362,000 in 1996, 1995 and 1994, respectively.
15. RESTRICTIONS ON CASH AND DUE FROM BANKS
- --------------------------------------------------------------------------------
Bank subsidiaries are required to maintain average reserve balances with the
Federal Reserve Bank. Balances of $12,518,000 and $20,140,000 at December 31,
1996 and 1995, respectively, exceeded required amounts.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
16. INCOME TAXES
- -------------------------------------------------------------------------------
The components of the provision for income taxes were (in thousands):
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Federal:
Current . . . . . . . . . . . . . . . . . . $ 18,455 $ 18,008 $ 12,646
Deferred. . . . . . . . . . . . . . . . . . (3,444) (3,546) (883)
-------- -------- --------
15,011 14,462 11,763
State:
Current . . . . . . . . . . . . . . . . . . 3,458 3,209 2,337
Deferred. . . . . . . . . . . . . . . . . . (462) (463) (148)
-------- -------- --------
2,996 2,746 2,189
-------- -------- --------
Provision for income taxes . . . . . . . . . . $ 18,007 $ 17,208 $ 13,952
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------
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):
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Tax at statutory rate (35%). . . . . . . . . . $ 17,681 $ 16,506 $ 12,838
State income tax,
net of federal tax benefit. . . . . . . . . 1,805 1,812 1,488
Minority interest. . . . . . . . . . . . . . . - 61 326
Tax-exempt interest. . . . . . . . . . . . . . (1,736) (2,376) (1,087)
Amortization of goodwill . . . . . . . . . . . 822 531 285
Other. . . . . . . . . . . . . . . . . . . . . (565) 674 102
-------- -------- --------
Provision for income taxes . . . . . . . . . . $ 18,007 $ 17,208 $ 13,952
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------
Deferred income tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting
purposes. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995, are as follows (in thousands):
- --------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------
Deferred tax assets:
Loan loss reserves. . . . . . . . . . . . . $ 8,737 $ 5,675
Contingency reserve . . . . . . . . . . . . 748 537
Deferred compensation . . . . . . . . . . . 863 477
Deferred loan fees. . . . . . . . . . . . . 316 190
Other . . . . . . . . . . . . . . . . . . . 566 818
-------- --------
11,230 7,697
Deferred tax liabilities:
Unrealized gains. . . . . . . . . . . . . . 897 1,220
Depreciation. . . . . . . . . . . . . . . . 87 501
Purchase accounting . . . . . . . . . . . . 151 164
Other . . . . . . . . . . . . . . . . . . . 297 243
-------- --------
1,432 2,128
-------- --------
Net deferred tax assets. . . . . . . . . . . . $ 9,798 $ 5,569
-------- --------
-------- --------
- --------------------------------------------------------------------
The realization of the Company's deferred tax assets is dependent upon the
Company's ability to generate taxable income in future periods and the reversal
of deferred tax liabilities during the same period. The Company has evaluated
the available evidence supporting the realization of its deferred tax assets and
determined it is more likely than not that the assets will be realized.
17. COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
Total rent expense was $1,318,000, $1,789,000 and $1,350,000 in 1996, 1995 and
1994, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
leases with initial or remaining terms of one year or more, consisted of the
following at December 31, 1996:
- -------------------------------------------------------------------------------
(In thousands) Operating Capital
- -------------------------------------------------------------------------------
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 677 $ 1,024
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 537 1,005
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 437 836
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 335 763
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1
-------- --------
$ 1,996 $ 3,629
Executory costs (taxes). . . . . . . . . . . . . . . . . (179)
--------
Net minimum lease payments . . . . . . . . . . . . . . . 3,450
Less:
Amount representing interest. . . . . . . . . . . . . (333)
--------
Present value of net minimum lease payments . . . . . $ 3,117
--------
--------
- -------------------------------------------------------------------------------
As a result of certain legal proceedings related to the May 1995 purchase
of Alliance, 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
December 31, 1996, 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.
In the normal course of business, there are various outstanding legal
proceedings, claims, commitments and contingent liabilities. In the opinion of
management, the Company and its subsidiaries will not be materially affected by
the outcome of such matters.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
18. COMMUNITY FIRST BANKSHARES, INC.
- --------------------------------------------------------------------------------
(Parent Company Only)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------
December 31 (In thousands) 1996 1995
- -------------------------------------------------------------------------------
ASSETS
Cash and due from subsidiary banks . . . . . . . . . . . $ 6,548 $ 6,106
Investment in subsidiaries . . . . . . . . . . . . . . . 275,100 241,623
Furniture and equipment. . . . . . . . . . . . . . . . . 1,657 1,148
Receivable from subsidiaries . . . . . . . . . . . . . . 2,336 790
Other assets . . . . . . . . . . . . . . . . . . . . . . 17,389 13,441
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . $303,030 $263,108
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings. . . . . . . . . . . . . . . . . . $ 14,164 $ 10,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . 39,006 44,902
Other liabilities. . . . . . . . . . . . . . . . . . . . 5,289 4,202
Shareholders' equity . . . . . . . . . . . . . . . . . . 244,571 204,004
-------- --------
Total liabilities and shareholders' equity . . . . . . . $303,030 $263,108
-------- --------
-------- --------
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
Years ended December 31 (In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Income:
Dividends from subsidiaries . . . . . . . . . $ 29,536 $ 34,453 $ 24,965
Service fees from subsidiaries. . . . . . . . 2,948 3,147 2,982
Interest income . . . . . . . . . . . . . . . 106 607 622
Other . . . . . . . . . . . . . . . . . . . . 467 (304) 91
-------- -------- --------
Total income . . . . . . . . . . . . . . . . . . 33,057 37,903 28,660
Expense:
Interest expense. . . . . . . . . . . . . . . 4,403 3,961 2,900
Other expense . . . . . . . . . . . . . . . . 17,323 11,862 9,002
-------- -------- --------
Total expense. . . . . . . . . . . . . . . . . . 21,726 15,823 11,902
-------- -------- --------
Income before income tax benefit, equity in
undistributed income of subsidiaries and
cumulative effect of accounting change. . . . 11,331 22,080 16,758
Income tax benefit . . . . . . . . . . . . . . . 6,799 4,423 2,889
-------- -------- --------
Income before undistributed income of
subsidiaries and cumulative effect of
accounting change . . . . . . . . . . . . . . 18,130 26,503 19,647
Equity in undistributed income of subsidiaries . 14,380 3,450 3,082
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729
-------- -------- --------
-------- -------- --------
Net income applicable to common equity . . . . . $ 30,900 $ 28,343 $21,638
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Years ended December 31 (In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in income of subsidiaries . . . . . (43,916) (37,903) (28,047)
Depreciation . . . . . . . . . . . . . . . 488 474 400
(Decrease) increase in interest payable. . (32) 64 (25)
Other, net . . . . . . . . . . . . . . . . (7,650) 1,213 1,725
-------- -------- --------
Net cash used in operating activities. . . . . . (18,600) (6,199) (3,218)
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from subsidiaries . . . . . . 29,536 34,453 24,965
Purchases of stock in subsidiaries . . . . . . . (14,743) (71,581) (16,858)
Net loans to subsidiaries. . . . . . . . . . . . (1,585) 10,197 (14,616)
Purchases of available-for-sale securities . . . - (4,393) (44,165)
Sales of available-for-sale securities,
net of gains. . . . . . . . . . . . . . . . . - 9,543 43,489
Net increase in furniture and equipment. . . . . (997) (578) (208)
-------- -------- --------
Net cash provided by (used in) investing
activities. . . . . . . . . . . . . . . . . . 12,211 (22,359) (7,393)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings. . . . . . 4,062 7,145 81
Proceeds from issuance of long-term debt . . . . 18,162 44,006 10,685
Repayment of long-term debt. . . . . . . . . . . (24,058) (27,302) (13,346)
Net proceeds from issuance of
common stock. . . . . . . . . . . . . . . . . 15,044 11,718 66
Net proceeds from issuance of
preferred stock . . . . . . . . . . . . . . . - - 21,952
Purchase of common stock held in treasury. . . . (1,535) (56) (1,384)
Sale of common stock held in treasury. . . . . . 3,829 754 451
Retirement of common stock . . . . . . . . . . . (349) - -
Preferred stock dividends paid . . . . . . . . . (1,610) (1,610) (1,091)
Common stock dividends paid. . . . . . . . . . . (6,714) (5,279) (3,794)
-------- -------- --------
Net cash provided by financing activities. . . . 6,831 29,376 13,620
-------- -------- --------
Net increase in cash and cash equivalents. . . . 442 818 3,009
Cash and cash equivalents at
beginning of year . . . . . . . . . . . . . . 6,106 5,288 2,279
-------- -------- --------
Cash and cash equivalents at end of year . . . . $ 6,548 $ 6,106 $ 5,288
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
Certain restrictions exist regarding the extent to which bank subsidiaries
may transfer funds to the Company in the form of dividends, loans or advances.
Federal law prevents the Company from borrowing from bank subsidiaries unless
the loans are secured by specified U.S. obligations. Secured loans to the
Company or any individual affiliate are generally limited in amount to 10% of
the banks' equity. Further, loans to the Company and all affiliates in total are
limited to 20% of the banks' equity. As of December 31, 1996 and 1995,
$27,066,000 and $23,978,000, respectively, of individual subsidiary banks'
capital was available for credit extension to the parent company. At
December 31, 1996 and 1995, bank subsidiaries had no credit extended to the
Company.
Payment of dividends to the Company by its subsidiary banks is subject to
various limitations by bank regulatory agencies. Undistributed earnings of the
bank subsidiaries available for distribution as dividends under these
limitations were $26,691,000 and $20,216,000 as of December 31, 1996 and 1995,
respectively.
19. RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company and its subsidiaries,
including their immediate families, companies in which they are principal owners
and trusts in which they are involved, are loan customers of the bank
subsidiaries. The aggregate dollar amounts of these loans were $12,700,000 and
$15,400,000 at December 31, 1996 and 1995, respectively. During 1996, 1995 and
1994, $5,779,000, $6,115,000 and $40,830,000 of new loans were made and
repayments totaled $8,479,000, $23,878,000 and $42,745,000, respectively.
20. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Years ended December 31 (In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Noncash transfers of held-to-maturity
securities to available-for-sale securities. . $ 22,659 $187,320 $ -
Unrealized (loss) gain on available-for-sale
securities . . . . . . . . . . . . . . . . . . (993) 11,545 (13,128)
Income taxes paid. . . . . . . . . . . . . . . . 23,485 20,745 15,790
Interest paid. . . . . . . . . . . . . . . . . . 94,185 76,154 52,214
- -------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S LETTER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COMMUNITY FIRST BANKSHARES, INC.
We have audited the accompanying consolidated statements of financial condition
of Community First Bankshares, Inc., and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the consolidated
financial statements of Mountain Parks Financial Corporation, which statements
reflect total assets constituting 16% of the related consolidated financial
statements totals for 1995, and which reflect net income constituting 24% and
25% of the related consolidated totals for the years ended December 31, 1995 and
1994, respectively. We also did not audit the 1994 consolidated financial
statements of Minowa Bancshares, Inc. and First Community Bankshares, Inc.,
which statements reflect net income constituting 8% and 9%, respectively, for
the year ended December 31, 1994, of the related consolidated financial
statement totals. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to data
included for Mountain Parks Financial Corporation, Minowa Bancshares, Inc. and
First Community Bankshares, Inc. is based solely on the reports of the other
auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for 1995 and 1994, the reports of
other auditors, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Community First
Bankshares, Inc., and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Minneapolis, Minnesota
January 23, 1997, except for Note 3,
as to which the date is February 28, 1997.
- --------------------------------------------------------------------------------
43
<PAGE>
CONSOLIDATED STATEMENT OF CONDITION - Community First Bankshares, Inc.
FIVE YEAR SUMMARY
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
December 31 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks. . . . . . . . . . . . . $ 175,732 $ 137,551 $ 96,232 $ 85,468 $ 70,518
Federal funds sold and securities purchased
under agreement to resell . . . . . . . . . . 3,600 25,965 8,135 35,685 46,826
Interest-bearing deposits. . . . . . . . . . . . 3,598 3,213 6,377 10,272 12,288
Available-for-sale securities. . . . . . . . . . 506,888 486,522 231,364 326,041 185,077
Held-to-maturity securities:
U.S. Treasury . . . . . . . . . . . . . . . . - - 72,519 44,162 17,556
U.S. Government agencies. . . . . . . . . . . 879 3,318 44,957 34,654 116,825
Mortgage-backed securities. . . . . . . . . . 86,506 106,429 185,753 177,381 145,592
Collateralized mortgage obligations . . . . . - - 22,811 25,151 63,890
State and political securities. . . . . . . . 56,694 55,267 43,672 34,990 29,680
Other . . . . . . . . . . . . . . . . . . . . 78,269 65,806 12,163 11,343 20,458
---------- ---------- ---------- ---------- ----------
Total securities . . . . . . . . . . . . . 729,236 717,342 613,239 653,722 579,078
Loans. . . . . . . . . . . . . . . . . . . . . . 2,064,108 1,767,193 1,330,146 1,037,666 813,550
Less: allowance for loan losses . . . . . . . (26,215) (22,712) (17,333) (14,332) (11,196)
---------- ---------- ---------- ---------- ----------
Net loans . . . . . . . . . . . . . . . . . . 2,037,893 1,744,481 1,312,813 1,023,334 802,354
Other assets . . . . . . . . . . . . . . . . . . 166,339 141,424 93,823 75,313 65,211
---------- ---------- ---------- ---------- ----------
Total assets. . . . . . . . . . . . . . . . . $3,116,398 $2,769,976 $2,130,619 $1,883,794 $1,576,275
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . $ 431,078 $ 398,314 $ 315,667 $ 273,382 $ 200,104
Interest-bearing. . . . . . . . . . . . . . . 2,106,362 1,961,402 1,478,898 1,354,607 1,174,755
---------- ---------- ---------- ---------- ----------
Total deposits . . . . . . . . . . . . . . 2,537,440 2,359,716 1,794,565 1,627,989 1,374,859
Short-term borrowings. . . . . . . . . . . . . . 247,634 90,881 113,469 62,194 59,452
Long-term debt . . . . . . . . . . . . . . . . . 46,750 81,288 38,092 48,354 18,015
Other liabilities. . . . . . . . . . . . . . . . 40,003 34,087 26,792 20,186 20,038
---------- ---------- ---------- ---------- ----------
Total liabilities . . . . . . . . . . . . . . 2,871,827 2,565,972 1,972,918 1,758,723 1,472,364
Shareholders' equity . . . . . . . . . . . . . . 244,571 204,004 157,701 125,071 103,911
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity. . $3,116,398 $2,769,976 $2,130,619 $1,883,794 $1,576,275
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
CONSOLIDATED STATEMENT OF INCOME - Community First Bankshares, Inc.
FIVE YEAR SUMMARY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,530 $ 150,948 $ 104,012 $ 81,931 $ 73,410
Investment securities . . . . . . . . . . . . . . . . . 44,936 40,210 38,032 37,479 38,890
Other . . . . . . . . . . . . . . . . . . . . . . . . . 960 1,710 1,193 1,736 3,009
--------- --------- --------- --------- ---------
Total interest income. . . . . . . . . . . . . . . . 229,426 192,868 143,237 121,146 115,309
INTEREST EXPENSE:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . 81,655 71,780 46,560 42,873 47,727
Short-term and other borrowings . . . . . . . . . . . . 9,247 6,184 4,029 1,994 2,072
Long-term debt. . . . . . . . . . . . . . . . . . . . . 4,332 4,927 2,879 2,404 1,071
--------- --------- --------- --------- ---------
Total interest expense . . . . . . . . . . . . . . . 95,234 82,891 53,468 47,271 50,870
--------- --------- --------- --------- ---------
Net interest income. . . . . . . . . . . . . . . . . . . . 134,192 109,977 89,769 73,875 64,439
Provision for loan losses. . . . . . . . . . . . . . . . . 6,757 2,711 1,839 2,149 2,433
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses. . . . 127,435 107,266 87,930 71,726 62,006
NONINTEREST INCOME:
Service charges on deposit accounts . . . . . . . . . . 12,328 10,116 8,467 7,571 6,328
Insurance commissions . . . . . . . . . . . . . . . . . 5,213 4,283 3,777 3,442 1,963
Fees from fiduciary activities. . . . . . . . . . . . . 3,332 2,718 2,157 2,103 1,993
Net gains on sales of securities. . . . . . . . . . . . 93 52 99 1,910 1,101
Other . . . . . . . . . . . . . . . . . . . . . . . . . 6,404 5,319 4,492 3,132 3,255
--------- --------- --------- --------- ---------
Total noninterest income . . . . . . . . . . . . . . 27,370 22,488 18,992 18,158 14,640
NONINTEREST EXPENSE:
Salaries and employee benefits. . . . . . . . . . . . . 54,870 42,796 35,083 29,931 25,188
Net occupancy . . . . . . . . . . . . . . . . . . . . . 15,085 10,563 9,353 8,413 6,675
FDIC insurance. . . . . . . . . . . . . . . . . . . . . 669 2,532 3,720 3,193 2,812
Professional service fees . . . . . . . . . . . . . . . 3,881 4,011 3,457 3,776 4,424
Data processing and loan servicing fees . . . . . . . . 1,506 1,607 856 722 752
Other . . . . . . . . . . . . . . . . . . . . . . . . . 28,277 21,084 17,772 14,819 13,141
--------- --------- --------- --------- ---------
Total noninterest expense. . . . . . . . . . . . . . 104,288 82,593 70,241 60,854 52,992
--------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of accounting change . . . . . . . . . . . . . . 50,517 47,161 36,681 29,030 23,654
Provision for income taxes . . . . . . . . . . . . . . . . 18,007 17,208 13,952 10,775 8,546
--------- --------- --------- --------- ---------
Income before cumulative effect of accounting change . . . 32,510 29,953 22,729 18,255 15,108
Cumulative effect of accounting change . . . . . . . . . . - - - 359 -
--------- --------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729 $ 18,614 $ 15,108
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Preferred dividend . . . . . . . . . . . . . . . . . . . . 1,610 1,610 1,091 - -
Net income applicable to common equity . . . . . . . . . . $ 30,900 $ 28,343 $ 21,638 $ 18,614 $ 15,108
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common and common equivalent share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . $ 1.85 $ 1.82 $ 1.48 $ 1.32 $ 1.07
Fully diluted . . . . . . . . . . . . . . . . . . . . . $ 1.79 $ 1.74 $ 1.42 $ 1.30 $ 1.07
Average common shares outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . 16,699,021 15,543,129 14,580,309 14,098,585 14,080,526
Fully diluted . . . . . . . . . . . . . . . . . . . . . 18,154,966 17,276,050 16,136,433 14,396,532 14,087,606
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
QUARTERLY RESULTS OF OPERATIONS Community First Bankshares, Inc.
(Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Interest income. . . . . . . . . . . . . . . . . . . . . . $ 53,664 $ 55,537 $ 58,711 $ 61,514
Interest expense . . . . . . . . . . . . . . . . . . . . . 22,651 22,871 24,002 25,710
--------- --------- --------- ---------
Net interest income. . . . . . . . . . . . . . . . . . . . 31,013 32,666 34,709 35,804
Provision for loan losses. . . . . . . . . . . . . . . . . 915 1,416 2,241 2,185
--------- --------- --------- ---------
Net interest income after provision for loan losses. . . . 30,098 31,250 32,468 33,619
Net gains on sales of securities . . . . . . . . . . . . . 3 (1) (8) 100
Noninterest income . . . . . . . . . . . . . . . . . . . . 5,938 6,701 6,499 8,138
Noninterest expense. . . . . . . . . . . . . . . . . . . . 22,868 23,813 25,810 31,797
--------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . . . . . . 13,171 14,137 13,149 10,060
Provision for income taxes . . . . . . . . . . . . . . . . 4,590 4,849 4,556 4,012
--------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . 8,581 9,288 8,593 6,048
Preferred stock dividends. . . . . . . . . . . . . . . . . 402 403 403 402
--------- --------- --------- ---------
Net income applicable to common equity . . . . . . . . . . $ 8,179 $ 8,885 $ 8,190 $ 5,646
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common and common equivalent shares:
Primary. . . . . . . . . . . . . . . . . . . . . . . . . $ .50 $ .54 $ .49 $ .33
Fully diluted. . . . . . . . . . . . . . . . . . . . . . $ .48 $ .52 $ .47 $ .32
Average common and common equivalent shares:
Primary. . . . . . . . . . . . . . . . . . . . . . . . .16,433,410 16,469,875 16,695,233 17,195,727
Fully diluted. . . . . . . . . . . . . . . . . . . . . .17,896,237 17,935,189 18,145,732 18,664,010
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Interest income. . . . . . . . . . . . . . . . . . . . . . $ 40,324 $ 46,409 $ 51,755 $ 54,380
Interest expense . . . . . . . . . . . . . . . . . . . . . 16,802 20,181 22,742 23,166
--------- --------- --------- ---------
Net interest income. . . . . . . . . . . . . . . . . . . . 23,522 26,228 29,013 31,214
Provision for loan losses. . . . . . . . . . . . . . . . . 585 582 762 782
--------- --------- --------- ---------
Net interest income after provision for loan losses. . . . 22,937 25,646 28,251 30,432
Net gains on sales of securities . . . . . . . . . . . . . (41) (94) 8 179
Noninterest income . . . . . . . . . . . . . . . . . . . . 4,763 5,492 6,201 5,980
Noninterest expense. . . . . . . . . . . . . . . . . . . . 17,583 20,469 21,484 23,057
--------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . . . . . . 10,076 10,575 12,976 13,534
Provision for income taxes . . . . . . . . . . . . . . . . 3,716 4,001 4,581 4,910
--------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . 6,360 6,574 8,395 8,624
Preferred stock dividends. . . . . . . . . . . . . . . . . 402 402 404 402
--------- --------- --------- ---------
Net income applicable to common equity . . . . . . . . . . $ 5,958 $ 6,172 $ 7,991 $ 8,222
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common and common equivalent shares:
Primary . . . . . . . . . . . . . . . . . . . . . . . . $ .40 $ .41 $ .50 $ .50
Fully diluted . . . . . . . . . . . . . . . . . . . . . $ .38 $ .39 $ .48 $ .48
Average common and common equivalent shares:
Primary . . . . . . . . . . . . . . . . . . . . . . . .14,751,100 15,027,266 16,063,302 16,329,391
Fully diluted . . . . . . . . . . . . . . . . . . . . .16,684,541 16,764,555 17,548,746 17,808,232
- --------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
MARKET PRICE RANGE OF COMMON SHARES
The Company's common shares trade on the Nasdaq National Market under the symbol
CFBX. The following table sets forth for the periods indicated the high and low
sales prices for the Company's common stock:
- ---------------------------------------------------------------------------
1996 1995
High Low High Low
- ---------------------------------------------------------------------------
First Quarter. . . . . . . . . 22 3/4 20 15 3/4 13 1/4
Second Quarter . . . . . . . . 24 1/4 22 1/4 17 14 1/8
Third Quarter. . . . . . . . . 23 7/8 22 1/2 19 1/4 16 3/4
Fourth Quarter . . . . . . . . 28 3/4 23 1/8 23 3/4 19
- ---------------------------------------------------------------------------
SHAREHOLDERS
As of February 14, 1997, the Company had 1,080 shareholders of record and an
estimated 3,400 additional beneficial holders whose stock was held in street
name by brokerage houses.
DIVIDEND POLICY
The Board of Directors has adopted a policy by declaring regular quarterly
dividends equal to approximately 25 percent of earnings. A dividend of 12 cents
per share was paid quarterly in 1995, and the rate was increased to 14 cents per
share for each of the first three quarters in 1996 and increased to 16 cents per
share for the fourth quarter of 1996.
56
<PAGE>
EXHIBIT 21.1
COMMUNITY FIRST BANKSHARES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C>
OWNERSHIP
SUBSIDIARY BANK: LOCATION: PERCENTAGE
Community First National Bank Fergus Falls, MN 100.000%
Community First National Bank Fargo, ND 100.000%
Community First State Bank Vermillion, ND 100.000%
Community First State Bank Redfield, SD 100.000%
Community First State Bank Decorah, IA 99.880%
Community First State Bank Alliance, NE 99.537%
Community First State Bank Spooner, WI 99.493%
Colorado Community First National Bank Ft. Morgan, CO 100.000%
Colorado Community First State Bank Steamboat Springs, CO 100.000%
Colorado Community First National Bank Trinidad, CO 100.000%
Colorado Community First State Bank - CO Denver, CO 100.000%
NONBANK SUBSIDIARIES:
Community First Financial, Inc. Fargo, ND 100.000%
Community First Service Corporation Fargo, ND 100.000%
Community Insurance, Inc. Fargo, ND 100.000%
Community First Properties, Inc. Fargo, ND 100.000%
Mountain Parks Data Corporation Fargo, ND 100.000%
OTHER AFFILIATES:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Vail Banks Inc. Vail, CO 24.690%
SUBSIDIARIES OF SUBSIDIARIES (100% OWNED):
Community First Insurance Agencies, Inc. Fargo, SD (Subsidiary of Community
First State Bank [Vermillion,
SD])
CFIN, Inc. Las Vegas, NV (Subsidiary of Community
First State Bank [Spooner])
<PAGE>
OWNERSHIP
SUBSIDIARIES OF SUBSIDIARIES: (CONTINUED) LOCATION PERCENTAGE
Equity Lending, Inc. Edina, MN (Subsidiary of Colorado
Community First State Bank
- CO [Denver, CO])
Mountain Parks Financial Services, Inc. Denver, CO Subsidiary of Colorado
Community First State Bank
- CO [Denver, CO])
Community First Minnesota Holdings, Inc. Georgetown, (Subsidiary of
British Community First National
Cayman Islands Bank [Fergus Falls])
CFIRE, Inc. Fargo, ND (Subsidiary of Community
First Minnesota Holdings,
Inc.)
Community First Colorado Holdings, Inc. Georgetown, (Subsidiary of
British Community Colorado
Cayman Islands Community First National
Bank [Ft. Morgan])
Colorado CFIRE, Inc. Fargo, ND (Subsidiary of Community
First Colorado Holdings,
Inc.)
</TABLE>
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Community First Bankshares, Inc. of our report dated January 23, 1997, except
Note 3, as to which the date is February 28, 1997, included in the 1996 Annual
Report to Shareholders of Community First Bankshares, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-44921) and in the related Prospectus pertaining to the
Community First Bankshares, Inc. 1987 Stock Option Plan and in the Registration
Statement (Form S-8, No. 33-48160) and in the related Prospectus pertaining to
the Community First Bankshares, Inc. 401(k) Retirement Plan of our report dated
January 23, 1997, with respect to the consolidated financial statements of
Community First Bankshares, Inc. incorporated by reference in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
Minneapolis, Minnesota
March 24,1997
