<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): December 18, 1996
COMMUNITY FIRST BANKSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 0-19368 46-0391436
- ---------------------------- ----------------------- -------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
520 Main Avenue
Fargo, North Dakota 58124-0001
- --------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (701) 298-5600
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 18, 1996, Mountain Parks Financial Corp. ("Mountain Parks") was
merged with and into Community First Bankshares, Inc. ("CFB" or the "Company")
pursuant to an Agreement and Plan of Reorganization dated as of June 25, 1996 by
and between CFB and Mountain Parks (the "Merger Agreement"). The 4,060,135
shares of outstanding Mountain Parks common stock as of the effective date of
the merger were converted into approximately 5.2 million shares of newly issued
common stock of the Company, according to the conversion ratio set forth in the
Merger Agreement of 1.275 shares of CFB common stock for each share of Mountain
Parks common stock (with cash being paid for fractional shares of CFB 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 CFB common stock on
the Nasdaq National Market on December 18, 1996.
Pursuant to the Merger Agreement, all properties and assets of every kind
held by Mountain Parks at the effective date of the merger have become the
properties and assets of CFB, and CFB has become liable for all the debts,
liabilities and other obligations of Mountain Parks. Mountain Parks was a bank
holding company that operated a Colorado state chartered bank with full service
commercial banking facilities in 17 Colorado communities located in winter ski
and summer recreational areas in the Colorado mountains and in the greater
Denver/Boulder metropolitan area. As of September 30, 1996, Mountain Parks had
total consolidated assets of approximately $581.8 million.
The merger with Mountain Parks will be accounted for as a pooling of
interests. Accordingly, all historical Mountain Parks information of CFB will
be restated to combine the results of operations, assets and liabilities of CFB
and Mountain Parks.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) SUPPLEMENTAL FINANCIAL STATEMENTS - COMMUNITY FIRST
BANKSHARES, INC. - YEARS ENDED DECEMBER 31, 1995, 1994
AND 1993 AS RESTATED TO REFLECT ACQUISITION OF MOUNTAIN
PARKS:
Supplemental Report of Independent Auditors. . . . . . . . . . . . F-1
Supplemental Consolidated Statement of Financial Condition . . . . F-2
Supplemental Consolidated Statements of Income . . . . . . . . . . F-3
Supplemental Consolidated Statements of Shareholders' Equity . . . F-5
Supplemental Consolidated Statements of Cash Flows . . . . . . . . F-7
Notes to Supplemental Consolidated Financial Statements. . . . . . F-8
Quarterly Results of Operations (unaudited). . . . . . . . . . . .F-34
Consolidated Statement of Condition - Five Year Summary. . . . . .F-36
2
<PAGE>
Consolidated Statement of Income - Five Year Summary . . . . . . .F-37
(b) SUPPLEMENTAL FINANCIAL STATEMENTS - COMMUNITY FIRST BANKSHARES,
INC. - NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AS RESTATED
TO REFLECT ACQUISITION OF MOUNTAIN PARKS:
Supplemental Condensed Consolidated Statements of Financial
Condition as of September 30, 1996 (Unaudited) and
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . .F-38
Supplemental Condensed Consolidated Statements of Income
for the Nine Months Ended September 30, 1996 and
1995 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . .F-39
Supplemental Condensed Consolidated Statements of Cash Flows
for the Nine Monhs Ended September 30, 1996 and 1995
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . .F-40
Notes to Unaudited Supplemental Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . . . . . .F-41
(c) SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 1995, 1994 AND 1993 AS RESTATED TO REFLECT
THE ACQUISITION OF MOUNTAIN PARKS. . . . . . . . . . . . . . . . .F-45
(d) SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AS RESTATED
TO REFLECT THE ACQUISITION OF MOUNTAIN PARKS. . . . . . . . . . . F-68
(e) EXHIBITS.
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMUNITY FIRST BANKSHARES, INC.
By /s/ Mark A. Anderson
--------------------------------------------
Mark A. Anderson, Executive Vice
President and Chief Financial Officer
Dated: January 15, 1997
3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Community First Bankshares, Inc.
We have audited the accompanying supplemental consolidated statements of
financial condition of Community First Bankshares, Inc., and subsidiaries
(formed as a result of the consolidation of Community First Bankshares, Inc. and
Mountain Parks Financial Corp.) as of December 31, 1995 and 1994, and the
related supplemental consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
The supplemental consolidated financial statements give retroactive effect to
the merger of Community First Bankshares, Inc. and Mountain Parks Financial
Corp. on December 18, 1996, which has been accounted for using the pooling of
interests method as described in the notes to the supplemental consolidated
financial statements. These supplemental financial statements are the
responsibility of the management of Community First Bankshares, Inc. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. We did not audit the consolidated financial
statements of Mountain Parks Financial Corp. which statements reflect total
assets constituting 16% for 1995 and 13% for 1994 of the related supplemental
consolidated financial statements totals, and which reflect net income
constituting 24%, 25%, and 18% of the related supplemental consolidated totals
for the years ended December 31, 1995, 1994 and 1993, respectively. We also did
not audit the 1994 and 1993 consolidated financial statements of Minowa
Bancshares, Inc. and First Community Bankshares, Inc., wholly-owned subsidiaries
acquired in 1995, which statements reflect total assets constituting 11% and 8%,
respectively, for 1994 of the related supplemental consolidated financial
statement totals, and which reflect net income constituting 8% and 9%,
respectively, for the year ended December 31, 1994 and 13% and 7%, respectively,
for the year ended December 31, 1993 of the related supplemental 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 Corp., 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 fianancial 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 the reports of other auditors, the
supplemental 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, 1995 and 1994 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, after giving retroactive
effect to the merger of Mountain Parks Financial Corp., as described in the
notes to the supplemental consolidated financial statements, in conformity with
generally accepted accounting principles.
As discussed in Note 15 to the supplemental consolidated financial statements,
in 1993 Community First Bankshares, Inc., changed its method of accounting for
income taxes.
Minneapolis, Minnesota
January 25, 1996, except for Note 3, as to
which the date is December 18, 1996
F-1
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31 1995 1994
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . $ 137,551 $ 96,232
Federal funds sold and securities purchased
under agreements to resell. . . . . . . . . . . . . 25,965 8,135
Interest-bearing deposits. . . . . . . . . . . . . . 3,213 6,377
Available-for-sale securities. . . . . . . . . . . . 486,522 231,364
Held-to-maturity securities
(Fair Value: 1995 - $231,704, 1994 - $362,367) . . 230,820 381,875
Loans, net . . . . . . . . . . . . . . . . . . . . 1,744,481 1,312,813
Bank premises and equipment, net . . . . . . . . . . 51,534 38,940
Accrued interest receivable. . . . . . . . . . . . . 28,347 20,124
Intangibles. . . . . . . . . . . . . . . . . . . . . 34,898 16,607
Other assets . . . . . . . . . . . . . . . . . . . . 26,645 18,152
- --------------------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 2,769,976 $ 2,130,619
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . $ 398,314 $ 315,667
Interest-bearing:
Savings and NOW accounts. . . . . . . . . . . . . 873,025 699,412
Time accounts over $100,000 . . . . . . . . . . . 202,520 115,052
Other time accounts . . . . . . . . . . . . . . . 885,857 664,434
- --------------------------------------------------------------------------------
Total deposits . . . . . . . . . . . . . . . . . . . 2,359,716 1,794,565
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . 50,102 74,319
Other short-term borrowings. . . . . . . . . . . . . 40,779 39,150
Long-term debt . . . . . . . . . . . . . . . . . . . 81,288 38,092
Accrued interest payable . . . . . . . . . . . . . . 15,978 9,275
Other liabilities. . . . . . . . . . . . . . . . . . 17,153 11,901
- --------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . 2,565,016 1,967,302
Minority interest. . . . . . . . . . . . . . . . . . 956 5,616
Shareholders' equity:
Preferred stock . . . . . . . . . . . . . . . . . . 23,000 23,000
Common stock, par value $.01 per share:
Authorized Shares - 20,000,000
Issued Shares - 16,164,357. . . . . . . . . . . . 162 148
Capital surplus . . . . . . . . . . . . . . . . . . 64,776 48,915
Retained earnings . . . . . . . . . . . . . . . . . 115,154 92,755
SFAS 115 Equity Adjustment. . . . . . . . . . . . . 1,976 (5,182)
Less cost of common stock in treasury - 1995 -
78,624 shares;
1994 - 144,344 shares . . . . . . . . . . . . . . (1,064) (1,935)
- --------------------------------------------------------------------------------
Total shareholders' equity . . . . . . . . . . . . . 204,004 157,701
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity . . . . . $ 2,769,976 $ 2,130,619
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . $ 150,948 $ 104,012 $ 81,931
Investment securities . . . . . . . . . . . 40,210 38,032 37,479
Interest-bearing deposits . . . . . . . . . 366 638 753
Federal funds sold and resale agreements. . 1,344 555 983
- -------------------------------------------------------------------------------
Total interest income. . . . . . . . . . . . 192,868 143,237 121,146
INTEREST EXPENSE:
Deposits. . . . . . . . . . . . . . . . . . 71,780 46,560 42,873
Short-term and other borrowings . . . . . . 6,184 4,029 1,994
Long-term debt. . . . . . . . . . . . . . . 4,927 2,879 2,404
- -------------------------------------------------------------------------------
Total interest expense . . . . . . . . . . . 82,891 53,468 47,271
- -------------------------------------------------------------------------------
Net interest income. . . . . . . . . . . . . 109,977 89,769 73,875
Provision for loan losses. . . . . . . . . . 2,711 1,839 2,149
- -------------------------------------------------------------------------------
Net interest income after provision for
loan losses . . . . . . . . . . . . . . . . 107,266 87,930 71,726
NONINTEREST INCOME:
Service charges on deposit accounts . . . . 10,116 8,467 7,571
Fees from fiduciary activities. . . . . . . 2,718 2,157 2,103
Insurance commissions . . . . . . . . . . . 4,283 3,777 3,442
Net gains on sales of securities. . . . . . 52 99 1,910
Other . . . . . . . . . . . . . . . . . . . 5,319 4,492 3,132
- -------------------------------------------------------------------------------
Total noninterest income . . . . . . . . . . 22,488 18,992 18,158
NONINTEREST EXPENSE:
Salaries and employee benefits. . . . . . . 42,796 35,083 29,931
Net occupancy . . . . . . . . . . . . . . . 10,563 9,353 8,413
FDIC insurance. . . . . . . . . . . . . . . 2,532 3,720 3,193
Legal and accounting. . . . . . . . . . . . 1,311 1,403 1,490
Other professional service. . . . . . . . . 2,700 2,054 2,286
Acquisition expense . . . . . . . . . . . . 768 908 -
Data processing . . . . . . . . . . . . . . 1,607 856 722
Amortization of intangibles . . . . . . . . 2,551 1,876 1,634
Other . . . . . . . . . . . . . . . . . . . 17,765 14,988 13,185
- -------------------------------------------------------------------------------
Total noninterest expense. . . . . . . . . . 82,593 70,241 60,854
- -------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change . . . . . . . . 47,161 36,681 29,030
Provision for income taxes . . . . . . . . . 17,208 13,952 10,775
- -------------------------------------------------------------------------------
Income before cumulative effect of accounting
change. . . . . . . . . . . . . . . . . . . 29,953 22,729 18,255
Cumulative effect of accounting change . . . - - 359
- -------------------------------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . $ 29,953 $ 22,729 $ 18,614
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Net income applicable to common equity . . . $ 28,343 $ 21,638 $ 18,614
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
F-3
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
Years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------
Earnings per common and common equivalent share:
Primary earnings per share before cumulative
effect of accounting change . . . . . . . . $ 1.82 $ 1.48 $ 1.29
Cumulative effect of accounting change. . . . - - .03
- -------------------------------------------------------------------------------
Primary earnings per share. . . . . . . . . . 1.82 1.48 1.32
- -------------------------------------------------------------------------------
Fully diluted earnings per share before
cumulative effect of accounting change. . . 1.74 1.42 1.27
Cumulative effect of accounting change. . . . - - .03
- -------------------------------------------------------------------------------
Fully diluted earnings per share. . . . . . . $ 1.74 $ 1.42 $ 1.30
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Average common and common equivalent shares
outstanding:
Primary . . . . . . . . . . . . . . . . . . 15,543,129 14,580,309 14,098,585
Fully diluted . . . . . . . . . . . . . . . 17,276,050 16,136,433 14,396,532
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
Years ended December 31, ----------------- ------------------ Capital Retained ----------------
1995, 1994, and 1993 Shares Amount Shares Amount Surplus Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 . . . . . . - $ - 13,868,234 $140 $ 43,720 $ 63,440 268,522 $(3,389) $103,911
Net income . . . . . . . . . . . . . . . - - - - - 18,614 - - 18,614
Common stock dividends
($.40 per share) . . . . . . . . . . . - - - - - (3,330) - - (3,330)
Purchases of common stock
for treasury at cost . . . . . . . . . - - - - - - 146,500 (1,882) (1,882)
Sales of treasury stock to
employee benefit plans . . . . . . . . - - - - - 2 (13,650) 177 179
Issuance of common stock . . . . . . . . - - 1,260,022 11 8,360 - - - 8,371
Exercise of options, net of stock
tendered in payment. . . . . . . . . . - - - - - (1,088) (128,607) 1,645 557
ESOP Loan Guarantee. . . . . . . . . . . - - - - (200) - - - (200)
Retirement of common stock . . . . . . . (605,625) (6) (3,937) (3,943)
Investment in data processing subsidiary (248) (248)
Unrealized gain on available-for-
sale securities, net of income
taxes of $1,822. . . . . . . . . . . . - - - - - 3,042 - - 3,042
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 . . . . . . - - 14,522,631 145 47,943 80,432 272,765 (3,449) 125,071
Net income . . . . . . . . . . . . . . . - - - - - 22,729 - - 22,729
Preferred stock dividends
($4.74 per share). . . . . . . . . . . - - - - - (1,091) - - (1,091)
Common stock dividends
($.44 per share) . . . . . . . . . . . - - - - - (3,794) - - (3,794)
Purchases of common stock for
treasury at cost . . . . . . . . . . . - - - - - - 102,000 (1,384) (1,384)
Sales of treasury stock to employee
benefit plans. . . . . . . . . . . . . - - - - 26 - (19,650) 243 269
Issuance of preferred stock. . . . . . . 230,000 23,000 - - (1,048) - - - 21,952
Exercise of options, net of stock
tendered in payment. . . . . . . . . . - - 10,200 - 14 (377) (40,176) 502 139
Exercise of warrants, net of stock
tendered in payment. . . . . . . . . . - - - - - (2,102) (170,595) 2,153 51
Conversion of debentures . . . . . . . . 212,089 3 1,980 1,983
Change in unrealized gain on available
for sale securities, net of income
tax benefit of $4,537. . . . . . . . . - - - - - (8,244) - - (8,244)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
Years ended December 31, ----------------- ------------------ Capital Retained ----------------
1995, 1994, and 1993 Shares Amount Shares Amount Surplus Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 . . . . . . 230,000 $23,000 14,744,919 $148 $48,915 $87,573 144,344 $(1,935) $157,701
Net income . . . . . . . . . . . . . . . - - - - - 29,953 - - 29,953
Preferred stock dividends
($4.74 per share). . . . . . . . . . . - - - - - (1,610) - - (1,610)
Common stock dividends
($0.48 per share). . . . . . . . . . . - - - - - (5,279) - - (5,279)
Issuance of common stock . . . . . . . . 891,863 9 11,568 11,577
Purchases of common stock for
treasury at cost . . . . . . . . . . . - - - - - - 4,000 (56) (56)
Sales of treasury stock to
employee benefit plans . . . . . . . . - - - - 22 - (18,194) 237 259
Exercise of options, net of stock
tendered in payment. . . . . . . . . . - - 20,635 - 156 (209) (51,526) 690 637
Exercise of warrants, net of stock
tendered in payment. . . . . . . . . . 21,602 -
Conversion of debentures . . . . . . . . 485,338 5 3,915 3,920
Liquidation of investment in
subsidiary to shareholders . . . . . . - - - - - (456) - - (456)
Termination of ESOP loan guarantee
upon satisfaction of debt. . . . . . . - - - - 200 - - - 200
Change in unrealized loss on available-
for-sale securities, net of income tax
benefit of $4,219. . . . . . . . . . . - - - - - 7,158 - - 7,158
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 . . . . . . 230,000 $23,000 16,164,357 $162 $64,776 $117,130 78,624 $(1,064) $204,004
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . $ 29,953 $ 22,729 $ 18,614
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses . . . . . . . . . 2,711 1,839 2,149
Depreciation. . . . . . . . . . . . . . . . 5,373 4,447 3,850
Cumulative effect of accounting change. . . - - (359)
Amortization of intangibles . . . . . . . . 2,551 1,876 1,634
Net amortization of premiums and discounts
on securities . . . . . . . . . . . . . . 1,946 2,545 2,160
Deferred income tax benefit . . . . . . . . (4,009) (1,031) (1,152)
(Increase) decrease in interest receivable. (2,309) (2,676) 644
Increase (decrease) in interest payable . . 4,746 856 (457)
Other, net. . . . . . . . . . . . . . . . . (6,066) 6,470 378
-------------------------------
Net cash provided by operating activities. . . 34,896 37,055 27,461
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired . . . . . . 35,667 2,410 5,931
Net decrease in interest-bearing deposits. . . (600) 2,728 5,924
Purchases of available-for-sale securities . . (86,629) (54,206) (48,786)
Maturities of available-for-sale securities. . 75,262 78,613 17,619
Sales of securities, net of gains. . . . . . . 50,530 61,607 141,684
Purchases of held-to-maturity securities . . . (75,871) (94,639) (296,714)
Maturities of held-to-maturity securities. . . 54,990 85,901 175,727
Net increase in loans. . . . . . . . . . . . . (139,434) (214,463) (159,310)
Net increase in bank premises and equipment. . (10,438) (9,782) (5,956)
Net (decrease) increase in minority interest . (4,828) 235 (173)
-------------------------------
Net cash used in investing activities. . . . . (101,351) (141,596) (164,054)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in demand deposits,
NOW accounts and savings accounts . . . . . . (44,603) (26,468) 89,135
Net increase in time accounts. . . . . . . . . 141,005 54,234 15,211
Net (decrease) increase in short-term and
other borrowings. . . . . . . . . . . . . . . (23,088) 50,525 3,289
Proceeds from issuance of long-term debt . . . 56,624 - 51,017
Repayment of long-term debt. . . . . . . . . . (10,000) (6,450) (22,578)
Retirement of common stock . . . . . . . . . . - - (3,943)
Net proceeds from issuance of common stock . . 11,577 66 8,371
Net proceeds from issuance of preferred stock. - 21,952 -
Purchase of common stock held in treasury. . . (56) (1,384) (1,882)
Sale of common stock held in treasury. . . . . 896 451 736
Preferred stock dividends paid . . . . . . . . (1,610) (1,091) -
Common stock dividends paid. . . . . . . . . . (5,279) (3,794) (3,330)
-------------------------------
Net cash provided by financing activities. . . 125,466 88,041 136,026
-------------------------------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . . . 59,011 (16,500) (567)
Cash and cash equivalents at beginning
of year . . . . . . . . . . . . . . . . . . . 104,653 121,153 121,720
-------------------------------
Cash and cash equivalents at end of year . . . $ 163,664 $ 104,653 $ 121,153
-------------------------------
-------------------------------
See accompanying notes.
F-7
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
1. SIGNIFICANT ACCOUNTING POLICIES
Community First Bankshares, Inc. (the "Company") is multi-bank holding
company, which at the end of 1995, served 75 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
As discussed in Note 3, the Company acquired Mountain Parks Financial
Corporation("Mountain Parks") on December 18, 1996, in a transaction accounted
for as a pooling of interests. Accordingly, the Company's financial statements
have been restated for all periods prior to the acquisition to include the
accounts and operations of Mountain Parks. These supplemental financial
statements, giving retroactive effect to the merger of Mountain Parks, will
become the Company's historical financial statements upon issuance of its annual
financial statements for the period ended December 31, 1996. 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 eighteen majority-owned subsidiary banks. Minority
interest is reflected in consolidation and is the portion of the subsidiary
banks (ranging from 0.00% to 2.87% at December 31, 1995, and from 0.00% to
18.93% at both December 31, 1994 and 1993) 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 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 three 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
F-8
<PAGE>
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
The excess cost over net assets (goodwill) of banking subsidiaries is
amortized over fifteen years. At December 31, 1995, goodwill totaled
$28,318,000, net of accumulated amortization of $4,066,000. Other intangible
assets, principally deposit base intangibles, unexpired premium lists and
noncompetition
F-9
<PAGE>
agreements, totaled $6,580,000, net of accumulated amortization of $4,022,000,
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.
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 $86,000,
$261,000 and $79,000 for the years ended December 31, 1995, 1994, and 1993,
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.
2. BUSINESS COMBINATIONS
On July 3, 1995, the Company issued 1,196,445 shares of common stock to
complete its merger with FCB, a holding company with five banks in Colorado.
The merger was accounted for using the pooling of interests method. Operating
results of the Company and FCB for the years ended December 31, 1994 and 1993,
and the six months ended June 30, 1995, prior to restatement were:
F-10
<PAGE>
The Company FCB Combined
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Six months ended June 30, 1995 (unaudited):
Net interest income . . . . . . . . . . . $ 36,687 $ 3,656 $ 40,343
Net income. . . . . . . . . . . . . . . . 9,220 490 9,710
Net income applicable to common equity. . 8,416 490 8,906
Earnings per common and common
equivalent share:
Primary . . . . . . . . . . . . . . . $.82 $2.46 $.78
Fully diluted . . . . . . . . . . . . $.79 $2.46 $.75
Year ended December 31, 1994:
Net interest income . . . . . . . . . . . $ 66,651 $ 7,127 $ 73,778
Net income. . . . . . . . . . . . . . . . 14,988 1,962 16,950
Net income applicable to common equity. . 13,897 1,962 15,859
Earnings per common and common
equivalent share:
Primary . . . . . . . . . . . . . . . $1.36 $9.86 $1.39
Fully diluted . . . . . . . . . . . . $1.35 $9.86 $1.37
Year ended December 31, 1993:
Net interest income . . . . . . . . . . . $ 57,033 $ 5,182 $ 62,215
Net income. . . . . . . . . . . . . . . . 13,994 1,313 15,307
Net income applicable to common equity. . 13,994 1,313 15,307
Earnings per common and common
equivalent share:
Primary . . . . . . . . . . . . . . . $1.36 $7.58 $1.35
Fully diluted . . . . . . . . . . . . $1.36 $7.58 $1.35
(OPERATING RESULTS OF THE COMPANY HAVE BEEN RESTATED TO REFLECT THE MINOWA
BANCSHARES, INC., ACQUISITION.)
(OPERATING RESULTS OF THE COMPANY HAVE NOT BEEN RESTATED TO REFLECT THE MOUNTAIN
PARKS FINANICAL CORPORATION ACQUISITION.)
(NO MATERIAL ADJUSTMENTS WERE REQUIRED TO RESTATE COMBINED RESULTS OF
OPERATIONS.)
On July 7, 1995, the Company acquired Financial Holdings, Inc. ("Financial
Holdings"), with offices in Boulder and Louisville, Colorado. In the
transaction which was accounted for as a purchase, 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.
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.
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.
F-11
<PAGE>
During 1994 and 1995, the Company completed the acquisition of several
smaller financial institutions in its existing markets. These acquisitions,
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 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 all 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. In the transaction which was accounted for as a
purchase, the Company paid approximately $5,596,000 for 100% of the People's
common stock. The transaction resulted in the recognition of approximately
$2,340,000 in goodwill.
On May 20, 1994, the Company acquired Frontier Bank of Denver, Denver,
Colorado ("Frontier") from Frontier Bank Corporation of Denver through a merger
of Frontier into a wholly-owned subsidiary. The transaction which was accounted
for as a purchase resulted in the Company acquiring 100% of Frontier's common
stock for a purchase price of approximately $4,700,000. The transaction
resulted in the recognition of approximately $1,974,000 in goodwill.
On April 1, 1994, the Company acquired Bank of Spooner, Spooner, Wisconsin
("Spooner"), Grand National Bank, Fraser, Colorado ("Fraser"), and Ada
BancShares, Inc., Ada, Minnesota ("Ada"). The Company paid approximately
$14,000,000 for substantially all the common stock of the acquired companies.
The transactions resulted in the recognition of goodwill of approximately
$4,100,000.
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,
1995, 1994 and 1993.
The following unaudited pro forma consolidated financial information for
the year ended December 31, 1995, reflects the results of operations as if the
acquisitions of Abbott and Financial Holdings had occurred on the first day of
1995. The unaudited pro forma consolidated financial information for the year
ended December 31, 1994, reflects the results of operations as if the
acquisitions of Abbott, Spooner, and Financial Holdings had occurred on the
first day of 1994. 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.
F-12
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1995 (unaudited)
Pro Forma
Consolidated
Community First The Abbott Financial
Bankshares, Inc. Bank Group Financial Holdings Information
Year Ended Four Months Ended Six Months Ended Adjustments Year Ended
December 31, April 30, June 30, ------------------ December 31,
1995 1995 1995 Debit Credit 1995
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest income. . . . . . . . $192,868 $9,009 $4,368 $206,245
Interest expense . . . . . . . 82,891 3,734 1,353 $1,249 (2) 89,227
--------------------------------------------------------------------------------------------
Net interest income. . . . . . 109,977 5,275 3,015 117,018
Provision for loan losses. . . 2,711 565 387 3,663
--------------------------------------------------------------------------------------------
Net interest income after
provision . . . . . . . . . . 107,266 4,710 2,628 113,355
Noninterest income . . . . . . 22,488 1,486 760 24,734
Noninterest expense. . . . . . 82,593 4,412 2,774 $348 (1) 90,127
--------------------------------------------------------------------------------------------
Income before income taxes . . 47,161 1,784 614 47,962
Provision for income taxes . . 17,208 742 304 $440 (3) 17,814
--------------------------------------------------------------------------------------------
Net income . . . . . . . . . . 29,953 1,042 310 30,148
--------------------------------------------------------------------------------------------
Net income applicable to
common equity . . . . . . . . $28,343 $1,042 $310 $28,538
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
Earnings per common and
common equivalent share:
Primary . . . . . . . . . . $1.82 $1.84
Fully diluted . . . . . . . $1.74 $1.75
</TABLE>
(1) Amortization of purchase accounting adjustments is computed using the
effective yield or straight-line method over periods ranging from three to
fifteen years, based upon the contractual or useful lives of the underlying
assets.
(2) Net interest expense resulting from additional borrowing incurred to fund
purchases.
(3) Tax effect of the pro forma adjustments.
F-13
<PAGE>
Year ended December 31, 1994 (unaudited)
<TABLE>
<CAPTION>
Pro Forma
Bank of Consolidated
Community First Spooner The Abbott Financial Financial
Bankshares, Inc. Three Months Bank Group Holdings Information
Year Ended Ended Year Ended Year Ended Adjustments Year Ended
December 31, March 31, December 31, December 31, --------------- December 31,
1994 1994 1994 1994 Debit Credit 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income. . . . . . $143,237 $1,383 $23,683 $6,319 $12 (1) $174,634
Interest expense . . . . . 53,468 559 9,492 1,573 $3,290 (2) $40 (1) 68,342
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income. . . . 89,769 824 14,191 4,746 106,292
Provision for loan loss. . 1,839 45 2,499 70 4,453
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision . . . . . . . . 87,930 779 11,692 4,676 101,839
Noninterest income . . . . 18,992 120 4,501 1,221 24,834
Noninterest expense. . . . 70,241 579 13,720 4,366 $907 (1) 89,813
- -------------------------------------------------------------------------------------------------------------------------------
Income before income
taxes . . . . . . . . . . 36,681 320 2,472 1,531 36,860
Provision for income
taxes . . . . . . . . . . 13,952 103 832 531 $1,148 (3) 14,270
- -------------------------------------------------------------------------------------------------------------------------------
Net income . . . . . . . . 22,729 217 1,640 1,000 22,590
- -------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common equity . . . . . . $ 21,638 $217 $ 1,640 $1,000 $21,499
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Earnings per common and
common equivalent share:
Primary. . . . . . . . . $1.48 $1.47
Fully diluted . . . . . $1.42 $1.42
</TABLE>
(1) Amortization of purchase accounting adjustments is computed using the
effective yield or straight-line method over periods ranging from three to
fifteen years, based upon the contractual or
useful lives of the underlying assets.
(2) Net interest expense resulting from additional borrowing incurred to fund
purchases.
(3) Tax effect of the pro forma adjustments.
F-14
<PAGE>
3. SUBSEQUENT EVENT
On December 18, 1996, the Company issued approximately 5.2 million shares
of common stock to acquire Mountain Parks Financial Corporation ("Mountain
Parks"), a four-bank holding company headquartered in Denver, Colorado. As of
December 31, 1995, Mountain Parks had approximately $443,000,000 in assets and
$370,000,000 in deposits at its four banks located in Denver, Colorado, with
offices in Aurora, Conifer and Evergreen; Breckenridge, Colorado, with offices
in Fairplay, Frisco, Granby, Grand Lake, Kremmling and Silverthorne, Colorado;
Boulder, Colorado and Louisville, Colorado. The Company used the pooling of
interests method to account for the transaction.
Operating results of the Company and Mountain Parks for the three years
ended December 31, 1995, prior to restatement were:
Years Ended December 31,
-------------------------
(IN MILLIONS) 1995 1994 1993
- ------------------------------------------------------------------------------
The Company Prior to Merger:
Net interest income. . . . . . . . . . . . . . $88,148 $73,778 $62,215
Cumulative effect of change in accounting
principles . . . . . . . . . . . . . . . . . - - 359
Net income . . . . . . . . . . . . . . . . . . 22,819 16,940 15,287
Mountain Parks:
Net interest income. . . . . . . . . . . . . . 21,829 15,991 11,660
Net income . . . . . . . . . . . . . . . . . . 7,134 5,789 3,327
Combined:
Net interest income. . . . . . . . . . . . . . 109,977 89,769 73,875
Cumulative effect of change in
accounting principles. . . . . . . . . . . . - - 359
Net income . . . . . . . . . . . . . . . . . . 29,953 22,729 18,614
(NO MATERIAL ADJUSTMENTS WERE REQUIRED TO RESTATE COMBINED RESULTS OF
OPERATIONS).
4. ACCOUNTING CHANGES
Effective January 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosure." These Statements require
creditors to establish a valuation allowance for impaired loans based on the
present value of expected future cash flows. The Company's adoption of SFAS No.
114 and 118 did not have a material impact on the Company's financial position.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." This Statement requires 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 adoption of SFAS 121, which will occur in the first quarter of
1996, is not expected to be material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement establishes a new fair value-based accounting
method for stock-based compensation plans. Companies may continue to apply the
accounting provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in determining net income; however, they must make pro forma
disclosures of net income and earnings per share as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied. The disclosure
requirements of SFAS No. 123 are required beginning in 1996. The Company plans
to continue to account for such plans in accordance with APB Opinion No. 25.
F-15
<PAGE>
5. SECURITIES
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.
The following is a summary of available-for-sale securities and held-to-
maturity securities at December 31, 1995 (in thousands):
Available-for-Sale Securities
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Held-to-Maturity Securities
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
F-16
<PAGE>
The following is a summary of available-for-sale securities and held-to-
maturity securities at December 31, 1994 (in thousands):
Available-for-Sale Securities
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
United States Treasury . . . . . . $ 92,583 $ 117 $ 2,672 $ 90,028
United States Government
agencies. . . . . . . . . . . . 35,503 86 2,236 33,353
Mortgage-backed securities . . . . 88,465 38 2,755 85,748
Collateralized mortgage
obligations . . . . . . . . . . 14,873 27 539 14,361
Other securities . . . . . . . . . 8,225 5 356 7,874
- ------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . $239,649 $ 273 $ 8,558 $231,364
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Held-to-Maturity Securities
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------
United States Treasury . . . . . . $ 72,519 $ 31 $ 2,269 $ 70,281
United States Government
agencies. . . . . . . . . . . . . 44,957 31 2,493 42,495
Mortgage-backed securities . . . . 185,753 206 12,692 173,267
Collateralized mortgage
obligations . . . . . . . . . . . 22,811 2 1,001 21,812
State and political securities . . 43,672 169 1,489 42,352
Other securities . . . . . . . . . 12,163 17 20 12,160
- ------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . $ 381,875 $ 456 $ 19,964 $ 362,367
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Proceeds from the sale of available-for-sale securities during the years
ended December 31, 1995, 1994 and 1993, were $50,596,000, $61,638,000 and
$143,552,000, respectively. Gross gains of $633,000, $428,000 and $1,945,000
and gross losses of $567,000, $397,000 and $77,000 were realized on those sales
during 1995, 1994 and 1993, respectively. The tax effect on the net gains
during 1995, 1994 and 1993 was approximately $22,000, $28,000 and $728,000,
respectively. There were no sales of held-to-maturity securities during 1995,
1994 or 1993.
The amortized cost and estimated fair value of debt securities at December
31, 1995, 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.
F-17
<PAGE>
Estimated
Amortized Fair
Available-for-Sale Cost Value
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Due in one year or less. . . . . . . . . . . . . . . . $ 131,000 $ 131,408
Due after one year through five years. . . . . . . . . 112,468 113,542
Due after five years through ten years . . . . . . . . 30,469 30,872
Due after ten years. . . . . . . . . . . . . . . . . . 9,204 9,288
- -------------------------------------------------------------------------------
283,141 285,110
Mortgage-backed securities . . . . . . . . . . . . . . 142,234 143,359
Collateralized mortgage obligations. . . . . . . . . . 57,887 58,053
- -------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 483,262 $ 486,522
- -------------------------------------------------------------------------------
Estimated
Amortized Fair
Held-to-Maturity Cost Value
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Due in one year or less. . . . . . . . . . . . . . . . $ 7,495 $ 7,543
Due after one year through five years. . . . . . . . . 16,396 16,584
Due after five years through ten years . . . . . . . . 13,826 14,079
Due after ten years. . . . . . . . . . . . . . . . . . 86,674 87,174
- -------------------------------------------------------------------------------
124,391 125,380
Mortgage-backed securities . . . . . . . . . . . . . . 106,429 106,324
- -------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 230,820 $ 231,704
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At December 31, 1995, the Company held no collateralized mortgage
obligations that exceeded 10% of total shareholders' equity.
Available-for-sale and held-to-maturity securities carried at $398,637,000
and $361,290,000 at December 31, 1995 and 1994, 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 a carrying value of
$24,222,000 and $16,260,000 at December 31, 1995 and 1994, respectively.
6. LOANS
The composition of the loan portfolio at December 31 was as follows (in
thousands):
1995 1994
---------- -----------
Real estate. . . . . . . . . . . . . . . . . . . $ 744,477 $ 544,809
Agriculture. . . . . . . . . . . . . . . . . . . 224,637 162,212
Commercial . . . . . . . . . . . . . . . . . . . 527,620 397,869
Consumer and other . . . . . . . . . . . . . . . 270,459 225,256
---------- -----------
1,767,193 1,330,146
Less allowance for loan losses . . . . . . . . . 22,712 17,333
---------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . $1,744,481 $ 1,312,813
---------- -----------
---------- -----------
At December 31, 1995, real estate loans totaling $148,000,000 were pledged to
secure borrowings.
F-18
<PAGE>
7. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance was as follows (in thousands):
1995 1994 1993
- -------------------------------------------------------------------------------
Balance at beginning of year . . . . . . . . . $ 17,333 $ 14,332 $ 11,196
Allowance of acquired companies. . . . . . . . 5,230 1,153 1,714
Provision charged to operating expense . . . . 2,711 1,839 2,149
Loans charged off. . . . . . . . . . . . . . . (3,463) (1,215) (1,439)
Recoveries of loans charged off. . . . . . . . 901 1,224 712
-----------------------------
Balance at end of year . . . . . . . . . . . . $ 22,712 $ 17,333 $ 14,332
-----------------------------
-----------------------------
Nonaccrual loans totaled $3,252,000, $3,087,000 and $3,742,000 at December
31, 1995, 1994 and 1993, 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, 1995. Interest income of
$398,000 on nonaccrual loans would have been recorded during 1995 if the loans
had been current in accordance with their original terms. During 1995, the
Company recorded interest income of $210,000 related to loans that were on
nonaccrual status as of December 31, 1995.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about the Fair Value of Financial Instruments,"
requires the disclosure of fair value of all financial instruments for which it
is practicable to estimate that value. Financial instruments are generally
defined as cash, equity instruments or investments and contractual obligations
to pay or receive cash or another financial instrument. In defining fair value,
the Statement indicates quoted market prices are the preferred means of
estimating the value of a specific instrument, however, in the cases where
market quotes are not available, fair values should be determined using various
valuation techniques, such as discounted cash flow calculations or by using
pricing models or services.
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 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.
F-19
<PAGE>
FEDERAL FUNDS PURCHASED AND SHORT-TERM BORROWED FUNDS
The carrying amount approximates fair value due to the short maturity of
the instruments and due to the instruments 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 analysis
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.
F-20
<PAGE>
INTEREST RATE SWAP
The interest rate swap valuation is determined using a market quotation as
of December 31, 1994.
The estimated fair values of the Company's financial instruments at
December 31 are shown in the table below (in thousands):
1995 1994
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Financial assets:
Cash and due from banks . . . . $ 137,551 $ 137,551 $ 96,232 $ 96,232
Federal funds sold and resale
agreements. . . . . . . . . . 25,965 25,965 8,135 8,135
Interest-bearing deposits . . . 3,213 3,254 6,377 6,546
Available-for-sale securities . 486,522 486,522 231,364 231,364
Held-to-maturity securities . . 230,820 231,704 381,875 362,367
Loans . . . . . . . . . . . . . 1,767,193 1,778,381 1,330,146 1,312,986
Allowance for loan losses . . . (22,712) (22,712) (17,333) (17,333)
-----------------------------------------------
Net loans . . . . . . . . . . . 1,744,481 1,755,669 1,312,813 1,295,653
Financial liabilities:
Deposits:
Noninterest-bearing . . . . . $ 398,314 $ 398,314 $315,667 $315,667
Interest-bearing:
Savings and NOW . . . . . . 873,025 873,025 699,412 699,412
Time accounts over
$100,000. . . . . . . . . 202,520 202,875 115,052 114,110
Other time accounts . . . . 885,857 893,140 664,434 669,587
----------------------------------------------
Total deposits. . . . . . . . . 2,359,716 2,367,354 1,794,565 1,798,776
Federal funds purchased and
repurchase agreements . . . . 50,102 50,102 74,319 74,319
Other short-term borrowings . . 40,779 40,779 39,150 39,150
Long-term debt. . . . . . . . . 82,702 83,997 39,981 39,657
Interest rate swap . . . . . . . - - 10 10
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, letters
of credit and interest rate swap contracts. The contract or notional amounts of
these financial instruments at December 31, 1995 and 1994, were as follows (in
thousands):
1995 1994
---- ----
Commitments to extend credit . . . . . . $ 295,735 $ 225,107
Standby letters of credit. . . . . . . . 14,239 6,545
Commercial letters of credit . . . . . . 1,149 772
Interest rate swap contract. . . . . . . - 1,750
F-21
<PAGE>
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 contractual 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 Company'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):
1995 1994
---- ----
Land . . . . . . . . . . . . . . . . . . . . . . $ 8,757 $ 7,030
Buildings. . . . . . . . . . . . . . . . . . . . 47,953 34,819
Furniture, fixtures and equipment. . . . . . . . 36,117 30,356
Leased property under capital lease
obligations . . . . . . . . . . . . . . . . . 4,500 4,176
--------- ---------
97,327 76,381
Less accumulated depreciation. . . . . . . . . . 45,793 37,441
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . $51,534 $ 38,940
--------- ---------
--------- ---------
F-22
<PAGE>
11. SHORT-TERM BORROWINGS
As of December 31, 1995, the Company's subsidiary banks had $28,775,000 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 5.15% to 6.03% at December 31, 1995. The Company's
subsidiaries had additional short-term borrowings of $2,004,000 outstanding at
December 31, 1995.
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, 1996, with a commitment fee of 0.2% on the unused amount. As of December
31, 1995, 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 $10,000,000 in commercial paper and has obtained a line of
credit to support these borrowings. As of December 31, 1995, there was a
$10,000,000 commercial paper balance outstanding with a blended rate of 5.91%.
The terms of the lines of credit include certain covenants with which the
Company must comply. At December 31, 1995, 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):
1995 1994
---- ----
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 -
Convertible exchangeable redeemable
subordinated debentures, interest at 7.375%
payable semi-annually, maturing August 1, 2003,
unsecured . . . . . . . . . . . . . . . . . . . . . - 4,402
Term note payable to bank, interest at bank's base
rate (8.75% and 6% at December 31, 1995 and
1994, respectively), payable quarterly, principal
payments of $100,000 due annually through
October 1, 1999, unsecured. . . . . . . . . . . . . 400 500
Term note payable to bank, interest at Federal
Funds rate plus 2% (7.25% at December 31,
1995), payable quarterly, principal payments
equal to 6.25% of the amortized balance,
semi-annually through July 1, 2003. . . . . . . . . 10,002 -
Term note payable to bank, interest at prime
rate (6% at December 31, 1994), payable
semi-annually, principal payments of $100,000
due January 1, 1996, and $510,000 due
January 31, 1997, and annually thereafter . . . . . - 4,000
Term note payable of employee stock ownership
plan, interest at prime rate (6% at December
31, 1994), payable semi-annually, principal
payments of $20,000 due annually through
January 31, 2005. . . . . . . . . . . . . . . . . . - 200
F-23
<PAGE>
Subsidiaries:
Federal Home Loan Bank advances, interest
rates ranging from 4.57% to 6.16%, payable
quarterly, with maturities extending to
June 1998 . . . . . . . . . . . . . . . . . . . . . 36,386 5,990
------- -------
$81,288 $38,092
------- -------
------- -------
The subordinated notes payable are not redeemable prior to April 15, 1996.
Thereafter, the notes 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 80% of the balance qualifies as Tier II 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, 1995, the Company was in compliance with all covenants pertaining
to the subordinated notes payable.
In July 1995, the Company issued the exchangeable subordinated notes (the
"Notes") to retire acquisition related debt, support the Company's growth
strategy and for general corporate purposes. On any interest payment date
beginning August 15, 1996, the Company may require the holder to exchange all,
but not part, of the Notes for shares of the Company's Cumulative Perpetual
Preferred Stock (the "Preferred Stock"), at the rate of one share of Preferred
Stock for each $25 in principal amount of Notes. The Preferred Stock would
accrue cumulative dividends, payable quarterly, at a rate equal to the interest
rate on the Notes. The Notes are, and the Preferred 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:
Percentage of
If redeemed during the 12-month period beginning August 15 principal amount
- ---------------------------------------------------------- ----------------
1998 103.0%
1999 101.5%
2000 and thereafter 100.0%
At the option of the holder, the Company's convertible exchangeable
redeemable subordinated debentures (the "Debentures") were convertible into
shares of common stock at any time prior to maturity at a conversion price of
$11.56 per share, subject to adjustment under certain circumstances. During
1994, $1,923,000 of Debentures were converted by their holders into the
equivalent of 212,088 shares of common stock.
On May 3, 1995, the Company called for the redemption of all its
outstanding 7.375% Debentures. The redemption date was June 1, 1995 and the
redemption price was 103% of the principal amount of the Debentures.
Essentially all Debentures were converted to common stock prior to June 1, 1995.
Maturities of long-term debt outstanding, primarily of the parent company,
at December 31, 1995, were (in thousands):
1996 . . . . . . . . . . . . . . $ 6,358
1997 . . . . . . . . . . . . . . 15,677
1998 . . . . . . . . . . . . . . 17,318
1999 . . . . . . . . . . . . . . 922
2000 . . . . . . . . . . . . . . 24,157
Thereafter . . . . . . . . . . . 16,856
---------
$81,288
---------
---------
F-24
<PAGE>
13. SHAREHOLDERS' EQUITY
In 1995, the Company extended the common stock 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 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 and warrants, issuance
of common stock under a compensation plan, which might 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.
During 1995, the Company completed issuance of the equivalent of 891,862
shares of common stock. Net proceeds from the issuance were approximately
$11,577,000. The proceeds were used to retire acquisition related debt, support
the Company's growth strategy and for general corporate purposes.
On February 1, 1995, the Company distributed a minority interest of common
stock it owned to shareholders. The dividend was distributed to shareholders
based on their pro rata ownership in the Company.
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.
On May 11, 1994, the Company completed an offering of preferred stock,
which resulted in the sale of 920,000 depositary shares (representing 230,000
outstanding shares of preferred stock), including the exercise of an
overallotment option by the underwriters. 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 commencing in April 1996 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. The proceeds to the Company prior
to deducting offering expenses of $128,000 amounted to $22,080,000. The sales
of these shares occurred with an underwriting discount of $1.00 per share
($920,000) paid by the Company. A total of 1,443,480 shares of authorized
common stock at December 31, 1995, was reserved for issuance upon the conversion
of the preferred stock. At December 31, 1995, the Company had 1,770,000 shares
of undesignated preferred stock with a par value of $.01 per share authorized,
but not outstanding.
In December 1993, the Company issued the equivalent of 168,975 shares of
the Company's common
stock, the proceeds of which were used to acquire substantially all the
outstanding common stock of Republic National Bank, Englewood, Colorado.
In July 1993, the Company sold the equivalent of 1,091,047 shares of common
stock and $6,325,000 in convertible exchangeable redeemable subordinated
debentures, the proceeds of which were used to purchase the equivalent of
605,625 shares from a stockholder and to retire short-term borrowings with the
F-25
<PAGE>
remaining proceeds used for working capital and general corporate purposes. In
connection with this public offering, the Company sold a five-year warrant to
purchase the equivalent of 49,087 shares of common stock to the underwriter.
During 1995 the underwriter exercised the warrant and pursuant to the terms of
the warranty, received the equivalent of 21,602 shares of common stock, net of
shares forfeited to pay the exercised price.
The Company's banking subsidiaries are required to meet certain risk-based
capital standards established by federal bank regulatory agencies. At December
31, 1995, all bank subsidiaries were in compliance with these standards.
14. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN - Under 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:
Options Option Price
Outstanding Per Share
----------- ------------
Balance at December 31, 1994 . . . . . . . . . 398,986 $4.77 to $14.00
Options granted in 1995 . . . . . . . . . . . 169,207 $14.50 to $14.75
Options exercised in 1995 . . . . . . . . . . (51,284) $4.77 to $14.00
Options terminated or canceled in 1995. . . . (17,132) $13.625 to $14.75
-------
Balance at December 31, 1995 . . . . . . . . . 499,777 $6.20 to $14.75
-------
-------
Exercisable at December 31, 1995 . . . . . . . 206,846 $6.20 to $14.00
A total of 652,665 shares of authorized common stock at December 31, 1995,
was reserved for exercise of options granted under the 1987 Stock Option Plan.
During 1993, the Company adopted the Employee's Equity Incentive Plan
("Employee Plan") and the Nonemployee Directors' Stock Option Plan ("Outside
Directors' Plan"). The Employee Plan was designed to provide long-term
incentives to key employees, including officers and directors employed by the
Company, while the Outside Directors' Plan was designed as an incentive to non-
employee directors of those affiliate entities. At December 31, 1995 the
Company had reserved 255,100 and 63,850 shares of common stock for issuance
under the Employee Plan and Outside Director Plan, respectively. The equivalent
of 100,654 shares are available for grant under the Employee Plan and 38,350
shares are available for grant under the Outside Directors' Plan at December 31,
1995. All options under these plans were exercised or terminated in connection
with the merger described in Note 3.
Information regarding the Employee Plan and Outside Directors Plan are
summarized below:
F-26
<PAGE>
Employee Outside Option Exercise
Plan Directors' Plan Price Per Share
---------------------------------------
Balance at December 31, 1994 116,343 20,400 $6.51 to $13.16
Options granted in 1995 30,855 5,100 $11.18 to $13.92
Options exercised in 1995 (20,634) - $6.51 to $11.96
Options terminated or canceled in 1995 (3,016) - $11.18 to $11.96
------------------
Balance at December 31, 1995 123,548 25,500 $6.51 to $13.92
------------------
------------------
Exercisable at December 31, 1995 99,789 25,500 $6.51 to $13.92
In 1993, the Company granted options to purchase the equivalent of 3,825
shares of common stock to an outside consultant at an exercise price which was
estimated by the Company to be the fair market value of the common stock on the
date of the grant. These options vested on the date of the grant and have a
term of five years.
INCENTIVE PLAN - A portion of the outstanding stock of each subsidiary bank
has been made available for award by the Company to bank presidents as incentive
awards, in lieu of cash bonuses, based on annual earnings of each bank. Stock
and cash bonuses are awarded based on actual performance of the bank in specific
areas as compared to the individual objectives identified for each bank. The
awards granted for 1993 and 1994 included nine and seventeen awards,
respectively, in the common stock of certain subsidiary banks representing an
average ownership of those banks of .09% and .08%, respectively. Awards for
1995 include 47 participants who will receive incentive payments that total
$831,000. Individual subsidiary bank incentive recipients may receive up to
one-half of their annual award in the form of stock. The final determination
will be made prior to March 31, 1996, and if all recipients choose stock, the
maximum level of subsidiary bank stock of those banks that would awarded would
be .25%.
At December 31, 1995 and 1994, the Company had accrued $304,000 and
$514,000, respectively, related to a performance incentive program for one
subsidiary bank managing officer. If the managing officer leaves the bank
employment because of death, disability or retirement the accumulated amounts
due would be paid at that time, departure for any other reason would result in
payments based upon a three-year vesting schedule. The program was discontinued
effective December 31, 1993.
CONTINUATION AGREEMENTS - Included in other liabilities is $980,000 at
December 31, 1995, and $557,000 at December 31, 1994, representing amounts due
to certain executives of the Company and certain subsidiary banks under
executive salary continuation agreements by and between the executives and the
Company or the subsidiary bank. These agreements provide for payments to the
executives (or their beneficiaries) upon the death or disability of the
executive or for a fixed period of time at their retirement.
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 $444,000, $267,000 and $277,000 in
1995, 1994 and 1993, respectively.
In 1993, the Company established an Employee Stock Ownership Plan that
borrowed $200,000 from an unrelated bank, repayable over ten years and
guaranteed by the Company. The plan and related borrowing pertained to FCB
employees. Subsequent to the July 1995 acquisition, the plan paid the loan and
the Company guarantee was released.
F-27
<PAGE>
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 $631,000, $362,000 and $306,000 in 1995, 1994 and 1993,
respectively.
The Company and certain other subsidiaries have various 401(k) plans
covering eligible employees. The Company and these subsidiaries made
contributions to the plans for the years ended December 31, 1995 and 1994, in
the amounts of $81,000 and $29,000, 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 $20,140,000 and $11,749,000 at December
31, 1995 and 1994, respectively, exceeded required amounts.
16. INCOME TAXES
The components of the provision for income taxes were (in thousands):
1995 1994 1993
---- ---- ----
Federal:
Current . . . . . . . . . . . . . . . $ 18,008 $ 12,646 $ 10,072
Deferred. . . . . . . . . . . . . . . (3,546) (883) (1,023)
----------------------------------
14,462 11,763 9,049
State:
Current . . . . . . . . . . . . . . . 3,209 2,337 1,855
Deferred. . . . . . . . . . . . . . . (463) (148) (129)
----------------------------------
2,746 2,189 1,726
Provision for income taxes . . . . . . $ 17,208 $ 13,952 $ 10,775
----------------------------------
----------------------------------
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):
1995 1994 1993
---- ---- ----
35% in 1995 and 1994, 34% in 1993 of
pretax income . . . . . . . . . . . . $ 16,506 $ 12,838 $ 9,870
State income tax, net of federal
tax benefit . . . . . . . . . . . . . 1,812 1,488 1,172
Minority interest. . . . . . . . . . . 61 326 331
Tax-exempt interest. . . . . . . . . . (2,376) (1,087) (944)
Amortization of goodwill . . . . . . . 531 285 144
Other. . . . . . . . . . . . . . . . . 674 102 202
---------------------------------
Provision for income taxes . . . . . . $ 17,208 $ 13,952 $ 10,775
---------------------------------
---------------------------------
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
F-28
<PAGE>
income tax reporting purposes. Significant components of the Company's deferred
tax assets and liabilities as of December 31, 1995 and 1994, are as follows (in
thousands):
1995 1994
---- ----
Deferred tax assets:
Loan loss reserves. . . . . . . . . . . . . $ 5,675 $ 5,035
Contingency reserve . . . . . . . . . . . . 537 -
Deferred compensation . . . . . . . . . . . 477 491
Deferred loan fees. . . . . . . . . . . . . 190 84
Unrealized losses . . . . . . . . . . . . . 0 3,062
Other . . . . . . . . . . . . . . . . . . . 818 375
---------------------
7,697 9,047
Deferred tax liabilities:
Unrealized gains. . . . . . . . . . . . . . 1,220 -
Depreciation. . . . . . . . . . . . . . . . 501 483
Purchase accounting . . . . . . . . . . . . 164 181
Other . . . . . . . . . . . . . . . . . . . 243 569
---------------------
2,128 1,233
---------------------
Net deferred tax assets. . . . . . . . . . . $ 5,569 $ 7,814
---------------------
---------------------
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by SFAS
No. 109 ("Accounting for Income Taxes"). As permitted under the new rules,
prior years' financial statements were restated. The cumulative effect of
adopting SFAS No. 109 as of January 1, 1993, was to increase net income by
$359,000. For the year ended December 31, 1993, application of the new income
tax rates to deferred items revalued under SFAS No. 109 decreased income tax
expense by $72,000.
The realization of the Company's deferred tax assets is dependent upon the
Company's ability to generate taxable income in future periods. 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 $1,789,000, $1,350,000 and $1,460,000 in 1995, 1994
and 1993, 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, 1995:
F-29
<PAGE>
Operating Capital
--------- -------
(IN THOUSANDS)
1996 . . . . . . . . . . . . . . . . . . . . $ 921 $ 704
1997 . . . . . . . . . . . . . . . . . . . . 832 615
1998 . . . . . . . . . . . . . . . . . . . . 680 217
1999 . . . . . . . . . . . . . . . . . . . . 646 50
2000 . . . . . . . . . . . . . . . . . . . . 647 -
Thereafter . . . . . . . . . . . . . . . . . 2,290 -
------- ------
$ 6,016 $1,586
Executory costs (taxes) ------- (66)
------- ------
Net minimum lease payments . . . . . . . . . 1,520
Less:
Amount representing interest (156)
------
Present value of net minimum lease payments $1,364
------
------
The Company entered into an agreement to lease office space for a period of
ten years, commencing August 1, 1993. The agreement contains options to renew
the lease for three additional consecutive five-year periods.
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, 1995, the reserve balance was $1.3 million. All remaining issues
subject to the reserve are expected to be resolved within a two-year period. It
is management's expectation that resolution of the remaining issues will not
exceed the current reserve balance.
The Company has entered into an employment contract with a key employee
that expires in December 1998. The agreement provides for an annual salary of
approximately $135,000 with potential incentives totaling $65,000 annually. In
addition, a phantom program provides other potential earnings equal to 20% of
the annual net income of the subsidiary the employee manages. The Company has
also entered into a consulting contract with a former officer that expires in
December 1998. The agreement provides for annual payments of $125,000, plus
reimbursement of certain expenses.
Numerous legislative proposals have been made that would affect the Savings
Association Insurance Fund ("SAIF") premium assessments. Although no proposals
have been enacted, they include a one-time special assessment for SAIF deposits.
It is not clear when, or if, this legislation will pass. Based on current
proposals, the Company may be subject to a special assessment of up to $616,000.
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.
F-30
<PAGE>
18. COMMUNITY FIRST BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31
-----------------------------
1995 1994
-----------------------------
(IN THOUSANDS)
(restated) (restated)
ASSETS
Cash and due from subsidiary banks . . . . . $ 6,106 $ 5,288
Investment in subsidiaries . . . . . . . . . 241,623 164,941
Furniture and equipment. . . . . . . . . . . 1,097 851
Receivable from subsidiaries . . . . . . . . 790 14,762
Other assets . . . . . . . . . . . . . . . . 13,492 10,684
---------------------------
$ 263,108 $ 196,526
---------------------------
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings. . . . . . . . . . . . $ 10,000 $ 2,855
Long-term debt . . . . . . . . . . . . . . . 44,902 32,102
Other liabilities. . . . . . . . . . . . . . 4,202 3,868
Shareholders' equity . . . . . . . . . . . . 204,004 157,701
---------------------------
$ 263,108 $ 196,526
---------------------------
---------------------------
CONDENSED STATEMENTS OF INCOME
Years ended December 31
---------------------------------
1995 1994 1993
---------------------------------
(IN THOUSANDS)
(Restated) (Restated) (Restated)
Income:
Dividends from subsidiaries . . . . . . . $ 34,453 $ 24,965 $18,180
Service fees from subsidiaries. . . . . . 3,147 2,982 2,466
Interest income . . . . . . . . . . . . . 607 622 132
Other . . . . . . . . . . . . . . . . . . (304) 91 28
---------------------------------
Total income . . . . . . . . . . . . . . . 37,903 28,660 20,806
Expense:
Interest expense. . . . . . . . . . . . . 3,961 2,900 2,554
Other expense . . . . . . . . . . . . . . 11,862 9,002 6,870
---------------------------------
Total expense. . . . . . . . . . . . . . . 15,823 11,902 9,424
---------------------------------
Income before income tax benefit, equity in
undistributed income of subsidiaries and
cumulative effect of accounting change. . 22,080 16,758 11,382
Income tax benefit . . . . . . . . . . . . 4,423 2,889 2,628
---------------------------------
Income before undistributed income of
subsidiaries and cumulative effect of
accounting change . . . . . . . . . . . . 26,503 19,647 14,010
Equity in undistributed income of
subsidiaries. . . . . . . . . . . . . . . 3,450 3,082 4,488
---------------------------------
Income before cumulative effect of accounting
change. . . . . . . . . . . . . . . . . . 29,953 22,729 18,498
Cumulative effect of accounting change . . - - 116
---------------------------------
Net income . . . . . . . . . . . . . . . . $ 29,953 $ 22,729 $ 18,614
---------------------------------
---------------------------------
Net income applicable to common equity . . $ 28,343 $ 21,638 $ 18,614
---------------------------------
---------------------------------
F-31
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
--------------------------------
1995 1994 1993
--------------------------------
(IN THOUSANDS)
(Restated) (Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . $ 29,953 $ 22,729 $ 18,614
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in income of subsidiaries. . . . . (37,903) (28,047) (22,668)
Depreciation. . . . . . . . . . . . . . . 474 400 264
Increase (decrease) in interest payable . 64 (25) 177
Other, net. . . . . . . . . . . . . . . . 1,213 1,725 700
-------------------------------
Net cash used in operating activities. . . . (6,199) (3,218) (2,913)
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from subsidiaries . . . . 34,453 24,965 18,180
Purchases of stock in subsidiaries . . . . . (71,581) (16,858) (23,357)
Net loans to subsidiaries. . . . . . . . . . 10,197 (14,616) 8
Purchases of available-for-sale securities . (4,393) (44,165) (3,900)
Sales of available-for-sale securities, net of
gains . . . . . . . . . . . . . . . . . . . 9,543 43,489 -
Net increase in furniture and equipment. . . (578) (208) (701)
-------------------------------
Net cash used in investing activities. . . . (22,359) (7,393) (9,770)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term
borrowings. . . . . . . . . . . . . . . . . 7,145 81 (7,720)
Proceeds from issuance of long-term debt . . 44,006 10,685 41,379
Preferred stock dividends paid . . . . . . . (1,610) (1,091) -
Common stock dividends paid. . . . . . . . . (5,279) (3,794) (3,330)
Repayment of long-term debt. . . . . . . . . (27,302) (13,346) (20,376)
Net proceeds from issuance of preferred
stock. . . . . . . . . . . . . . . . . . . - 21,952 -
Sale of common stock held in treasury. . . . 754 451 738
Purchase of common stock held in treasury. . (56) (1,384) (1,881)
Retirement of common stock . . . . . . . . . - - (3,943)
Net proceeds from issuance of common stock . 11,718 66 8,371
-------------------------------
Net cash provided by financing activities. . 29,376 13,620 13,238
-------------------------------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . 818 3,009 555
Cash and cash equivalents at beginning
of year . . . . . . . . . . . . . . . . . . 5,288 2,279 1,724
-------------------------------
Cash and cash equivalents at end of year . . $ 6,106 $ 5,288 $ 2,279
-------------------------------
-------------------------------
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,
F-32
<PAGE>
1995 and 1994, $23,978,000 and $16,793,000, respectively, of individual
subsidiary banks' capital was available for credit extension to the parent
company. At December 31, 1995 and 1994, 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 $20,216,000 and $14,809,000 as of December 31, 1995 and 1994,
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
$15,400,000 and $33,163,000 at December 31, 1995 and 1994, respectively. During
1995, 1994 and 1993, $6,115,000, $40,830,000 and $37,055,000 of new loans were
made and repayments totaled $23,878,000, $42,745,000 and $37,137,000,
respectively.
20. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Noncash transfers of held-to-maturity
securities to available-for-sale securities $ 187,320 $ - $ -
Net noncash transfer of available-for-sale
securities to held-to-maturity securities . - - 18,778
Unrealized gain (loss) on available-for-sale
securities. . . . . . . . . . . . . . . . . 11,545 (13,128) 4,928
Income taxes paid. . . . . . . . . . . . . . 20,745 15,790 11,548
Interest paid. . . . . . . . . . . . . . . . 76,154 52,214 47,110
F-33
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1995 and 1994 (in thousands, except per share and per
share data):
<TABLE>
<CAPTION>
First Second Third Fourth 1995
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Interest income $40,324 $46,409 $51,755 $54,380 $192,868
Interest expense 16,802 20,181 22,742 23,166 82,891
-------------------------------------------------------------------
Net interest income 23,522 26,228 29,013 31,214 109,977
Provision for loan losses 585 582 762 782 2,711
-------------------------------------------------------------------
Net interest income after provision
for loan losses 22,937 25,646 28,251 30,432 107,266
Net gains on sales of securities (41) (94) 8 179 52
Noninterest income 4,763 5,492 6,201 5,980 22,436
Noninterest expense 17,583 20,469 21,484 23,057 82,593
-------------------------------------------------------------------
Income before income taxes 10,076 10,575 12,976 13,534 47,161
Provision for income taxes 3,716 4,001 4,581 4,910 17,208
-------------------------------------------------------------------
Net income 6,360 6,574 8,395 8,624 29,953
-------------------------------------------------------------------
-------------------------------------------------------------------
Preferred stock dividends 402 402 404 402 1,610
-------------------------------------------------------------------
Net income applicable to common
equity $5,958 $6,172 $7,991 $8,222 $28,343
-------------------------------------------------------------------
-------------------------------------------------------------------
Earnings per common and common
equivalent shares:
Primary $.40 $.41 $.50 $.50 $1.82
Fully diluted $.38 $.39 $.48 $.48 $1.74
Average common and common
equivalent shares:
Primary 14,751,100 15,027,266 16,063,302 16,329,391 15,543,129
Fully diluted 16,684,541 16,764,555 17,548,746 17,808,232 17,276,050
</TABLE>
F-34
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
QUARTERLY RESULTS OF OPERATIONS (unaudited) (continued)
<TABLE>
<CAPTION>
First Second Third Fourth 1994
Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Interest income $31,203 $35,199 $37,524 $39,311 143,237
Interest expense 11,483 12,818 13,978 15,189 53,468
- --------------------------------------------------------------------------------------------------------------
Net interest income 19,720 22,381 23,546 24,122 89,769
Provision for loan losses 351 381 635 472 1,839
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 19,369 22,000 22,911 23,650 87,930
Net gains on sales of securities 266 104 12 (283) 99
Noninterest income 4,180 4,898 4,899 4,916 18,893
Noninterest expense 15,905 17,683 17,722 18,931 70,241
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 7,910 9,319 10,100 9,352 36,681
Provision for income taxes 2,939 3,498 3,808 3,707 13,952
- --------------------------------------------------------------------------------------------------------------
Net income 4,971 5,821 6,292 5,645 22,729
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Preferred stock dividends - 286 403 402 1,091
- --------------------------------------------------------------------------------------------------------------
Net income applicable to common
equity $4,971 $5,535 $5,889 $5,243 $21,638
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Earnings per common and common
equivalent shares:
Primary $.34 $.38 $.40 $.36 $1.48
Fully diluted $.33 $.37 $.38 $.34 $1.42
Average common and common
equivalent shares:
Primary 14,527,773 14,531,408 14,563,960 14,699,150 14,580,309
Fully diluted 15,225,198 15,979,166 16,666,410 16,643,062 16,136,433
</TABLE>
F-35
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONSOLIDATED STATEMENT OF CONDITION -
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
DECEMBER 31 (IN THOUSANDS) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks. . . . . . . . . . . . . . $ 137,551 $ 96,232 $ 85,468 $ 70,518 $ 66,658
Federal funds sold and securities
purchased under agreement to
resell. . . . . . . . . . . . . . . . . . . . 25,965 8,135 35,685 46,826 27,449
Interest-bearing deposits. . . . . . . . . . . . . 3,213 6,377 10,272 12,288 31,775
Available-for-sale securities. . . . . . . . . . . 486,522 231,364 326,041 185,077 48,612
Held-to-maturity securities:
U.S. Treasury. . . . . . . . . . . . . . . . . . . - 72,519 44,162 17,556 109,648
U.S. Government agencies. . . . . . . . . . . 3,318 44,957 34,654 116,825 111,564
Mortgage-backed securities. . . . . . . . . . 106,429 185,753 177,381 145,592 163,501
Collateralized mortgage
obligations. . . . . . . . . . . . . . . 1 22,811 25,151 63,890 71,681
State and political securities. . . . . . . . 55,267 43,672 34,990 29,680 26,967
Other . . . . . . . . . . . . . . . . . . . . 65,805 12,163 11,343 20,458 22,142
- ------------------------------------------------------------------------------------------------------------------------------
Total securities . . . . . . . . . . . . 717,342 613,239 653,722 579,078 554,115
Loans . . . . . . . . . . . . . . . . . . . . 1,767,193 1,330,146 1,037,666 813,550 685,053
Less: allowance for loan losses . . . . . . . 22,712 17,333 14,332 11,196 10,502
- ------------------------------------------------------------------------------------------------------------------------------
Net loans. . . . . . . . . . . . . . . . 1,744,481 1,312,813 1,023,334 802,354 674,551
Other assets . . . . . . . . . . . . . . . . . . . 141,424 93,823 75,313 65,211 60,312
- ------------------------------------------------------------------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . $ 2,769,976 $ 2,130,619 $ 1,883,794 $ 1,576,275 $ 1,414,860
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . $ 398,314 $ 315,667 $ 273,382 $ 200,104 $ 169,344
Interest-bearing. . . . . . . . . . . . . . . 1,961,402 1,478,898 1,354,607 1,174,755 1,070,077
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits . . . . . . . . . . . . . 2,359,716 1,794,565 1,627,989 1,374,859 1,239,421
Short-term borrowings. . . . . . . . . . . . . . . 90,881 113,469 62,194 59,452 40,807
Long-term debt . . . . . . . . . . . . . . . . . . 81,288 38,092 48,354 18,015 17,872
Other liabilities. . . . . . . . . . . . . . . . . 34,087 26,792 21,500 20,038 23,513
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . . 2,565,972 1,972,918 1,760,037 1,472,364 1,321,613
Shareholders' equity . . . . . . . . . . . . . . . 204,004 157,701 123,757 103,911 93,247
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . . $ 2,769,976 $ 2,130,619 $ 1,883,794 $ 1,576,275 $ 1,414,860
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-36
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME -
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans . . . . . . . . . . . . . . . . . . . . $ 150,948 $ 104,012 $ 81,931 $ 73,410 $ 75,840
Investment securities . . . . . . . . . . . . 40,210 38,032 37,479 38,890 37,210
Other . . . . . . . . . . . . . . . . . . . . 1,710 1,193 1,736 3,009 6,962
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income. . . . . . . . . . 192,868 143,237 121,146 115,309 120,012
INTEREST EXPENSE:
Deposits. . . . . . . . . . . . . . . . . . . 71,780 46,560 42,873 47,727 59,883
Short-term and other borrowings . . . . . . . 6,184 4,029 1,994 2,072 1,718
Long-term debt. . . . . . . . . . . . . . . . 4,927 2,879 2,404 1,071 2,921
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense . . . . . . . . . 82,891 53,468 47,271 50,870 64,522
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income. . . . . . . . . . . . . . . . 109,977 89,769 73,875 64,439 55,490
Provision for loan losses. . . . . . . . . . . . . 2,711 1,839 2,149 2,433 3,427
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses . . . . . . . . . . . . . . . . . 107,266 87,930 71,726 62,006 52,063
NONINTEREST INCOME:
Service charges on deposit
accounts. . . . . . . . . . . . . . . . 10,116 8,467 7,571 6,328 5,784
Insurance commissions . . . . . . . . . . . . 4,283 3,777 3,442 1,963 210
Fees from fiduciary activities. . . . . . . . 2,718 2,157 2,103 1,993 1,860
Net gains on sales of securities. . . . . . . 52 99 1,910 1,101 1,045
Other . . . . . . . . . . . . . . . . . . . . 5,319 4,492 3,132 3,255 3,032
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest income . . . . . . . . 22,488 18,992 18,158 14,640 11,931
NONINTEREST EXPENSE:
Salaries and employee benefits. . . . . . . . 42,796 35,083 29,931 25,188 20,695
Net occupancy . . . . . . . . . . . . . . . . 10,563 9,353 8,413 6,675 6,361
FDIC insurance. . . . . . . . . . . . . . . . 2,532 3,720 3,193 2,812 2,406
Professional service fees . . . . . . . . . . 4,011 3,457 3,776 4,424 3,459
Data processing and loan
servicing fees . . . . . . . . . . . . . 1,607 856 722 752 1,606
Other . . . . . . . . . . . . . . . . . . . . 21,084 17,772 14,819 13,141 10,900
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense. . . . . . . . 82,593 70,241 60,854 52,992 45,427
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes,
extraordinary item and cumulative
effect of accounting change . . . . . . . . . 47,161 36,681 29,030 23,654 18,567
Provision for income taxes . . . . . . . . . . . . 17,208 13,952 10,775 8,546 6,285
- ------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of accounting
change. . . . . . . . . . . . . . . . . . . . 29,953 22,729 18,255 15,108 12,282
Extraordinary item:
Loss from early extinguishment of debt
(Less applicable income taxes of
$393). . . . . . . . . . . . . . . . . . - - - - (653)
Cumulative effect of accounting
change. . . . . . . . . . . . . . . . . . . . - - 359 - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . $ 29,953 $ 22,729 $ 18,614 $ 15,108 $ 11,629
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Preferred dividend . . . . . . . . . . . . . . . . 1,610 1,091 - - 655
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common
equity. . . . . . . . . . . . . . . . . . . . $ 28,343 $ 21,638 $ 18,614 $ 15,108 $ 10,974
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Earnings per common and common
equivalent share:
Primary . . . . . . . . . . . . . . . . $1.82 $1.48 $1.32 $1.07 $0.87
Fully diluted . . . . . . . . . . . . . $1.74 $1.42 $1.30 $1.07 $0.87
Average common shares outstanding:
Primary . . . . . . . . . . . . . . . . . . . 15,543,129 14,580,309 14,098,585 14,080,526 12,621,595
Fully diluted . . . . . . . . . . . . . . . . 17,276,050 16,136,433 14,396,532 14,087,606 12,621,595
</TABLE>
F-37
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
(restated) (restated)
ASSETS (unaudited)
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . $ 138,085 $ 137,551
Federal funds sold and securities purchased under
agreements to resell. . . . . . . . . . . . . . . . . . . . 310 25,965
Interest-bearing deposits. . . . . . . . . . . . . . . . . . . . 2,488 3,213
Available-for-sale securities. . . . . . . . . . . . . . . . . . 499,035 486,522
Held-to-maturity securities (fair values: $235,790 and
$231,704, respectively) . . . . . . . . . . . . . . . . . . 237,235 230,820
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,976,592 1,767,193
Less: Allowance for loan losses . . . . . . . . . . . . . . (25,771) (22,712)
- ------------------------------------------------------------------------------------------------------
Net loans. . . . . . . . . . . . . . . . . . . . . . . 1,950,821 1,744,481
Bank premises and equipment. . . . . . . . . . . . . . . . . . . 64,610 51,534
Accrued interest receivable. . . . . . . . . . . . . . . . . . . 33,574 28,347
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 36,823 27,588
Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . 36,755 33,955
- ------------------------------------------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 2,999,736 $ 2,769,976
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . $ 419,474 $ 398,314
Interest-bearing. . . . . . . . . . . . . . . . . . . . . . 2,004,841 1,961,402
- ------------------------------------------------------------------------------------------------------
Total deposits . . . . . . . . . . . . . . . . . . . . 2,424,315 2,359,716
Federal funds purchased and securities sold under
agreements to repurchase. . . . . . . . . . . . . . . . . . 122,536 50,102
Other short-term borrowings. . . . . . . . . . . . . . . . . . . 153,056 40,779
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 38,898 81,288
Capital lease obligations. . . . . . . . . . . . . . . . . . . . 3,093 1,364
Accrued interest payable . . . . . . . . . . . . . . . . . . . . 15,616 15,978
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . 14,195 15,789
- ------------------------------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . 2,771,709 2,565,016
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . 1,248 956
Shareholders' equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . 22,997 23,000
Common stock. . . . . . . . . . . . . . . . . . . . . . . . 165 162
Capital surplus . . . . . . . . . . . . . . . . . . . . . . 70,114 64,776
Retained earnings . . . . . . . . . . . . . . . . . . . . . 134,199 117,130
Common stock in treasury, at cost --
September 30, 1996 -- 30,511 shares, December 31,
1995 -- 78,624 shares. . . . . . . . . . . . . . . . . (696) (1,064)
- ------------------------------------------------------------------------------------------------------
Total equity . . . . . . . . . . . . . . . . . . . . . 226,779 204,004
- ------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity . . . . . . $ 2,999,736 $ 2,769,976
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
F-38
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------------------------------
(Dollars in thousands, except share and
per share data)
(Unaudited) 1996 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income: (restated) (restated) (restated) (restated)
Loans . . . . . . . . . . . . . . . . . . . . $ 47,255 $ 40,614 $ 133,789 $ 107,884
Investment securities . . . . . . . . . . . . 11,367 10,570 33,227 29,454
Interest-bearing deposits . . . . . . . . . . 35 109 123 291
Federal funds sold and resale agreements. . . 54 462 773 859
- --------------------------------------------------------------------------------------------------------------
Total interest income. . . . . . . . . . 58,711 51,755 167,912 138,488
Interest expense:
Deposits. . . . . . . . . . . . . . . . . . . 20,214 19,341 60,074 51,411
Short-term and other borrowings . . . . . . . 2,848 1,731 6,046 5,203
Long-term debt. . . . . . . . . . . . . . . . 940 1,670 3,404 3,111
- --------------------------------------------------------------------------------------------------------------
Total interest expense . . . . . . . . . 24,002 22,742 69,524 59,725
- --------------------------------------------------------------------------------------------------------------
Net interest income. . . . . . . . . . . . . . . . 34,709 29,013 98,388 78,763
Provision for loan losses. . . . . . . . . . . . . 2,241 762 4,572 1,929
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses. . . . . . . . . . . . . . . . . . . . 32,468 28,251 93,816 76,834
- --------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts . . . . . 3,178 2,806 9,056 7,481
Fees from fiduciary activities. . . . . . . . 787 908 2,403 2,006
Insurance commissions . . . . . . . . . . . . 1,295 1,313 3,474 2,954
Net loss on sales of available-for-sale
securities . . . . . . . . . . . . . . . (8) 8 (7) (127)
Other . . . . . . . . . . . . . . . . . . . . 1,263 1,174 4,206 4,015
- --------------------------------------------------------------------------------------------------------------
Total noninterest income:. . . . . . . . 6,515 6,209 19,132 16,329
- --------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits. . . . . . . . 14,469 11,106 40,216 30,449
Net occupancy . . . . . . . . . . . . . . . . 3,374 2,906 9,566 7,731
FDIC insurance. . . . . . . . . . . . . . . . 506 (34) 636 2,117
Legal and accounting. . . . . . . . . . . . . 515 406 1,448 1,203
Other professional service. . . . . . . . . . 445 552 1,381 1,836
Data processing . . . . . . . . . . . . . . . 328 67 919 603
Acquisitions. . . . . . . . . . . . . . . . . - 164 19 763
Minority interest . . . . . . . . . . . . . . 53 58 147 138
Amortization of intangibles . . . . . . . . . 1,008 654 2,700 1,609
Other . . . . . . . . . . . . . . . . . . . . 5,136 5,605 15,459 13,087
- --------------------------------------------------------------------------------------------------------------
Total noninterest expense. . . . . . . . 25,834 21,484 72,491 59,536
Income before income taxes . . . . . . . . . . . . 13,149 12,976 40,457 33,627
Income taxes . . . . . . . . . . . . . . . . . . . 4,556 4,581 13,995 12,298
- --------------------------------------------------------------------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . $ 8,593 $ 8,395 $ 26,462 $ 21,329
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Dividends on preferred stock . . . . . . . . . . . 403 404 1,208 1,208
- --------------------------------------------------------------------------------------------------------------
Net income applicable to common equity . . . . . . $ 8,190 $ 7,991 $ 25,254 $ 20,121
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Earnings per common and common equivalent share:
Primary net income . . . . . . . . . . . $0.49 $0.50 $1.53 $1.32
Fully diluted net income . . . . . . . . $0.47 $0.48 $1.47 $1.26
Average number of common and common
equivalent shares:
Primary. . . . . . . . . . . . . . . . . 16,695,233 16,063,302 16,532,714 15,280,976
Fully diluted. . . . . . . . . . . . . . 18,145,732 17,548,746 17,992,255 17,049,679
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Common dividends declared. . . . . . . . . . . . . $0.14 $0.12 $0.42 $0.36
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
F-39
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------------
(Dollars in thousands)
(Unaudited) 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (restated) (restated)
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 26,462 $ 21,329
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . 4,572 1,929
Depreciation . . . . . . . . . . . . . . . . . . . . . 4,736 4,020
Amortization of intangibles. . . . . . . . . . . . . . 2,700 1,609
Amortization of premium. . . . . . . . . . . . . . . . 1,527 1,526
Increase in interest receivable. . . . . . . . . . . . (4,131) (6,303)
(Decrease) increase in interest payable. . . . . . . . (362) 5,003
Other - net. . . . . . . . . . . . . . . . . . . . . . (9,593) (14,731)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities. . . . . . . . . . . . 25,911 14,382
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of acquisitions, net of cash paid. . . . . . . . . . . 12,449 (3,620)
Net decrease in interest-bearing deposits . . . . . . . . . 725 2,204
Purchases of available-for-sale securities. . . . . . . . . (187,182) (36,812)
Maturities of available-for-sale securities . . . . . . . . 171,939 46,342
Sales of available-for-sale securities, net of gains. . . . 7,556 43,230
Purchases of held-to-maturity securities. . . . . . . . . . (22,616) (56,840)
Maturities of held-to-maturity securities . . . . . . . . . 22,355 32,064
Net increase in loans . . . . . . . . . . . . . . . . . . . (160,574) (86,292)
Net increase in bank premises and equipment . . . . . . . . (15,535) (8,689)
Net increase (decrease) in minority interest. . . . . . . . 292 (4,631)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities. . . . . . . . . . . . . . (170,591) (73,044)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts and
savings accounts . . . . . . . . . . . . . . . . . . . (20,191) (120,293)
Net increase in time accounts . . . . . . . . . . . . . . . 13,357 116,886
Net increase in short-term and other borrowings . . . . . . 173,328 18,329
Net (decrease) increase in long-term debt . . . . . . . . . (40,661) 46,466
Retirement of Common Stock. . . . . . . . . . . . . . . . . (349) -
Net Proceeds from Issuance of Common Stock. . . . . . . . . - 11,576
Purchase of common stock held in treasury . . . . . . . . . (790) (56)
Conversion of preferred stock to common stock . . . . . . . (4) -
Sale of common stock held in treasury . . . . . . . . . . . 1,254 780
Preferred stock dividends paid. . . . . . . . . . . . . . . (1,208) (1,208)
Common stock dividends paid . . . . . . . . . . . . . . . . (4,799) (3,910)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities. . . . . . . . . . . . 119,937 68,570
- ------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents. . . . . . . . . . . . (24,743) 9,908
Cash and cash equivalents at beginning of period . . . . . . . . 163,664 104,653
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 138,921 $ 114,561
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
F-40
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE A - BASIS OF PRESENTATION
As discussed in Note C, the Company acquired Mountain Parks Financial
Corporation ("Mountain Parks") on December 18, 1996 in a transaction accounted
for as a pooling of interests. Accordingly, the Company's financial statements
have been restated for all periods prior to the acquisition to include the
accounts and operations of Mountain Parks. These supplemental financial
statements, giving retroactive effect to the merger of Mountain Parks, will
become the Company's historical financial statements upon issuance of its yearly
financial statements for the period ended December 31, 1996.
The accompanying unaudited condensed consolidated financial statements,
which include the accounts of Community First Bankshares, Inc. (the "Company"),
its wholly-owned data processing, credit origination and insurance agency
subsidiaries, and its thirteen majority-owned subsidiary banks, have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for fair presentation have been included.
The Company acquired Minowa Bancshares, Inc. ("Minowa"), on February 22,
1995, and First Community Bankshares, Inc. ("First Community"), on July 3, 1995,
in transactions accounted for as poolings of interests. Accordingly, the
consolidated financial information has been restated for all periods prior to
the acquisitions to include the accounts and operations of these institutions.
The acquisitions of Minowa and First Community resulted in the addition of
approximately $224 million and $153 million in assets, respectively.
EARNINGS PER COMMON SHARE
Primary earnings per common share is calculated by dividing net income,
after reduction for preferred stock dividends declared, by the weighted average
number of common shares and equivalents outstanding. Common share equivalents
included in the computation represent the number of shares of common stock
issuable upon assumed exercise of stock options and warrants during each period.
On a fully diluted basis, both net income and common shares outstanding are
adjusted to assume the conversion of convertible preferred stock outstanding
from the beginning of the period or date of issuance, if later. Such
adjustments to the weighted average number of shares of common stock outstanding
are made only when such adjustments dilute earnings per share.
NOTE B - BUSINESS COMBINATIONS
On October 1, 1996, the Company issued 538,803 shares of common stock to
complete its merger with Financial Bancorp, Inc. ("Financial Bancorp"), which
owned 100% of the outstanding capital stock of the Trinidad National Bank,
Trinidad, Colorado. The transaction resulted in the addition of approximately
F-41
<PAGE>
$68 million of assets. The merger was accounted for using the pooling of
interests method. Prior periods will not be restated as the merger is not
material to the Company's financial statements.
On July 31, 1996, the Company acquired High Plains Bank Corporation
("Kiowa"), a bank holding company with offices in Kiowa, Elizabeth, and Parker,
all in Colorado. In the transaction which was accounted for as a purchase, the
Company paid approximately $7,100,000 for 100% of the Kiowa common stock. The
transaction resulted in the recognition of approximately $3,700,000 in goodwill.
On July 3, 1996, the Company issued the equivalent of 232,050 shares of
common stock and approximately $500,000 in cash, to acquire Charter Bank
Corporation ("Charter"), a bank holding company which had one banking office in
Englewood, Colorado. In this transaction, which was accounted for as a
purchase, the Company paid approximately $4,600,000 for 100% of the Charter
common stock, resulting in the recognition of approximately $2,700,000 in
goodwill.
NOTE C - SUBSEQUENT EVENTS
On December 18, 1996, the Company issued 5,176,672 shares of common stock
to acquire Mountain Parks Financial Corporation ("Mountain Parks"), a one-bank
holding company headquartered in Denver, Colorado. As of December 18, 1996,
Mountain Parks had approximately $597,000,000 in assets and $453,000 in deposits
at its seventeen bank locations throughout Colorado. The Company used the
pooling of interests method to account for the transaction.
NOTE D - INVESTMENTS
The following is a summary of available-for-sale and held-to-maturity
securities at September 30, 1996. (in thousands):
Available-for-Sale Securities
- ----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------
United States Treasury . . . . $123,599 $599 $(662) $123,536
United States Government
agencies. . . . . . . . . . . 103,363 102 (1,863) 101,602
Mortgage-backed securities . . 220,979 1,434 (1,379) 221,034
Collateralized mortgage
obligations . . . . . . . . . 41,016 212 (255) 40,973
Other securities . . . . . . . 11,873 99 (82) 11,890
- ----------------------------------------------------------------------------
$500,830 $2,446 $(4,241) $499,035
Held-to-Maturity Securities
- ----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------
Mortgage-backed securities . . $ 95,166 $432 $(2,266) $93,332
State and political
securities. . . . . . . . . . 59,401 710 (235) 59,876
Other securities . . . . . . . 82,668 1 (87) 82,582
- ----------------------------------------------------------------------------
$237,235 $1,143 $(2,588) $235,790
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Proceeds from the sale of available-for-sale securities during the three months
ended September 30, 1996 and 1995, were $6,551,000 and $1,956,000, respectively.
Gains of $2,000 and $15,000 were realized on sales during 1996 and 1995. Gross
losses of $9,000 and $3,000 were realized on these sales during 1996
F-42
<PAGE>
and 1995, respectively. Gains and losses at disposition of these securities were
computed using the specific identification method.
NOTE E - LOANS
The composition of the loan portfolio at September 30, 1996, was as follows
(in thousands):
Real estate . . . . . . . . . . . . . . $863,462
Commercial. . . . . . . . . . . . . . . 556,184
Agricultural. . . . . . . . . . . . . . 226,065
Consumer and other. . . . . . . . . . . 330,881
---------
1,976,592
Less allowance for loan losses. . . . . (25,771)
---------
Net loans . . . . . . . . . . . . . $1,950,821
---------
---------
NOTE F - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
In the normal course of business, the Company is party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers and to manage its interest rate risk. These financial instruments
include commitments to extend credit and letters of credit. The contract or
notional amounts of these financial instruments at September 30, 1996, were as
follows (in thousands):
Commitments to extend credit. . . . . . $372,027
Letters of credit . . . . . . . . . . . 16,850
NOTE G - SUBORDINATED NOTES
Long-term debt at September 30, 1996, included $23 million in subordinated
notes issued in April 1993. These notes are due April 15, 2000, and bear an
interest rate of 7.75%, with interest payable monthly. At September 30, 1996,
$13.8 million of the notes qualified as Tier 2 capital. Long-term debt also
included $11.5 million in exchangeable subordinated notes issued in July 1995.
These notes are due August 15, 2005 and bear an interest rate of 9.0% with
interest payable quarterly. At September 30, 1996, the entire $11.5 million of
notes qualified as Tier 2 Capital.
NOTE H - INCOME TAXES
The Company's effective tax rate has declined due to expansion into
additional states and implementation of certain tax strategies.
The reconciliation between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate was as follows (in
thousands):
F-43
<PAGE>
SEPTEMBER 30, 1996
------------------
35% of pretax income. . . . . . . . . . $4,602
State income tax, net of federal
tax benefit. . . . . . . . . . . . . . 532
Minority interest . . . . . . . . . . . 19
Tax-exempt interest . . . . . . . . . . (762)
Amortization of goodwill. . . . . . . . 260
Other . . . . . . . . . . . . . . . . . (95)
--------
Provision for income taxes. . . . . . . $ 4,556
NOTE I - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30 (in thousands) 1996 1995
- -------------------------------------------------------------------------
Unrealized loss on available-for-sale securities $ 5,073 $ (10,366)
NOTE J - CONTINGENT LIABILITIES
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
September 30, 1996, the reserve balance was $964,000. All remaining issues
subject to the reserve are expected to be resolved within a two-year period. It
is management's expectation that resolution of the remaining issues will not
exceed the current reserve balance.
The Company's affiliate bank in Alliance, Nebraska (formerly known as The
Abbott Bank), is named in a petition filed by an attorney who represented The
Abbott Bank through early 1994, prior to the Company's May 1995 acquisition of
the bank. The petition asserts claims relating to alleged abuse of process in
connection with certain investigations and administrative actions commenced by
state and federal banking regulators in February 1994. The petition claims $10
million in actual damages and $10 million in punitive damages. Based upon the
facts currently known to the Company and discussions with counsel, and in light
of the availability of indemnification in connection with the acquisition of The
Abbott Bank and/or director and officer liability coverage (subject to
deductible amounts), the Company believes the claims lack merit and are not
likely to result in material loss to the Company or the Alliance Bank.
F-44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
BASIS OF PRESENTATION
The following is a discussion of the Company's financial condition as of
December 31, 1995 and 1994, and its results of operations for the years ended
December 31, 1995, 1994 and 1993. 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.
The Company completed its acquisition of Mountain Parks Financial
Corporation ("Mountain Parks") on December 18, 1996. The Mountain Parks
acquisition was accounted for using the pooling of interests method.
Accordingly, the consolidated financial information has been restated to reflect
the results of operations of the two companies on a combined basis for all
periods presented.
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. Both
acquisitions were accounted for using the pooling of interests method.
Accordingly, the Company's financial statements have been restated to reflect
the results of operation of the companies on a combined basis for all periods
presented.
Also during the periods presented, the Company made the following
acquisitions of banks (or associated holding companies), each of which was
accounted for as a purchase:
Total Assets
Acquisition At Date of
Month and Location of Bank or Acquisition
Year Name of Acquired Entity (In Millions)
------------------------------------------------------------------
March 1993 Morris, Minnesota $39
June 1993 Steamboat Springs, Colorado $48
June 1993 Cooperstown, North Dakota $24
June 1993 Caledonia, Minnesota $43
November 1993 Greenwald, Minnesota $17
December 1993 Englewood, Colorado $43
April 1994 Spooner, Wisconsin $83
April 1994 Ada, Minnesota $17
April 1994 Fraser, Colorado $21
May 1994 Denver, Colorado $37
May 1995 Alliance, Nebraska $293
July 1995 Boulder, Colorado $60
July 1995 Louisville, Colorado $36
September 1995 Aurora, Colorado $41
October 1995 Beach, North Dakota $44
F-45
<PAGE>
Each of the acquisitions described in the above table is reflected in the
Company's results of operations for all periods following the acquisition and is
reflected in the Company's financial condition at all dates subsequent to the
acquisition.
OVERVIEW
For the year ended December 31, 1995, net income was $30.0 million, an
increase of $7.3 million, or 32.2%, from the $22.7 million earned during 1994.
Return on average assets was 1.24% for 1995, compared with 1.13% for 1994.
Return on average common shareholders' equity for 1995 and 1994 was 18.19% and
16.77%, respectively. Factors contributing to these changes included
approximately $3.4 million of incremental net income provided by entities
acquired during 1995 and 1994.
For the year ended December 31, 1994, net income was $22.7 million, an
increase of $4.4 million, or 24.0%, from the $18.3 million earned during 1993.
Return on average assets was 1.13% for 1994, compared with 1.10% for 1993.
Return on average common shareholders' equity for 1994 and 1993 was 16.77% and
16.64%, respectively. Factors contributing to these increases included
approximately $2.1 million of incremental net income provided by entities
acquired during 1994 and 1993.
Total assets were $2,770 million and $2,131 million at December 31, 1995
and 1994, respectively. The increase of $639 million, or 30.0%, during 1995 was
principally due to the 1995 acquisitions of the banks in Aurora, Alliance,
Beach, Boulder and Louisville, as well as loan growth in the Company's
subsidiary banks.
RESULTS OF OPERATIONS
NET INTEREST INCOME - Net interest income is interest earned on loans and
other earning assets minus interest paid on deposits and other interest-bearing
liabilities. Earning assets are categorized as loans, investment securities
and other earning assets, which include federal funds sold and certificates of
deposit with other financial institutions. Interest-bearing liabilities are
categorized as interest-bearing checking, time and savings deposits, short-term
borrowings, which include federal funds purchased, and long-term borrowings.
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:
F-46
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Yields and Average Yields and Average Yields and
Balance Interest Rates Balance Interest Rates Balance Interest Rates
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1) (2). . . . . . . . . $1,545,497 $151,154 9.78% $1,171,925 $104,766 8.94% $ 909,890 $ 82,153 9.03%
Investment securities (2). . . 656,435 43,009 6.55% 658,216 39,313 5.97% 625,123 38,385 6.14%
Other earning assets . . . . . 29,369 1,710 5.82% 26,051 1,193 4.58% 46,688 1,736 3.72%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total earning assets . . . . 2,231,301 195,873 8.78% 1,856,192 145,272 7.83% 1,581,701 122,274 7.73%
Noninterest-earning assets . . 192,912 149,626 116,042
---------- ---------- ----------
Total assets . . . . . . . . $2,424,213 $2,005,818 $1,697,743
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND
SHAREHOLDER'S EQUITY
Interest-bearing checking. . . $406,080 $8,805 2.17% $388,466 $6,998 1.80% $380,054 $7,858 2.07%
Savings deposits . . . . . . . 349,522 9,748 2.79% 306,147 7,186 2.35% 221,481 5,357 2.42%
Time deposits. . . . . . . . . 963,594 53,227 5.52% 749,027 32,376 4.32% 670,387 29,658 4.42%
Short-term borrowings. . . . . 111,784 6,184 5.53% 83,563 4,029 4.82% 54,435 1,994 3.66%
Long-term borrowings . . . . . 65,379 4,927 7.54% 42,544 2,879 6.77% 36,292 2,404 6.62%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total interest-bearing
liabilities. . . . . . . . 1,896,359 82,891 4.37% 1,569,747 53,468 3.41% 1,362,649 47,271 3.47%
Demand deposits. . . . . . . . 317,806 272,245 166,069
Noninterest-bearing
liabilities. . . . . . . . . 31,189 20,224 57,148
Preferred shareholders'
equity . . . . . . . . . . . 23,000 14,594 -
Common shareholders'
equity . . . . . . . . . . . 155,859 129,008 111,877
---------- ---------- ----------
527,854 436,071 335,094
---------- ---------- ----------
Total liabilities and
shareholders' equity . . . . $2,424,213 $2,005,818 $1,697,743
---------- ---------- ----------
---------- ---------- ----------
Net interest income. . . . . . $112,982 $91,804 $75,003
-------- -------- --------
-------- -------- --------
Net interest spread. . . . . . 4.41% 4.42% 4.26%
---- ---- ----
---- ---- ----
Net interest margin. . . . . . 5.06% 4.95% 4.74%
---- ---- ----
---- ---- ----
</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 1995, 1994 and 1993.
F-47
<PAGE>
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>
1995 compared to 1994 1994 compared to 1993
- ------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1) (2) . . . . . . . . . $ 33,396 $ 12,992 $ 46,388 $ 23,659 $ (1,046) $ 22,613
Investment securities (2) . . . (106) 3,802 3,696 2,032 (1,104) 928
Other earning assets. . . . . . 152 365 517 (767) 224 (543)
- ------------------------------------------------------------------------------------------------------------------------
Total interest income. . . . . . . 33,442 17,159 50,601 24,924 (1,962) 22,998
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits and
interest-bearing
checking. . . . . . . . . . 1,335 3,034 4,369 2,222 (1,253) 969
Time deposits . . . . . . . . . 9,275 11,576 20,851 3,479 (761) 2,718
Short-term borrowings . . . . . 1,361 794 2,155 1,067 (968) 2,035
Long-term borrowings. . . . . . 1,545 503 2,048 414 61 475
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense . . . . . . 13,516 15,907 29,423 7,182 (985) 6,197
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in
net interest income . . . . . . $ 19,926 $ 1,252 $ 21,178 $ 17,742 $ (941) $ 16,801
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes loan fees.
(2) Interest income is presented on a tax equivalent basis.
From 1994 to 1995, average earning assets increased by $375 million, or
20.2%, from $1,856 million to $2,231 million. Average assets increased
primarily due to acquisitions made by the Company, which included the
Spooner, Ada and Fraser banks in April 1994, the Denver bank in May 1994, the
Alliance bank in May 1995, the Boulder and Louisville banks in July 1995,
Aurora bank in September 1995 and the Beach bank in October 1995. Average
loans rose from $1,172 million in 1994 to $1,545 million in 1995, an increase
of $373 million, or 31.8%. Interest income on a tax equivalent basis in 1995
was $195.9 million, compared to $145.3 million in 1994. The increase of
$50.6 million was due to the increase in loan volume provided by the acquired
banks, as well as loan growth in existing markets.
Average interest-bearing liabilities increased from $1,570 million in
1994 to $1,896 million in 1995, an increase of $326 million, or 20.8%. The
increase was due to the nine bank acquisitions made by the Company from the
second quarter of 1994 through December 1995. Total interest expense in 1995
was $82.9 million, an increase of $29.4 million, or 55.0%, from $53.5 million
in 1994. Average interest rates on liabilities increased from 3.41% in 1994
to 4.37% in 1995. The impact of the additional volume of liabilities, as
shown in the rate/volume analysis table above, accounts for the increase.
The increase in the average interest rate paid was attributed to the combined
effect of higher rates paid on all deposit liability accounts and short-term
borrowings and a reduction in the rate paid on long-term borrowing. The
average volume of interest-bearing checking accounts with an average rate of
2.17% increased $18 million, or 4.6%, from $388 million in 1994 to $406
million in 1995. The average volume of savings deposit accounts with an
average rate in 1995 of 2.79% increased from $306 million in 1994 to $350
million in 1995, an increase of $44 million, or 14.4%. The average volume
of time deposits with an average rate in 1995 of 5.52% increased from $749
million in 1994 to $964 million in 1995, an increase of $215 million, or
28.7%. Average short-term borrowings increased from $84 million in 1994 to
$112 million in 1995, an increase of $28 million, or 33.3%. Average
long-term borrowings increased from $43 million in 1994 to $65 million in
1995, an increase of $22 million, or 51.2%.
F-48
<PAGE>
From 1993 to 1994, average earning assets increased by $274 million, or
17.3%, from $1,582 million to $1,856 million. Average assets increased
primarily due to acquisitions made by the Company, which included the six bank
acquisitions in 1993 and the four bank acquisitions in 1994. Average loans rose
from $910 million in 1993 to $1,172 million in 1994, an increase of $262
million, or 28.8%. Interest income on a tax equivalent basis in 1994 was $145.3
million, compared to $122.3 million in 1993. The increase of $23.0 million was
due to the increase in loan volume provided by the acquired banks, as well as
the loan growth in existing markets.
Average interest-bearing liabilities increased from $1,363 million in 1993
to $1,570 million in 1994, an increase of $207 million, or 15.2%. The increase
was due to the ten bank acquisitions made by the Company from the second quarter
of 1993 through December 1994. Total interest expense in 1994 was $53.5
million, an increase of $6.2 million, or 13.1%, from $47.3 million in 1993. The
decline in average interest rate on liabilities from 3.47% in 1993 to 3.41% in
1994 partially offset the impact of the additional volume of liabilities. The
increase in interest expense was attributed to the combination of a decline in
the rates paid on interest-bearing checking, savings deposits and time deposits
and an increase in the rates paid on short-term and long-term borrowings. The
average volume of interest-bearing checking with an average rate in 1994 of
1.80% increased from $380 million in 1993 to $388 million in 1994, an increase
of $8 million, or 2.1%. The average volume of savings deposits with an average
rate in 1994 of 2.35% increased from $221 million in 1993 to $306 million in
1994, an increase of $85 million, or 38.5%. The average volume of time
certificates with an average rate in 1994 of 4.32% increased from $670 million
in 1993 to $749 million in 1994, an increase of $79 million, or 11.8%. Average
short-term borrowings increased from $54 million to $84 million, an increase of
$30 million, or 55.6%. Average long-term borrowings increased from $36 million
in 1993 to $43 million in 1994.
Net interest income on a tax equivalent basis in 1995 was $113.0 million, a
$21.2 million increase, or 23.1%, from $91.8 million in 1994. This increase was
due to the increase in the volume of average earning assets. The increase of
earning asset yield of .95% from 7.83% to 8.78% was complemented by a .96%
increase in the rate paid on interest-bearing liabilities from 3.41% to 4.37%.
The ratio of average interest-bearing liabilities to average earning assets
increased slightly to 85.0% from 84.6%. The net margin increased from 4.95% to
5.06%, an increase of .11%.
Net interest income on a tax equivalent basis in 1994 was $91.8 million, a
$16.8 million increase, or 22.4%, from the $75.0 million in 1993. This increase
was due primarily to the $274 million increase in earning asset volume, offset
in part by a $207 million increase in interest-bearing liabilities. A slight
increase of .10% in earning asset yield from 7.73% in 1993 to 7.83% in 1994, was
complemented by a slight decrease of .06% in the interest-bearing liability
yield from 3.47% in 1993 to 3.41% in 1994. The 1994 net interest margin of
4.95% was .21% higher than the 1993 net interest margin of 4.74%.
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 1995 was $2.7
million, an increase of $872,000, or 47.4%, from the $1.8 million provision
during 1994. The increased loan loss provision was principally due to the
Company's strong loan growth. 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 1994 was $1.8 million, a decrease
of $310,000, or 14.4% from the 1993 provision of $2.1 million.
NONINTEREST INCOME - Noninterest income associated with the Company's
community banking operations consists mainly of service charges on deposit
accounts, service fees on checking accounts, insurance commissions and fees for
trust services.
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
F-49
<PAGE>
in 1995 to $10.1 million from the $8.5 million in 1994, an increase of $1.6
million, or 18.8%. The increase is attributed to $1.0 million in service
charges on deposit accounts at banks acquired during 1995. Net investment
security gains decreased to $52,000 from $99,000 in 1994. 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 1994 was $19.0 million, an increase of $834,000, or
4.6%, from the $18.2 million earned in 1993. The increase was principally due
to an increase in service charges on deposit accounts in 1994 from $7.6 million
earned during 1993 to $8.5 million earned in 1994, an increase of $896,000, or
11.8%. Net investment security gains decreased to $99,000 from $1.9 million in
1993. Sales of securities, which resulted in gains due to the liquidation of
securities at a price in excess of the securities' adjusted book values, were
completed to meet liquidity needs required by loan growth at subsidiary banks
and to adjust portfolio duration.
NONINTEREST EXPENSE - The following table presents the components of
noninterest expense for the periods indicated:
Years Ended December 31
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands)
Salaries and employee benefits . . . . . $ 42,796 $ 35,083 $ 29,931
Net occupancy. . . . . . . . . . . . . . 10,563 9,353 8,413
FDIC insurance . . . . . . . . . . . . . 2,532 3,720 3,193
Legal and accounting . . . . . . . . . . 1,311 1,403 1,490
Other professional service . . . . . . . 2,700 2,054 2,286
Acquisition expenses . . . . . . . . . . 768 908 -
Data processing and loan
servicing fees. . . . . . . . . . . . . 1,607 856 722
Minority interest. . . . . . . . . . . . 175 948 967
Intangibles. . . . . . . . . . . . . . . 2,551 1,876 1,634
Other. . . . . . . . . . . . . . . . . . 17,590 14,040 12,218
- ------------------------------------------------------------------------------
Total noninterest expense . . . . . . $ 82,593 $ 70,241 $ 60,854
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Noninterest expense for 1995 was $83.0 million, an increase of $12.8
million, or 18.2%, 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 banks acquired during
1995 and $712,000 was due to 1994 acquisitions. During 1995 and 1994,
salaries and employee benefits represented 51.8% and 49.9%, respectively, of
total noninterest expense. Net occupancy expense was $10.6 million, an
increase of $1.2 million, or 12.8%, from $9.4 million in 1994. Of the
increase, $1.2 million was due to 1995 acquisitions and $191,000 was due to
1994 acquisitions. Federal Deposit Insurance Corporation ("FDIC") insurance
expense was $2.5 million, a decrease of $1.2 million, or 32.4%, from $3.7
million in 1994. The decrease was 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 1995 and 1994 bank acquisitions and an increase in
average deposits for 1995 to $2,037 million from $1,716 million in 1994, an
increase of $321 million, or 18.7%. Legal and accounting fees declined
$92,000, or 6.6%, from $1,403,000 to $1,311,000 during 1995. Acquisition
expenses of $768,000 were incurred in 1995 in conjunction with the
acquisition of Minowa and First Community. Acquisition expenses represented
legal and accounting expenses incurred by the Company (including the acquired
entities) in conjunction with the transactions. Intangible expense increased
$675,000, or 36.0%, 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
$17.6 million, an increase of $3.6 million, or 25.7%, from $14.0 million in
1994.
F-50
<PAGE>
Noninterest expense for 1994 was $70.2 million, an increase of $9.3
million, or 15.3%, from the level of $60.9 million during 1993. The increase
was principally due to an increase of $5.2 million, or 17.4%, in salaries and
employee benefits, of which $1.9 million was due to the 1993 acquisitions and
$1.5 million was due to the banks acquired during 1994. During 1994, salaries
and employee benefits represented 49.9% of total noninterest expense, slightly
higher than the 49.2% in 1993. Net occupancy expense was $9.4 million, an
increase of $1.0 million, or 11.9%, from $8.4 million in 1993. Of the increase,
$769,000 was due to 1993 and 1994 acquisitions. FDIC insurance expense was $3.7
million, an increase of $527,000, or 16.5%, from $3.2 million in 1993. Deposits
obtained through bank acquisitions accounted for the additional expense.
Average deposits for 1994 were $1,716 million, which is $278 million, or 19.3%,
higher than the 1993 level of $1,438 million. Acquisition expenses of $908,000
were incurred in 1994 in conjunction with the acquisitions of Minowa and First
Community. Acquisition expenses represented legal and accounting costs incurred
by the Company (including the acquired entities) in connection with the
transactions. Intangible expense increased $242,000, or 14.8%, due to the
additional intangible assets recognized in connection with the Company's
acquisitions. Other noninterest expense was $14.0 million, an increase of $1.8
million, or 14.8%, from $12.2 million during 1993.
Minority interest represents the claim on subsidiary bank earnings of the
minority shareholders of the banks. At December 31, 1995, an average (weighted
according to the equity of each bank) of .38% of the common stock of the
Company's subsidiary banks was owned by local bank presidents, directors and
employees. This is a reduction from 3.41% at December 31, 1994. In the
consolidated statements of income of the Company, minority interest is included
in noninterest expense. The level of minority interest expense is directly
attributable to earnings and the level of minority ownership of the subsidiary
banks. It is the Company's policy to provide and encourage minority ownership
by bank presidents within Company prescribed constraints. 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.
PROVISION FOR INCOME TAXES
The provision for income taxes for the year ended December 31, 1995, was
$17.2 million, an increase of $3.2 million, or 22.9%, from the level of $14.0
million for the 1994 period, principally due to increased pretax income. Income
before income taxes was $47.2 million in the 1995 period, an increase of $10.5
million, or 28.6%, from the 1994 level. The effective tax rate of the 1995
period was 36.4%, a decrease from the 1994 level of 38.1%, a portion of which is
attributed to the addition of approximately $61 million of tax exempt assets.
The provision for income taxes for the year ended December 31, 1994, was
$14.0 million, an increase of $3.2 million, or 29.6%, from the level of $10.8
million for the 1993 period, principally due to increased pretax income. Income
before income taxes was $36.7 million in the 1994 period, an increase of $7.7
million, or 26.6%, from the 1993 level. The effective tax rate of the 1994
period was 38.1%, an increase from the 1993 rate of 37.2%.
FINANCIAL CONDITION
LOANS - 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
F-51
<PAGE>
nonclassified borrower and $250,000 per classified borrower are presented to the
Senior Credit Committee for approval.
At December 31, 1995, total loans were $1,767 million, an increase of $437
million, or 32.9%, from the December 31, 1994, level of $1,330 million. A
significant portion of this increase is attributable to in-market loan growth in
the Company's existing markets. In addition, the purchase of five banking
institutions in 1995 accounted for $307 million of the increase, while the
Company's volume of purchased loan assets increased $79 million. 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. 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 $192 million at December 31, 1995, compared to $113 million at
December 31, 1994. 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 1996.
F-52
<PAGE>
<TABLE>
<CAPTION>
The following table presents the Company's balance of each major category of loans at the dates indicated:
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan category:
Real estate. . . . . . . $ 744,477 42.13% $ 544,809 40.96% $ 403,716 38.91% $305,851 37.59% $263,719 38.50%
Commercial . . . . . . . 527,620 29.86% 397,869 29.91% 316,565 30.51% 252,361 31.02% 208,061 30.37%
Consumer and other . . . 270,459 15.30% 225,256 16.93% 170,271 16.41% 138,139 16.98% 118,714 17.33%
Agricultural . . . . . . 224,637 12.71% 162,212 12.20% 147,114 14.18% 117,199 14.41% 94,559 13.80%
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans. . . . . . . . 1,767,193 100.00% 1,330,146 100.00% 1,037,666 100.00% 813,550 100.00% 685,053 100.00%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Less allowance for loan
losses . . . . . . . . . 22,712 17,333 14,332 11,196 10,502
---------- ---------- ---------- -------- --------
Total. . . . . . . . . . . $1,744,481 $1,312,813 $1,023,334 $802,354 $674,551
---------- ---------- ---------- -------- --------
---------- ---------- ---------- -------- --------
</TABLE>
F-53
<PAGE>
GENERAL. The Company's loan mix remained relatively constant from 1994 to
1995. Real estate loans continued to be the largest category of loans,
representing 42.1% 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. At December 31, 1995, real estate loans were $744 million,
or 42.1% of total loans. This level represented an increase of $198 million, or
36.3%, from $546 million at December 31, 1994, when real estate loans
represented 41.0% of total loans. At December 31, 1994, real estate loans were
$546 million. This represented an increase of $142 million, or 35.1%, from $404
million at December 31, 1993. As of December 31, 1995, $291 million, or 39.1%,
of the Company's real estate loan portfolio consisted of residential real estate
loans, $114 million, or 15.3%, were secured by farmland, $236 million, or 31.7%,
represented commercial and other real estate loans and $103 million, or 13.9%,
represented construction loans.
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. As of December 31,
1995, commercial loans represented $528 million, or 29.9% of total loans,
compared to $397 million, or 29.8% of total loans at December 31, 1994. This
increase of $131 million, or 33.0%, was partially due to the acquisitions of
five banks during 1995, increases in the Company's commercial loan portfolio and
the purchase of other loan assets. Commercial loans at December 31, 1994, were
$80 million, or 25.2% greater than the December 31, 1993, level of $317 million.
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. At December 31, 1995, consumer and other loans were $270 million, or
15.3% of total loans, an increase of $45 million, or 20.0%, from $225 million at
December 31, 1994, which represented 16.9% of total loans. The increase was due
to the 1995 acquisitions of the Alliance, Aurora, Beach, Boulder and Louisville
banks and growth in consumer loans at specific subsidiary banks. Consumer and
other loans rose $55 million, or 32.4%, from $170 million at December 31, 1993,
to $225 million at December 31, 1994. The increase was due to the purchase of
the banks in Ada, Denver, Fraser and Spooner.
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.
Agricultural loans were $224 million at December 31, 1995, or 12.7% of total
loans. At December 31, 1995, agricultural loans increased $62 million, or
38.3%, from $162 million at December 31, 1994. The increase in agricultural
loans during 1995 was due principally to the acquisitions of Alliance and Beach.
Agricultural loans rose $15 million, or 10.2%, from December 31, 1993, to
December 31, 1994, primarily due to the purchases of the banks in Ada, Fraser
and Spooner.
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 $398,000 on nonaccrual
loans would have been recorded during 1995 if the loans had been current in
accordance with their original terms. During 1995, the Company recorded
interest income of $210,000 related to loans that were on nonaccrual status as
of December 31, 1995.
F-54
<PAGE>
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,
- ---------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans:
Nonaccrual loans. . . . . . . . . $ 3,252 $ 3,087 $ 3,742 $ 4,395 $ 4,455
Restructured loans. . . . . . . . 483 140 1,100 602 673
- ---------------------------------------------------------------------------------------------------------------
Nonperforming loans . . . . . . . 3,735 3,227 4,842 4,997 5,128
OREO . . . . . . . . . . . . . . . . 1,701 1,265 1,622 4,210 4,089
- ---------------------------------------------------------------------------------------------------------------
Nonperforming assets. . . . . . . $ 5,436 $ 4,492 $ 6,464 $ 9,207 $ 9,217
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Loans 90 days or more past
due but still accruing. . . . . . $ 779 $ 722 $ 761 $ 1,228 $ 1,122
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Nonperforming loans as a
percentage of total
loans . . . . . . . . . . . . . . 0.21% 0.24% 0.47% 0.61% 0.75%
Nonperforming assets as a
percentage of total
assets. . . . . . . . . . . . . . 0.20% 0.21% 0.34% 0.58% 0.65%
Nonperforming assets as a
percentage of total loans
and OREO. . . . . . . . . . . . . 0.31% 0.34% 0.62% 1.13% 1.34%
Total loans. . . . . . . . . . . . . $ 1,767,193 $ 1,330,146 $ 1,037,666 $ 813,550 $ 685,053
Total assets . . . . . . . . . . . . $ 2,769,976 $ 2,130,619 $ 1,883,794 $ 1,576,275 $ 1,414,860
</TABLE>
Nonperforming assets were $5.4 million at December 31, 1995, an increase of
$944,000, or 21.0%, from $4.5 million at December 31, 1994. Nonperforming loans
increased by $508,000 due principally to restructured loans at banks acquired
during 1995.
OREO increased from $1,265,000 at December 31, 1994, to $1,701,000 at
December 31, 1995, an increase of $436,000, or 34.5%. This increase was the
result of moving one $700,000 real estate development loan to OREO and the
transfer of approximately $300,000 out of OREO. The ratio of nonperforming
assets to total assets at December 31, 1995, was .20%, compared to .21% at
December 31, 1994.
Nonperforming assets were $4.5 million at December 31, 1994, a decrease of
$2.0 million, or 30.8%, from $6.5 million at December 31, 1993. Nonperforming
loans decreased by $1.6 million, resulting principally from a $540,000 decrease
in purchased real estate mortgages. OREO decreased $357,000, or 22.0%, from
$1.6 million at December 31, 1993 to $1.3 million at December 31, 1994. The
ratio of nonperforming assets to total assets at December 31, 1994, was .21%,
compared to .34% at December 31, 1993.
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
F-55
<PAGE>
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, 1995.
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, 1995.
The following table sets forth the Company's allowance for loan losses as
of the dates indicated:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
year. . . . . . . . . . . . . . . . . . . . $ 17,333 $ 14,332 $ 11,196 $ 10,502 $ 10,104
Allowance of acquired
companies . . . . . . . . . . . . . . . . . 5,230 1,153 1,714 724 696
Charge-offs:
Real estate . . . . . . . . . . . . . . . . 303 109 303 691 562
Commercial. . . . . . . . . . . . . . . . . 1,285 484 617 1,514 1,765
Consumer and other. . . . . . . . . . . . . 1,502 581 461 714 459
Agricultural. . . . . . . . . . . . . . . . 373 38 58 88 129
Credit cards (1). . . . . . . . . . . . . . - 3 - - 1,587
- --------------------------------------------------------------------------------------------------------------------------
Total charge-offs . . . . . . . . . . . . . 3,463 1,215 1,439 3,007 4,502
Recoveries:
Real estate . . . . . . . . . . . . . . . . 63 549 162 69 33
Commercial. . . . . . . . . . . . . . . . . 245 247 325 221 475
Consumer and other. . . . . . . . . . . . . 536 218 188 227 205
Agricultural. . . . . . . . . . . . . . . . 57 210 37 27 64
- --------------------------------------------------------------------------------------------------------------------------
Total recoveries. . . . . . . . . . . . . . 901 1,224 712 544 777
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs. . . . . . . . . . . . . . . . 2,562 (9) 727 2,463 3,725
Provision charged to
operations. . . . . . . . . . . . . . . . . 2,711 1,839 2,149 2,433 3,427
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year . . . . . . . . . . . . $ 22,712 $ 17,333 $ 14,332 $ 11,196 $ 10,502
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Allowance as a percentage
of total loans. . . . . . . . . . . . . . . 1.29% 1.30% 1.38% 1.38% 1.53%
Net charge-offs
to average loans
outstanding . . . . . . . . . . . . . . . . 0.17% -0.00% 0.08% 0.33% 0.55%
Total loans. . . . . . . . . . . . . . . . . . $ 1,767,193 $ 1,330,146 $ 1,037,666 $ 813,550 $ 685,053
Average loans. . . . . . . . . . . . . . . . . $ 1,545,497 $ 1,171,925 $ 909,890 $ 745,984 $ 675,209
</TABLE>
(1) Represents charge-offs, net of recoveries.
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 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. This decrease is attributed to strong loan growth and loan
portfolio credit quality.
F-56
<PAGE>
At December 31, 1994, the allowance for loan losses was $17.3 million, an
increase of $3.0 million from the December 31, 1993, level of $14.3 million.
The Company's 1994 acquisitions accounted for $1.2 million of the increase, with
the remaining increase due to maintaining an adequate reserve in recognition of
the Company's loan growth and the decrease in net charge-offs during 1994. At
December 31, 1994, the allowance for loan losses as a percentage of total loans
was 1.30%, as compared to 1.38% at December 31, 1993.
During 1995, net charge-offs were $2.6 million, an increase from the net
recoveries of $9,000 for 1994. The increase included an increase of $603,000 in
consumer and other loan net charge-offs from $363,000 in 1994 to $966,000 in
1995, due in part to banks acquired during 1995. Also, commercial loan net
charge-offs increased from $237,000 in 1994 to $1,040,000 in 1995, an increase
of $803,000. Agricultural net charge-offs increased from a 1994 net recovery of
$172,000 to a $316,000 net charge-off in 1995, an increase of $488,000. The
Company's provision for loan loss increased from $1.8 million in 1994 to $2.7
million in 1995. Excluding the impact of the credit card participations, the
net charge-offs to average loans outstanding in 1995, 1994, 1993, 1992 and 1991
would have been .17%, .00%, .08%, .33% and .27%, respectively.
During 1994, net recoveries were $9,000, a reduction of $736,000 from the
net charge-offs of $727,000 for 1993. The principal causes for the decrease
were the reduction of real estate net charge-offs from $141,000 in 1993 to
$440,000 net recovery in 1994, a decrease of $581,000; the reduction of
commercial net charge-offs from $292,000 in 1993 to $237,000 in 1994, a decrease
of $55,000; and the reduction of agricultural net charge-offs from $21,000 in
1993 to a $172,000 net recovery in 1994, a reduction of $193,000. The Company's
provision for loan loss was $1.8 million in 1994 and $2.1 in 1993.
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:
F-57
<PAGE>
<TABLE>
<CAPTION>
Allowance as a Percent of Loans Outstanding
Allowance for Loan Losses at December 31, by Category at December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate. . . . . . . $ 4,208 $ 3,252 $ 2,801 $ 2,235 $ 2,247 .57% 0.60% 0.69% 0.73% 0.85%
Commercial . . . . . . . 4,400 3,605 3,509 2,858 3,203 .83% 0.91% 1.11% 1.13% 1.54%
Consumer and other . . . 1,690 1,614 1,346 1,031 1,290 .62% 0.72% 0.79% 0.75% 1.09%
Agricultural . . . . . . 1,615 1,737 1,529 1,245 920 .72% 1.07% 1.04% 1.06% .97%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Allocated
Allowance. . . . . . . 11,913 10,208 9,185 7,369 7,660 0.67% 0.77% 0.89% 0.91% 1.12%
Total Unallocated
Allowance. . . . . . . 10,799 7,125 5,147 3,827 2,842 0.62% 0.54% 0.50% 0.47% 0.41%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Allowance. . . . . $22,712 $17,333 $14,332 $11,196 $10,502 1.29% 1.30% 1.38% 1.38% 1.53%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-58
<PAGE>
INVESTMENTS - Management augments the quality of the loan portfolio by
maintaining a high quality investment portfolio oriented toward U.S. Government
agency 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. Federal funds sold and certificates of
deposit are additional assets that are not classified as investment securities.
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,
1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands)
U.S. Treasury. . . . . . . . . . . . . . $- $72,519 $44,162
U.S. Government agencies . . . . . . . . 3,318 44,957 34,654
Mortgage-backed securities . . . . . . . 106,429 185,753 177,381
Collateralized mortgage obligations. . . - 22,811 25,151
State and political securities . . . . . 55,267 43,672 34,990
Other securities . . . . . . . . . . . . 65,806 12,163 11,343
- ------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . $230,820 $381,875 $327,681
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The following table sets forth the composition of the Company's available-for-
sale securities portfolio estimated fair value as of the dates indicated:
Book Value at December 31,
1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands)
U.S. Treasury. . . . . . . . . . . . . . $154,508 $90,028 $119,697
U.S. Government agencies . . . . . . . . 121,588 33,353 88,796
Mortgage-backed securities . . . . . . . 143,359 85,748 90,022
Collateralized mortgage obligations. . . 58,053 14,361 19,047
State and political securities . . . . . 1,443 0 0
Other . . . . . . . . . . . . . . . . . 7,571 7,874 8,479
- ------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . $486,522 $231,364 $326,041
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
F--59
<PAGE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities At December 31, 1995, 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
Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1)
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
agencies . . . . . . . . . $ 122 7.47% $ 963 5.61% $ 1,168 7.13% $ 1,065 7.18% $ 3,318 6.72%
Mortgage-backed
securities . . . . . . . . 1,584 7.73% 10,632 7.46% 52,764 5.81% 41,449 6.50% 106,429 6.27%
Collateralized Mortgage
Obligations. . . . . . . . - 0.00% - 0.00% - 0.00% - 0.00% - 0.00%
Municipal Bonds. . . . . . . 7,612 7.55% 16,207 7.63% 11,250 7.81% 20,198 8.33% 55,267 7.91%
Other. . . . . . . . . . . . 3,554 6.13% - - - - 62,252 7.47% 65,806 7.40%
- ----------------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . $12,872 7.18% $27,802 7.50% $65,182 6.18% $124,964 7.29% $230,820 6.99%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(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 4.30% cost of funds.
Available-for-Sale Securities At December 31, 1995, 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
Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1)
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury . . . . . . . $96,171 5.95% $57,439 6.11% $898 7.57% $- 0.00% $154,508 6.02%
U.S. Government
agencies . . . . . . . . . 29,842 5.69% 52,746 5.93% 30,666 6.95% 8,334 7.01% 121,588 6.20%
Mortgage-backed
securities . . . . . . . . 2,729 6.07% 12,590 6.00% 3,885 6.43% 124,155 6.36% 143,359 6.32%
Collateralized mortgage
obligations. . . . . . . . 8,352 5.30% 36,980 6.12% 8,317 6.09% 4,404 6.11% 58,053 6.00%
Municipal Bonds. . . . . . . 246 8.59% 494 8.09% 329 8.74% 374 10.02% 1,443 8.82%
Other. . . . . . . . . . . . 4,811 5.50% 1,641 7.25% - 0.00% 1,119 3.58% 7,571 5.60%
- ----------------------------------------------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . $142,151 5.86% $161,890 6.06% $44,095 6.76% $138,386 6.38% $486,522 6.15%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(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 4.30% cost of funds.
</TABLE>
F-60
<PAGE>
At December 31, 1995, the Company had $487 million in available-for-sale
securities, consisting of U.S. Treasury securities of $154 million, mortgage-
backed securities of $143 million and other securities, including U.S.
Government agencies and collateralized mortgages, totaling $190 million. Under
the provisions of SFAS No. 115, the total of $487 million includes net
unrealized gains of $3.3 million. The contractual maturities of the available-
for-sale securities range from one month to twenty-nine years. Consistent with
the Company's tax strategy to minimize tax expense, the Company increased its
investment in tax-exempt securities during 1995.
The Company's investments, including available-for-sale and held-to-
maturity securities, increased $105 million, or 17.1%, to $718 million at
December 31, 1995, from $613 million at December 31, 1994. This increase was
due to the addition of $129 million of securities obtained through 1995 bank
acquisitions. At December 31, 1995, the Company's investments represented 25.9%
of total assets, compared to 28.8% at December 31, 1994. In addition to
available-for sale and held-to-maturity securities, the Company had investments
in interest-bearing deposits at December 31, 1995, of $3 million, a decrease of
$3.2 million from $6.4 million at December 31, 1994.
The book value of securities sold in 1995 was $51 million, a decrease of
$11 million from the $62 million sold during 1994. Securities were sold
primarily to fund increased loan volume and in conjunction with the
restructuring of acquired bank investment portfolios. These securities were
carried as available-for-sale.
DEPOSITS - The following table sets forth a summary of the deposits of the
Company at the dates indicated:
December 31,
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
(In thousands)
Noninterest-bearing. . . . . . . . . $ 398,314 $ 315,667 $ 273,382
Interest-bearing:
Savings and checking
accounts . . . . . . . . . . . 873,025 699,412 666,973
Time accounts less than
$100,000 . . . . . . . . . . . 894,805 664,434 594,975
Time accounts greater than
$100,000 . . . . . . . . . . . 193,572 115,052 92,659
- ------------------------------------------------------------------------------
Total deposits . . . . . . . . . . . $ 2,359,716 $ 1,794,565 $ 1,627,989
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Total deposits at December 31, 1995, were $2,360 million, an increase of
$565 million, or 31.5%, from $1,795 million at December 31, 1994. The Company's
core deposits as a percentage of total deposits were 90.7% and 93.6% as of
December 31, 1995 and December 31, 1994, respectively. Core deposits are
defined as noninterest-bearing deposits, interest-bearing savings and checking
accounts and time deposits of less than $100,000. The increase in total
deposits was primarily due to the 1995 bank acquisitions, with aggregate total
deposits of $439 million as of the respective acquisition dates. Interest-
bearing deposits at December 31, 1995, were $1,962 million, an increase of $483
million, or 32.7%, over the December 31, 1994, level of $1,479 million.
At December 31, 1995, $219 million, or 9.3% of total deposits were in time
accounts greater than $100,000. The increase in deposits greater than $100,000
of $104 million, or 90.4%, from $115 million at December 31, 1994, $29 million
was due to the institutions acquired during 1995. Management believes virtually
all the deposits in excess of $100,000 are with persons or entities that hold
other deposit relationships with the banks. At December 31, 1995, maturities of
deposits in excess of $100,000 were as follows: $81 million maturing in less
than three months; $45 million maturing in three to six months; $40 million
maturing in six to twelve months; and $28 million maturing in over twelve
months.
F-61
<PAGE>
Due to the availability of core deposits, management has determined it is
not necessary to employ a brokered deposit program and the Company does not
intend to employ such a program. Two affiliate banks acquired a nominal amount
of deposits during 1995 through the use of a deposit broker. The Company
intends to continue to expand its core deposit base through acquisitions.
BORROWINGS - Long-term debt of the Company was $81 million as of December
31, 1995, and $38 million as of December 31, 1994. Long-term debt includes $23
million of unsecured subordinated notes issued in April 1993. The subordinated
notes mature April 15, 2000, carry a 7.75% interest rate and are not redeemable
prior to April 16, 1996. The exchangable subordinated notes mature August 15,
2005, carry a 9.0% interest rate and in accordance with terms of the note may be
redeemable in whole or in part any time after August 15, 1998. The Company also
has two term notes with its primary lender, including one note with $400,000
outstanding at December 31, 1995. The note bears interest at the bank's base
rate (8.75% at December 31, 1995) payable quarterly, with annual principal
payments of $100,000 on October 1 through maturity in 1999. A second term note
with $10,002,000 outstanding at December 31, 1995, bears interest at Federal
Funds rate plus 2% (7.25% at December 31, 1995) payable quarterly with principal
payments equal to 6.25% of the amortized balance payable semiannually through
maturity in 2003.
The Company's subsidiary banks had arrangements with the Federal Home Loan
Bank that provide for borrowing up to $186 million. As of December 31, 1995,
$36,386,000 long-term and $28,775,000 short-term advances were outstanding. The
Company's subsidiaries had additional short-term borrowings of $2,004,000
outstanding at December 31, 1995.
At December 31, 1995, the Company had no balance outstanding of a $3
million revolving line of credit with its primary lender used to fund operating
needs. The line of credit bears interest at the Federal Funds rate plus 2%
(7.25% at December 31, 1995). The Company had a $10 million balance outstanding
on its $10 million short-term commercial paper arrangement (5.91% blended rate
at December 31, 1995).
F-62
<PAGE>
The following table sets forth a summary of the short-term borrowings of
the Company during 1995, 1994 and 1993, and as of the end of each such period:
<TABLE>
<CAPTION>
Average Maximum Weighted Average
Outstanding Daily Outstanding Average Interest
at Amount at any Interest Rate at
(In thousands) Year-End Outstanding Month-End Rate Year-End
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1993
Federal funds purchased
and securities sold
under agreements
to repurchase. . . . . . . . . . . . . . . . . $ 56,206 $ 47,742 $ 82,271 3.30% 2.74%
Commercial paper . . . . . . . . . . . . . . . . 2,637 3,795 4,945 3.56% 3.45%
Other . . . . . . . . . . . . . . . . . . . . . 3,351 2,898 3,751 5.42% 3.76%
- ---------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . $ 62,194 $ 54,435 $ 79,116 3.43% 2.83%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
CAPITAL MANAGEMENT - Risk-based guidelines established by regulatory
agencies set minimum capital standards based on the level of risk associated
with a financial institution's assets. As of December 31, 1995, a financial
institution's total capital is required to equal at least 8% of risk-weighted
assets. At least half of the required 8% must consist of Tier 1 capital and the
remainder may be Tier 2 capital. Risk-weighted assets are determined by
weighting the assets according to guideline characteristics.
F-63
<PAGE>
The table below sets forth the Company's risk-based capital levels as of
December 31, 1995 and 1994, compared to the risk-based requirements:
Excess at
December 31, Capital December 31,
--------------- -------------
1995 1994 Requirements 1995 1994
- -----------------------------------------------------------------------
CAPITAL CATEGORY (1)
Tier 1 capital . . . 8.51% 10.64% 4.00% 4.51% 6.64%
Tier 2 capital . . . 2.67% 2.82% - - -
- -----------------------------------------------------------------------
Total risk-based
capital . . . . . 11.18% 13.46% 8.00% 3.18% 5.46%
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
(1) Capital ratios are expressed as a percentage of risk-weighted assets, which
were $1,974 million and $1,428 million as of December 31, 1995 and 1994,
respectively.
Additionally, the regulatory agencies established a minimum leverage ratio
of tangible Tier 1 capital to total assets of 3%. The federal regulatory
agencies have stated that banking organizations contemplating significant
expansion proposals or having high or inordinate levels of risk are expected to
maintain capital levels substantially above the minimum levels. Management
believes that regulators will expect the Company to maintain a minimum leverage
ratio of 4% to 5%. As of December 31, 1995, the Company's Tier 1 capital and
total risk-based capital were $168 million and $221 million, respectively. As
of December 31, 1995, the Company's leverage ratio was 6.10%.
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.
SHAREHOLDERS' EQUITY - Total shareholders' equity increased $46.3 million,
or 29.4%, to $204.0 million at December 31, 1995, from $157.7 million at
December 31, 1994, as a result of the retention of a majority of earnings, the
conversion of debentures and the issuance of common stock. In June 1995 the
Company called all the outstanding 7.375% convertible exchangable redeemable
subordinated debentures, essentially converting all debentures to the equivalent
of 485,338 shares of common stock, which resulted in an additional $3.9 million
of equity capital. During 1995 the equivalent of 891,863 shares of common stock
were issued resulting in an increase in shareholders equity of $11.6 million.
In 1995, the Company extended the common stock 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
repurchase program providing for a systematic repurchase of up to 600,000
additional shares. The shares are used primarily for the issuance of common
stock under stock-based compensation plans and for preferred stock conversions.
In 1995, the Company acquired 4,000 shares of its common stock for cash
consideration of $56,000. The Company has an ESOP that provides that all
employees over 21 years of age who work more than 1,000 hours and have completed
one year of service are eligible to participate. Contributions to the ESOP are
principally used to purchase treasury stock of the Company, increasing
shareholders' equity. Contributions to the ESOP for 1995 were $444,000.
F-64
<PAGE>
In 1995, the Company increased the number of authorized common shares from
14,000,000 to 20,000,000 and the number of authorized preferred shares from
900,000 to 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.
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 1995,
1994 and 1993, the liquidity ratio was 8.96%, 7.37% and 9.16%, respectively.
The level of loans maturing within one year greatly added to the Company's
liquidity position in 1995. Including loans maturing within one year, the
liquidity ratio was 40.23%, 34.57% and 34.25%, 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 1996. The balance outstanding on
this line of credit at December 31, 1995, was $10 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 $91 million in federal funds from four nonaffiliated financial
institutions.
Additionally, all 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 will represent an aggregate of $186 million in additional funding
capacity.
INTEREST RATE SENSITIVITY - Effective asset/liability management also
includes minimizing the impact of future interest rate changes on net interest
income. 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. Interest rate sensitivity indicates a
financial institution's potential earnings exposure to fluctuating interest
rates. 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. While no single measure can completely
identify the impact of changes in interest rates on net interest income, one
gauge of interest rate sensitivity is to measure, over a variety of time
periods, the differences in the amounts of the Company's rate sensitive assets
and rate sensitive liabilities. These differences, or "gaps," provide an
indication of the extent that net interest income may be affected by future
changes in interest rates.
F-65
<PAGE>
A positive gap exists when rate sensitive assets exceed rate sensitive
liabilities and indicates that a greater volume of assets than liabilities will
reprice during a given period. This mismatch may enhance earnings in a rising
rate environment and may inhibit earnings when rates decline. Conversely, when
rate sensitive liabilities exceed rate sensitive assets, referred to as a
negative gap, it indicates that a greater volume of liabilities than assets will
reprice during the period. In this case, a rising interest rate environment may
inhibit earnings and declining rates may enhance earnings.
The Company does not engage in the speculative use of derivative financial
instruments.
The following table sets forth the Company's interest rate sensitivity
analysis by contractual repricing or maturity at December 31, 1995:
<TABLE>
<CAPTION>
Repricing or Maturing in
- -----------------------------------------------------------------------------------------------------------
1 Year Over 1 Over 5
or Less to 5 Years Years Total
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Rate sensitive assets:
Loans. . . . . . . . . . . . . . . . $ 1,126,578 $ 553,818 $ 86,797 $ 1,767,193
Held-to-maturity
securities. . . . . . . . . . . . 86,565 63,638 80,617 230,820
Available-for-sale
securities. . . . . . . . . . . . 235,413 189,237 61,872 486,522
Other earning assets . . . . . . . . 28,982 196 0 29,178
- ---------------------------------------------------------------------------------------------------------
Total rate sensitive
assets. . . . . . . . . . . . . . $ 1,477,538 $ 806,889 $ 229,286 $ 2,513,713
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Rate sensitive liabilities:
Savings deposits and
interest-bearing
checking. . . . . . . . . . . . . $ 873,025 - - 873,025
Time deposits. . . . . . . . . . . . 826,606 247,986 13,785 1,088,377
Short-term
borrowings. . . . . . . . . . . . 89,876 1,005 - 90,881
Long-term borrowings . . . . . . . . 234 37,528 44,940 82,702
- ---------------------------------------------------------------------------------------------------------
Total rate sensitive
liabilities . . . . . . . . . . . $ 1,789,741 $ 286,519 $ 58,725 $ 2,134,985
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Rate sensitive gap . . . . . . . . . . $ (312,203) $ 520,370 $ 170,561 $ 378,728
Cumulative rate
sensitive gap. . . . . . . . . . . . $ (312,203) $ 208,167 $ 378,728 $ 378,728
Rate sensitive gap
percentage . . . . . . . . . . . . . (17.44%) 281.62% 390.44% 117.74%
Cumulative rate sensitive
gap percentage . . . . . . . . . . . (17.44%) 110.03% 117.74% 117.74%
</TABLE>
F-66
<PAGE>
The following sets forth the Company's interest rate sensitivity analysis
at December 31, 1995, with respect to the individual categories of loans and
provides separate analyses with respect to fixed interest rate loans and
floating interest rate loans:
Repricing or Maturing in
- --------------------------------------------------------------------------------
1 Year Over 1 Over 5
or Less to 5 Years Years Total
- --------------------------------------------------------------------------------
(Dollars in thousands)
Loan category:
Real estate. . . . . $ 441,627 $ 245,431 $ 57,419 $ 744,477
Agricultural . . . . 191,502 27,926 5,209 224,637
Commercial . . . . . 356,538 155,285 15,797 527,620
Consumer and other . 136,911 125,176 8,372 270,459
- --------------------------------------------------------------------------------
Total loans. . . . . $ 1,126,578 $ 553,818 $ 86,797 $ 1,767,193
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fixed interest
rate loans . . . . . $ 455,995 $ 493,477 $ 78,304 $ 1,027,776
Floating interest
rate loans. . . . . . 670,583 60,341 8,493 739,417
- --------------------------------------------------------------------------------
Total loans. . . . . $ 1,126,578 $ 553,818 $ 86,797 $ 1,767,193
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Management 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. At December 31, 1995, the Company's
balance sheet was more liability sensitive in the short term, as assets
repricing in less than one year were less than liabilities repricing within one
year by 17.44%, or $312 million. Further, it is management's belief that the
rate sensitivity analysis, as determined by contractual repricing of maturities,
does not accurately reflect the asset sensitivity inherent in the Company's mix
of rate sensitive assets and liabilities for reasons set forth below. The
consequences of such asset sensitivity may include a negative effect on net
interest income in a falling rate environment and a positive effect in a rising
rate environment.
A number of factors contribute to management's belief that the Company is
asset rate sensitive. First, management believes there is an inherent tendency
of community banks toward asset sensitivity due to repricing characteristics of
certain demand deposits and interest-bearing savings and checking accounts.
This results from the experienced infrequency of repricing because these
deposits are fairly price inelastic and bear relatively low interest rates. It
is management's assessment from past experience that the amount of savings
deposits and interest-bearing checking included in the one year or less
repricing category will not reprice commensurate with changes in the general
interest rate level. Based on the Company's experience from 1988 to 1995, a
period of volatile interest rates, management believes its savings deposits and
interest-bearing checking accounts have repriced within a significantly narrower
range than changes in the general interest rate level. During this time period,
the range of federal funds rates was in excess of 675 basis points, while the
range of rates paid on the Company's savings deposits and interest-bearing
checking accounts had a range of approximately one-half this range. Further,
the balances in these accounts have remained constant during this period of
volatile rates, which further supports management's belief that the Company's
core deposits are relatively inelastic as to pricing.
F-67
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
BASIS OF PRESENTATION
The following is a discussion of the Company's financial condition as of
September 30, 1996, and December 31, 1995, and its results of operations for the
nine month periods ended September 30, 1996 and 1995. The Company completed
twelve acquisitions during 1995, and, as of September 30, 1996, the Company had
one pending bank acquisition. Each of these acquisitions has had, or will have,
an effect upon the Company's results of operations and financial condition.
The Company completed its acquisition of Mountain Parks Financial
Corporation ("Mountain Parks") on December 18, 1996. The Mountain Parks
acquisition was accounted for using the pooling of interests method.
Accordingly, the consolidated financial information has been restated to reflect
the results of operations of the two companies on a combined basis for all
periods presented.
During 1995 and 1996, the Company made the following acquisitions of banks
or associated holding companies:
Total Assets
at Date of
Month and Holding Company or Acquisition
Year Location of Bank (In Millions)
-----------------------------------------------------------------------
July 1996 Kiowa, Colorado $58
July 1996 Englewood, Colorado 19
October 1995 Craig, Colorado 31
October 1995 Beach, North Dakota 44
September 1995 Aurora, Colorado 41
July 1995 First Community (Colorado) 153
July 1995 Boulder, Colorado 60
July 1995 Louisville, Colorado 36
May 1995 Alliance, Nebraska 293
May 1995 Hankinson, North Dakota 8
February 1995 Minowa 224
January 1995 Vail, Colorado *
*The Company's acquisition consists of a 24.75% interest in the holding company
that owns 100% of the Vail Bank, which had total assets of $82 million.
The Minowa and First Community 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 three
companies on a combined basis for all periods presented. Each of the other
acquisitions described in the above table is reflected in the Company's results
of operations for all periods following the acquisition and is reflected in the
Company's statement of financial condition at all dates subsequent to the
acquisition.
F-68
<PAGE>
OVERVIEW
For the nine months ended September 30, 1996, net income was $26.5 million,
an increase of $5.2 million, or 24.4%, from the $21.3 million earned during the
1995 period. The increase was primarily due to earnings contributed by banks
acquired during 1995 and an increase in the net interest margin. Primary
earnings per common share for the nine months ended September 30, 1996, were
$1.53, compared to $1.32 in 1995. Fully diluted earnings per common share for
the nine months ended September 30, 1996, were $1.47. Net income applicable to
common equity for the nine month period was reduced by $1,208,000, due to
dividends paid on preferred stock.
Return on average assets and return on common equity for the nine months
ended September 30, 1996, were 1.26% and 17.73%, respectively, as compared to
the 1995 ratios of 1.23% and 18.30%, respectively.
Total assets were $3.0 billion and $2.77 billion at September 30, 1996 and
December 31, 1995, respectively. The $210 million increase in loans was funded
through the combination of a $64 million increase in deposits and a $143 million
increase in net borrowings, primarily short-term borrowings. Bank premises and
equipment increased $13 million, due principally to the Company's purchase,
through a subsidiary, of its Fargo office facility, equipment purchases at the
data processing subsidiary, and banks acquired during 1996 and 1995.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income for the nine months ended September 30, 1996, was $98.4
million, an increase of $19.5 million, or 24.7%, from the net interest income of
$78.8 million earned during the 1995 period. The increase was principally due
to the increased asset base associated with the acquisitions completed during
1996 and 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the nine months ended September 30, 1996,
was $4,572,000, an increase of $2,643,000, or 137.0%, from the
F-69
<PAGE>
$1,929,000 provision during the 1995 period. This increase reflects the
Company's objective of maintaining adequate reserve levels in recognition of
significant loan growth, including acquisitions completed during 1996 and 1995.
NONINTEREST INCOME
Noninterest income for the nine months ended September 30, 1996, was $19.1
million, an increase of $2.8 million, or 17.2%, from the level of $16.3 million
earned in the 1995 period. The increase was primarily due to an increase of
$1.6 million in bank deposit service charges, an increase of $520,000 in
insurance commissions and an increase of $397,000 in trust income.
NONINTEREST EXPENSE
Noninterest expense for the nine months ended September 30, 1996, was $72.5
million, an increase of $13.0 million, or 21.8%, from the level of $59.5 million
during the 1995 period. The increase was principally from banks acquired in
1995. Salaries and benefits increased $9.8 million from $30.4 million in the
1995 period to $40.2 million for the 1996 period. Net occupancy was $9.6
million, a $1.9 million, or 24.7%, increase from $7.7 million in the 1995
period. FDIC expense decreased $1.5 million, or 71.4%, from the 1995 level of
$2.1 million to $636,000 during the 1996 period as a result of a significant
decrease in deposit premium rates which became effective beginning in the third
quarter of 1995, which was partially offset by the effect of the special
assessment from the Savings Association Insurance Fund ("SAIF") on deposits
acquired from former savings and loan associations recorded during the current
quarter.
PROVISION FOR INCOME TAXES
The provision for income taxes for the nine months ended September 30,
1996, was $14.0 million, an increase of $1.7 million, or 13.8%, from the 1995
level of $12.3 million, due to increase in the level of pretax income.
F-70
<PAGE>
FINANCIAL CONDITION
LOANS
At September 30, 1996, total loans were $1,977 million, an increase of $210
million, or 11.9%, from the December 31, 1995, level of $1,767 million.
The following table presents the Company's balance of each major category
of loans:
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------------------------------------------------------
(DOLLARS IN THOUSANDS)
Loan category:
Real estate. . . . . . $ 863,462 43.68% $ 744,477 42.13%
Commercial . . . . . . 556,184 28.14% 527,620 29.86%
Agricultural . . . . . 226,065 11.44% 224,637 12.71%
Consumer and other . . 330,881 16.74% 270,459 15.30%
- --------------------------------------------------------------------------------
Total loans. . . . . . $ 1,976,592 100.00% $ 1,767,193 100.00%
--------- ---------
--------- ---------
Less allowance for
loan losses . . . . . . 25,771 22,712
----------- -----------
Total $ 1,950,821 $ 1,744,481
----------- -----------
----------- -----------
NONPERFORMING ASSETS
At September 30, 1996, nonperforming loans were $6.2 million, an increase
of $2.5 million, or 67.6%, from the $3.7 million level at December 31, 1995.
The increase was principally due to transferring selected commercial and
agricultural loans to nonaccrual status as a result of regularly scheduled loan
reviews, principally at banks acquired during 1995 and 1996. At September 30,
1996, nonperforming loans as a percent of total loans were .31%, up from the
December 31, 1995 level of .21%. Other real estate owned ("OREO") was $2.1
million at September 30, 1996, an increase of $400,000, or 23.5%, from the $1.7
million at December 31, 1995.
Nonperforming assets of the Company are summarized in the following table:
September 30, December 31,
1996 1995
----------------------------
Loans:
Nonaccrual loans. . . . . . . . . . . . . $ 5,897 $ 3,252
Restructured loans. . . . . . . . . . . . 298 483
- -----------------------------------------------------------------------
Nonperforming loans . . . . . . . . . . . 6,195 3,735
Other real estate owned. . . . . . . . . . . 2,078 1,701
- -----------------------------------------------------------------------
Nonperforming assets . . . . . . . . . . . . $ 8,273 $ 5,436
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Loans 90 days or more past due
but still accruing. . . . . . . . . . . . . $ 1,790 $ 779
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
F-71
<PAGE>
Nonperforming loans as a percentage of total loans . . . . . . .31% .21%
Nonperforming assets as a percentage of total assets . . . . . .28% .20%
Nonperforming assets as a percentage of loans and OREO . . . . .42% .31%
ALLOWANCE FOR LOAN LOSSES
At September 30, 1996, the allowance for loan losses was $25.8 million, an
increase of $2.8 million from the December 31, 1995 level of $23.0 million. Net
charge-offs during the 1996 period were $358,000 more than those incurred during
the three months ended September 30, 1995.
At September 30, 1996, the allowance for loan losses as a percentage of
total loans was 1.30%, a decrease from the September 30, 1995, level of 1.36%.
During the nine months ended September 30, 1996, charge-offs were $2,717,000,
an increase of $655,000, or 31.8%, from the $2,062,000 charged off during the
1995 period. These charge-offs related to the Company conforming the credit
practices of the acquired institutions to those of its own and the continued
periodic review of the existing loan portfolios.
The following table sets forth the Company's allowance for loans losses:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
-----------------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period . . . . . . . . . $ 22,712 $ 17,333
Acquired bank allowance. . . . . . . . . . . . . 544 545,127
Charge-offs:
Commercial . . . . . . . . . . . . . . . . . . 660 327
Real estate. . . . . . . . . . . . . . . . . . 147 259
Agricultural . . . . . . . . . . . . . . . . . 413 384
Consumer and other . . . . . . . . . . . . . . 1,497 1,092
- -----------------------------------------------------------------------------
Total charge-offs . . . . . . . . . . . . 2,717 2,062
- -----------------------------------------------------------------------------
Recoveries:
Commercial . . . . . . . . . . . . . . . . . . 161 184
Real estate. . . . . . . . . . . . . . . . . . 215 60
Agricultural . . . . . . . . . . . . . . . . . 61 31
Consumer and other . . . . . . . . . . . . . . 223 446
- -----------------------------------------------------------------------------
Total recoveries. . . . . . . . . . . . . 660 721
- -----------------------------------------------------------------------------
Net charge-offs. . . . . . . . . . . . . . . . . 2,057 1,341
Provision charged to operations. . . . . . . . . 4,572 1,929
- -----------------------------------------------------------------------------
Balance at end of period . . . . . . . . . . . . $ 25,771 $ 23,048
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Allowance as a percentage of total loans . . . . 1.30% 1.36%
Annualized net charge-offs to average
loans outstanding . . . . . . . . . . . . . . . 0.15% 0.12%
F-72
<PAGE>
INVESTMENTS
The investment portfolio, including available-for-sale securities and held-
to-maturity securities, was $736 million at September 30, 1996, an increase of
$18 million or 2.5% from the $718 million level at December 31, 1995. At
September 30, 1996, the investment portfolio represented 24.5% of total assets,
compared with 25.9% at December 31, 1995. In addition to investment securities,
the Company had investments in interest-bearing deposits of $2 million at
September 30, 1996, a $1 million decrease from the $3 million at December 31,
1995.
DEPOSITS
Total deposits at September 30, 1996, were $2,424 million, an increase of
$64 million, or 2.7%, from $2,360 million at December 31, 1995. Noninterest-
bearing deposits at September 30, 1996, were $419 million, an increase of $21
million, or 5.3%, from $398 million at December 31, 1995. The Company's core
deposits as a percent of total deposits were 90.9% and 91.4% as of September 30,
1996, and December 31, 1995, respectively. Interest-bearing deposits at
September 30, 1996, and December 31, 1995, were $2,005 million and $1,961
million, respectively. The Company's deposit mix among noninterest-bearing
deposits and interest-bearing deposits at September 30, 1996, and December 31,
1995, was similar, indicative of the Company's relatively stable deposit base.
BORROWINGS
Short-term borrowings of the Company were $153 million as of September 30,
1996, as compared to $41 million at December 31, 1995, an increase of $112
million, or 273.2%. The increase is a result of management's strategy to use
short-term borrowings to fund loan growth and replace selected long-term debt.
Long-term debt of the Company was $39 million as of September 30, 1996, a
decrease of $42 million, or 51.9%, from the $81 million as of December 31, 1995.
CAPITAL MANAGEMENT
Shareholders' equity increased $23 million, or 11.3%, to $227 million at
September 30, 1996, from $204 million at December 31, 1995. At September 30,
1996, the Company's Tier 1 capital, total risk-based capital and leverage ratios
were 8.48%, 10.77% and 6.35%, respectively, compared to minimum required levels
of 4%, 8% and 3%, respectively (subject to change and the discretion of
regulatory authorities to impose higher standards in individual cases). At
September 30, 1996, the Company had risk-weighted assets of $2,235 million.
F-73
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We 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 25, 1996, except for Note 3, as to which the date is December 18, 1996,
with respect to the supplemental consolidated financial statements of Community
First Bankshares, Inc. included in the Current Report on form 8-K/A dated
January 16, 1997.
Minneapolis, Minnesota
January 16, 1997
Ernst & Young LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
SUPPLEMENTAL FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT IN
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 138,085
<INT-BEARING-DEPOSITS> 2,488
<FED-FUNDS-SOLD> 310
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 499,035
<INVESTMENTS-CARRYING> 237,235
<INVESTMENTS-MARKET> 235,790
<LOANS> 1,976,592
<ALLOWANCE> 25,771
<TOTAL-ASSETS> 2,999,736
<DEPOSITS> 2,424,315
<SHORT-TERM> 153,056
<LIABILITIES-OTHER> 155,440
<LONG-TERM> 38,898
0
22,997
<COMMON> 165
<OTHER-SE> 226,614
<TOTAL-LIABILITIES-AND-EQUITY> 2,999,736
<INTEREST-LOAN> 47,255
<INTEREST-INVEST> 11,367
<INTEREST-OTHER> 89
<INTEREST-TOTAL> 58,711
<INTEREST-DEPOSIT> 20,214
<INTEREST-EXPENSE> 24,002
<INTEREST-INCOME-NET> 34,709
<LOAN-LOSSES> 2,241
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 25,834
<INCOME-PRETAX> 13,149
<INCOME-PRE-EXTRAORDINARY> 8,593
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,593
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
<YIELD-ACTUAL> 0
<LOANS-NON> 5,897
<LOANS-PAST> 1,790
<LOANS-TROUBLED> 298
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 22,712
<CHARGE-OFFS> 2,717
<RECOVERIES> 660
<ALLOWANCE-CLOSE> 25,771
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
