<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-19368
COMMUNITY FIRST BANKSHARES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 46-0391436
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 Main Avenue
Fargo, ND 58124
---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(701) 298-5600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES X NO
----- -----
At November 9, 1998, 47,196,422 shares of Common Stock were outstanding.
1
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION: ----
<S> <C>
Item 1. Condensed Consolidated Financial Statements and Notes ........... 3-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 11-17
Item 3. Quantitative and Qualitative Disclosure About Market Risk ....... 18
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings................................................ 19
Item 2. Changes in Securities............................................ 19
Item 3. Defaults Upon Senior Securities.................................. 19
Item 4. Submission of Matters to a Vote of Security Holders ............. 19
Item 5. Other Information................................................ 19
Item 6. Exhibits and Reports on Form 8-K................................. 19
SIGNATURES.......................................................................... 20
</TABLE>
2
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1998 1997
- ---------------------- ------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks .................................. $ 216,826 $ 222,088
Federal funds sold and securities purchased under
agreements to resell ................................. 40,990 12,690
Interest-bearing deposits ................................ 7,482 1,287
Available-for-sale securities ............................ 1,940,993 1,498,877
Held-to-maturity securities (fair value: 9/30/98 -
$69,399, 12/31/97 - $182,335) ........................ 69,399 180,512
Loans .................................................... 3,387,246 2,637,057
Less: Allowance for loan losses ..................... (45,567) (36,194)
---------- ----------
Net loans ....................................... 3,341,679 2,600,863
Bank premises and equipment, net ......................... 124,829 101,820
Accrued interest receivable .............................. 57,207 40,105
Other Assets ............................................. 44,550 99,977
Intangible Assets ........................................ 137,194 97,307
---------- ----------
Total assets .................................... $5,981,149 $4,855,526
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing .................................. $ 833,491 $ 597,333
Interest-bearing .................................... 3,995,670 3,022,001
---------- ----------
Total deposits .................................. 4,829,161 3,619,334
Federal funds purchased and securities sold under
agreements to repurchase ............................. 116,848 43,002
Other short-term borrowings .............................. 319,912 230,571
Long-term debt ........................................... 119,280 116,476
Capital lease obligations ................................ 5,752 5,209
Accrued interest payable ................................. 28,393 20,842
Other liabilities ........................................ 25,089 360,798
---------- ----------
Total liabilities ............................... 5,444,435 4,396,232
Company-obligated mandatorily redeemable
preferred securities of CFB Capital I & II .......... 120,000 120,000
Shareholders' equity:
Common stock ......................................... 477 204
Capital surplus ...................................... 187,789 157,138
Retained earnings .................................... 238,262 183,335
Less cost of common stock in treasury -
September 30, 1998 - 448,145 shares
December 31, 1997 - 36,255 shares .............. (9,814) (1,383)
---------- ----------
Total shareholders' equity ..................... 416,714 339,294
---------- ----------
Total liabilities and shareholders' equity ..... $5,981,149 $4,855,526
---------- ----------
---------- ----------
</TABLE>
3
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
(Dollars in thousands, except per share data) 9/30/98 9/30/97 9/30/98 9/30/97
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans ...................................................... $ 84,471 $ 60,431 $ 221,293 $ 155,748
Investment securities ...................................... 31,876 16,697 88,879 39,492
Interest-bearing deposits .................................. 125 138 204 483
Federal funds sold and resale agreements ................... 639 143 1,119 167
--------- --------- --------- ---------
Total interest income ................................. 117,111 77,409 311,495 195,890
Interest expense:
Deposits ................................................... 41,001 29,292 114,285 71,827
Short-term and other borrowings ............................ 7,031 1,982 13,323 6,384
Long-term debt ............................................. 2,159 2,224 6,423 3,715
--------- --------- --------- ---------
Total interest expense ................................ 50,191 33,498 134,031 81,926
--------- --------- --------- ---------
Net interest income ............................................ 66,920 43,911 177,464 113,964
Provision for loan losses ...................................... 4,402 1,710 7,307 5,426
--------- --------- --------- ---------
Net interest income after provision for loan losses ............ 62,518 42,201 170,157 108,538
--------- --------- --------- ---------
Noninterest income:
Service charges on deposit accounts ........................ 7,979 4,828 20,704 11,914
Fees from fiduciary activities ............................. 1,232 832 3,596 2,684
Insurance commissions ...................................... 2,025 1,485 5,275 4,119
Net gain(loss) on sales of available-for-sale securities ... 354 62 1,302 123
Other ...................................................... 3,912 2,501 11,947 8,229
--------- --------- --------- ---------
Total noninterest income: ............................. 15,502 9,708 42,824 27,069
--------- --------- --------- ---------
Noninterest expense:
Salaries and employee benefits ............................. 26,110 17,764 71,386 45,810
Net occupancy .............................................. 8,942 5,163 24,514 12,967
FDIC insurance ............................................. 162 124 495 226
Legal and accounting ....................................... 547 400 1,495 1,237
Other professional service ................................. 1,391 599 2,890 1,675
Data processing ............................................ 1,743 299 3,527 984
Acquisitions, integration, and conforming .................. 1,273 - 2,903 14
Company-obligated mandatorily redeemable preferred
securities of CFB Capital I & II ...................... 2,561 1,331 7,656 3,476
Amortization of intangibles ................................ 2,629 1,657 7,704 3,498
Other ...................................................... 10,173 7,111 28,384 17,341
--------- --------- --------- ---------
Total noninterest expense ............................. 55,531 34,448 150,954 87,228
Income from continuing operations before income
taxes and extraordinary item ............................... 22,489 17,461 62,027 48,379
Provision for income taxes ..................................... 7,950 5,391 19,513 15,669
--------- --------- --------- ---------
Income from continuing operations before
extraordinary item ........................................ 14,539 12,070 42,514 32,710
Discontinued operations:
Income from operations of discontinued operations
(less applicable income taxes) ........................ - 229 (2,232) 1,521
Loss on disposal of discontinued operations, including
provision for operating losses during phase-out
period (less applicable taxes) ........................ - - (1,676) -
--------- --------- --------- ---------
Net income before extraordinary item ........................... 14,539 12,299 38,606 34,231
Extraordinary item:
Loss from early extinguishment of debt ..................... - - - (265)
Net income ..................................................... $ 14,539 $ 12,299 $ 38,606 $ 33,966
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
(Dollars in thousands, except per share data) 9/30/98 9/30/97 9/30/98 9/30/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings per common and common equivalent share:
Basic income from continuing operations before
extraordinary items .......................... $ 0.31 $ 0.32 $ 0.98 $ 0.90
Discontinued operations .......................... 0.00 0.01 (0.09) 0.04
Extraordinary item ............................... $ 0.00 $ 0.00 0.00 (0.01)
----------- ----------- ----------- -----------
Basic net income ................................. $ 0.31 $ 0.33 $ 0.89 $ 0.93
----------- ----------- ----------- -----------
Diluted income from continuing operations before
extraordinary items .......................... $ 0.31 $ 0.32 $ 0.96 $ 0.86
Discontinued operations .......................... 0.00 0.00 (0.09) 0.04
Extraordinary item ............................... $ 0.00 $ 0.00 0.00 0.00
----------- ----------- ----------- -----------
Diluted net income ............................... $ 0.31 $ 0.32 $ 0.87 $ 0.90
----------- ----------- ----------- -----------
Average common shares outstanding:
Basic ........................................ 46,709,659 37,285,344 43,508,500 36,545,992
Diluted ...................................... 47,252,121 37,985,212 44,147,577 37,868,204
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Dividend declared per common share ............... $ 0.11 $ 0.10 $ 0.33 $ 0.26
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
5
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------
(In thousands)
(Unaudited) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 38,606 $ 33,966
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ........................ 7,307 5,426
Depreciation ..................................... 10,941 6,203
Amortization of intangibles ...................... 7,704 3,498
Net of amortization of premiums & discounts
on securities ............................... (512) (56)
Increase in interest receivable .................. (12,623) (7,860)
Increase in interest payable ..................... 5,864 2,236
Other - net .................................... (66,797) (24,900)
----------- -----------
Net cash (used) provided by operating activities .......... (9,510) 18,513
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired ..................... 56,809 133,999
Net increase in interest-bearing deposits ............. (6,096) (9,184)
Purchases of available-for-sale securities ............ (2,708,980) (469,185)
Maturities of available-for-sale securities ........... 2,006,967 299,317
Sales of securities, net of gains ..................... 136,436 47,310
Purchases of held-to-maturity securities .............. (5,568) (23,543)
Maturities of held-to-maturity securities ............. 3,738 20,328
Net increase in loans ................................. (284,846) (26,450)
Net increase in bank premises and equipment ........... (19,785) (10,584)
Net decrease in minority interest ..................... - (1,311)
----------- -----------
Net cash used in investing activities ..................... (821,325) (39,303)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts ......................... 369,496 (99,057)
Net increase in time accounts ............................. 304,044 88,167
Net increase (decrease) in short-term & other borrowings .. 155,762 (79,898)
Net increase in long-term debt ............................ 2,804 87,741
Net proceeds from issuance of Company-obligated mandatorily
redeemable preferred securities of CFB Capital I & II . - 60,000
Net proceeds from issuance of common stock ................ 48,613 1,067
Purchase of common stock held in treasury ................. (13,438) (2,777)
Conversion of preferred stock to common stock ............. - (52)
Sale of common stock held in treasury ..................... 1,108 984
Common stock dividends paid ............................... (14,516) (9,297)
----------- -----------
Net cash provided by financing activities ................. 853,873 46,878
----------- -----------
Net increase in cash and cash equivalents ................. 23,038 26,088
Cash and cash equivalents at beginning of period .......... 234,778 179,332
----------- -----------
Cash and cash equivalents at end of period ................ $ 257,816 $ 205,420
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements,
which include the accounts of Community First Bankshares, Inc. (the "Company"),
its wholly-owned data processing, credit origination, insurance agency and
properties subsidiaries, and its 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
considered necessary for fair presentation have been included.
On April 28, 1998, the shareholders approved a charter amendment that
facilitated a two-for-one split of the Company's common stock, in the form of a
100 percent dividend payable to shareholders of record on May 1, 1998 and
distributed on May 15, 1998. Accordingly, the historical consolidated financial
information has been restated to reflect the impact of the two-for-one split on
the common share, weighted average common share and basic and diluted earnings
per share data.
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income
applicable to common equity by the weighted average number of shares of common
stock outstanding.
Diluted earnings per common share is calculated by dividing net income
applicable to common equity by the weighted average number of shares of common
stock outstanding. The weighted average number of shares of common stock
outstanding is increased by 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.
NOTE B - BUSINESS COMBINATIONS AND DIVESTITURES
On August 7, 1998, the Company issued approximately 1,526,000 shares of
common stock to acquire Guardian Bancorp ("Guardian"), the holding company for
Guardian State Bank, Salt Lake City, Utah, with offices in Salt Lake City and
Sandy, Utah. At acquisition, Guardian had approximately $99 million in assets
and $89 million in deposits. The Company used the pooling of interests method to
account for the transaction. This merger was not material to the Company's
consolidated financial information or operating results. Accordingly, the
Company's consolidated financial information has not been restated to reflect
this merger. The operating results are included in the Company's consolidated
statements from the date of the merger.
In July, 1998, the Company sold the operating assets of its two sub-prime
lending subsidiaries. Seven loan production offices of Equity Lending, Inc.
("Equity Lending") were sold to FIRSTPLUS Financial Group, Inc., in a cash
transaction on July 27, 1998. Servicing rights to the portfolio of automobile
installment contracts originated by Mountain Parks Financial Services, Inc.
("Mountain Parks") were acquired by Cygnet Financial Services, Inc. on July 31,
1998. The Company retained approximately $50 million in loans originated by
Equity Lending and servicing rights on an additional $100 million in Equity
Lending loans sold to other parties. The Company also retained approximately $50
million in auto installment contracts originated by Mountain Parks. In addition
to a $2.1 million operating loss in the second quarter, consisting of $707,000
attributed to quarterly operations and $1.4 million associated with one-time
operating expenses related to preparing the subsidiaries for sale, the Company
recognized a charge of $1.7 million for the second quarter, which reflected the
expected loss on disposition of the subsidiaries. Equity
7
<PAGE>
Lending, which originates residential non-conforming mortgages and Mountain
Parks, which purchases sub-prime auto installment contracts, were acquired in
December 1996, as a result of the Company's merger with Mountain Parks Financial
Corporation. The two companies were classified as discontinued operations on the
Company's 1997 financial statements.
On July 1, 1998, the Company issued approximately 1,932,000 shares of common
stock to acquire Western Bancshares of Las Cruces, Inc. ("Western"), the holding
company for Western Bank, Las Cruces, New Mexico, with offices in Anthony,
Hatch, and Las Cruces, New Mexico. At acquisition, Western had approximately
$159 million in assets and $136 million in deposits. The Company used the
pooling of interests method to account for the transaction. This merger was not
material to the Company's consolidated financial information or operating
results. Accordingly, the Company's consolidated financial information has not
been restated to reflect this merger. The operating results are included in the
Company's consolidated statements from the date of the merger.
On June 12, 1998, the Company, through its Colorado subsidiary, completed
the sale of its office in Ault, Colorado. The Ault office was acquired on
January 23, 1998 as part of the Company's purchase and assumption of 37 offices
of Banc One Corporation located in Arizona, Colorado, and Utah. The transaction
included the disposition of approximately $9 million in deposits.
On May 7, 1998, the Company issued 1,135,406 shares of common stock to
acquire FNB, Inc. ("FNB") a bank holding company with banks in Greeley, Colorado
and Fort Collins, Colorado. At acquisition, FNB had approximately $120 million
in assets and $109 million in deposits. The Company used the pooling of
interests method to account for the transaction. This merger was not material to
the Company's consolidated financial information or operating results.
Accordingly, the Company's consolidated financial information has not been
restated to reflect this merger. The operating results are included in the
Company's consolidated statements from the date of the merger.
On April 30, 1998, the Company issued approximately 1,432,000 shares of
common stock to acquire Pioneer Bank of Longmont ("Pioneer"), Longmont,
Colorado, with offices in Berthoud, Longmont, Lyons, and Niwot, Colorado. At
acquisition, Pioneer had approximately $138 million in assets and $128 million
in deposits. The Company used the pooling of interests method to account for the
transaction. This merger was not material to the Company's consolidated
financial information or operating results. Accordingly, the Company's
consolidated financial information has not been restated to reflect this merger.
The operating results are included in the Company's consolidated statements from
the date of the merger.
On April 3, 1998, the Company issued approximately 852,000 shares of common
stock to acquire Community Bancorp., Inc. ("CBI"), the parent company of
Community First National Bank, Thornton, Colorado, with two offices in Thornton,
Colorado and one office in Arvada, Colorado. At acquisition, CBI had
approximately $78 million in assets and $72 million in deposits. The Company
used the pooling of interests method to account for the transaction. The merger
was not material to the Company's consolidated financial information or
operating results. Accordingly, the Company's consolidated financial information
has not been restated to reflect this merger. The operating results are included
in the Company's consolidated statements from the date of the merger.
On January 23, 1998, the Company completed the purchase and assumption of
approximately $730 million in assets and liabilities of 37 offices of Banc One
Corporation located in Arizona, Colorado and Utah. The 25 Arizona and four Utah
offices were merged into the Company's Arizona affiliate. The eight Colorado
offices were merged into one of the Company's Colorado affiliates. The
transaction was accounted for as a purchase of certain assets and assumption of
certain liabilities and resulted in the recognition of a deposit based
intangible of approximately $44 million.
NOTE C - SUBSEQUENT EVENTS
On October 30, 1998, the Company redeemed all of its 9.00% Exchangeable
Subordinated Notes due August 15, 2005 at a redemption price of 103% of the
principal amount, plus accrued interest to the
8
<PAGE>
redemption date. The total outstanding principal amount of the notes, which were
issued in July 1995, was $11.5 million. The early redemption will result in a
one-time pre-tax charge of $345,000.
NOTE D - ACCOUNTING CHANGES
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
REPORTING COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities which prior to adoption was reported separately
in shareholders' equity to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
During the third quarter of 1998 and 1997, total comprehensive income
amounted to $30.4 million and $15.4 million, respectively. Total comprehensive
income as of September 30, 1998 and 1997 amounted to $54.8 million and $36.9
million, respectively.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
no. 128, "Earnings Per Share", which the Company adopted on December 31, 1997.
This Statement replaced the previous method of computing earnings per share with
basic and diluted earnings per share and required restatement for all prior
periods. Under the new requirements for calculating basic earnings per share,
the dilutive effect of stock options will be excluded. The calculation of
diluted earnings per share is similar to the previous diluted earnings per
share. The adoption of Statement 128 did not have a material impact on the
calculation of earnings per share.
NOTE E - INVESTMENTS
The following is a summary of available-for-sale and held-to-maturity
securities at September 30, 1998:
<TABLE>
<CAPTION>
Available-for-Sale Securities
- --------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Treasury ................. $ 132,950 $ 2,756 $ - $ 135,706
United States Government agencies ...... 335,011 5,736 70 340,677
Mortgage-backed securities ............. 1,190,608 24,539 608 1,214,539
Collateralized mortgage obligations .... 75,303 650 50 75,903
State and Political Securities ......... 119,409 3,597 74 122,932
Other securities ....................... 51,548 39 351 51,236
---------- ---------- ---------- ----------
$1,904,829 $ 37,317 $ 1,153 $1,940,993
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
- ---------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
9
<PAGE>
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other securities..................................... 69,399 - - 69,399
- ---------------------------------------------------------------------------------------------------------------
$ 69,399 $ - $ - $ 69,399
-------- ---------- ----------- ---------
-------- ---------- ----------- ---------
</TABLE>
Proceeds from the sale of available-for-sale securities during the three
months ended September 30, 1998 and 1997, were $42,893,000 and $13,425,000,
respectively. Gross gains of $354,000 and $75,000 were realized on sales during
1998 and 1997, respectively. Gross losses of $0 and $13,000 were realized on
these sales during 1998 and 1997, respectively. Gains and losses on disposition
of these securities were computed using the specific identification method.
NOTE F - LOANS
The composition of the loan portfolio at September 30, 1998, was as
follows (in thousands):
<TABLE>
<S> <C>
Real estate................................... $ 1,542,874
Commercial.................................... 907,437
Agricultural.................................. 318,667
Consumer and other............................ 618,268
-----------
3,387,246
Less allowance for loan losses 45,567
-----------
Net loans.................................. $ 3,341,679
-----------
-----------
</TABLE>
NOTE G - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers and to manage its interest rate risk. These financial instruments
include commitments to extend credit and letters of credit. The contract or
notional amounts of these financial instruments at September 30, 1998, were as
follows (in thousands):
<TABLE>
<S> <C>
Commitments to extend credit..................... $ 564,415
Letters of credit................................ 22,729
</TABLE>
NOTE H - SUBORDINATED NOTES
Long-term debt at September 30, 1998, included $60 million of 7.30%
Subordinated Notes issued in June 1997. These notes are due June 30, 2004, with
interest payable semi-annually. Long-term debt also included $12 million of
9.00% Subordinated Notes issued in July 1995, which are due August 15, 2005,
with interest payable quarterly. At September 30, 1998, both issues, totaling
$72 million, qualified as Tier 2 capital.
The $12 million of 9.00% Subordinated Notes were subsequently redeemed on
October 30, 1998 at a redemption price of 103% of the principal amount.
NOTE I - INCOME TAXES
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):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
<S> <C>
35% of pretax income.................................. $ 21,709
State income tax, net of federal tax benefit ......... (408)
Tax-exempt interest................................... (2,760)
Amortization of goodwill.............................. 659
Other ......................................... 313
---------
Provision for income taxes............................ $ 19,513
---------
---------
</TABLE>
NOTE J - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30 (in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Noncash transfers of held-to-maturity securities
10
<PAGE>
to available-for-sale securities ......................... $ 153,813 $ 42,328
Unrealized gain (loss) on available-for-sale securities ....... 27,436 4,542
Conversion of preferred stock to common stock ................. - 22,937
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BASIS OF PRESENTATION
The following is a discussion of the Company's financial condition as of
September 30, 1998, and December 31, 1997, and its results of operations for
the three and nine month periods ended September 30, 1998 and 1997. Each of
the acquisitions described in the table below is reflected in the Company's
results of operations for all periods following the acquisition and is
reflected in the Company's statement of financial condition at all dates
subsequent to the acquisition.
MERGER, ACQUISITION AND DIVESTITURE ACTIVITY
The Company completed five acquisitions during the first nine months of
1998. As of September 30, 1998, the Company had no pending bank acquisitions.
The Company completed three acquisitions during 1997. Each of these acquisitions
has had, or will have, an effect upon the Company's results of operations and
financial condition.
During the first nine months of 1998 and the year of 1997, the Company
made the following acquisitions of banks or associated holding companies:
<TABLE>
<CAPTION>
Total Assets
at Date of
Month and Holding Company or Acquisition
Year Location of Bank (In Millions)
- --------------------------------------------------------------------------
<S> <C> <C>
August 1998 Salt Lake City, Utah $ 99
July 1998 Las Cruces, New Mexico 159
May 1998 FNB, Inc., Colorado 120
April 1998 Longmont, Colorado 138
April 1998 Thornton, Colorado 78
December 1997 Gunnison, Colorado 90
November 1997 Phoenix, Arizona 54
July 1997 Cheyenne, Wyoming 1,100
</TABLE>
In July 1998, the Company sold the operating assets of its two sub-prime
lending subsidiaries, Mountain Parks and Equity Lending. Both Mountain Parks,
which purchased auto contracts and Equity Lending, which originated residential,
non-conforming mortgages, were acquired by the Company in December 1996 through
the merger with Mountain Parks Financial Corporation. The Company had accounted
for these entities as discontinued operations on the consolidated financial
statements. At September 30, 1998, net assets of these entities retained by the
Company was $47 million and $71 million for Mountain Parks and Equity Lending,
respectively.
On January 23, 1998, the Company completed the purchase and assumption of
approximately $730 million in assets and liabilities of 37 offices of Banc One
Corporation located in Arizona, Colorado, and Utah. The transaction was
accounted for as a purchase of certain assets and assumption of certain
liabilities and resulted in the recognition of a deposit based intangible of
approximately $44 million.
OVERVIEW
For the three months ended September 30, 1998, net income was $14.5
million, an increase of $2.2 million, or 17.9%, from the $12.3 million earned
during the 1997 period. The Company's basic earnings per common share for the
third quarter of 1998 were $0.31, compared to $0.33 in 1997. Diluted earnings
per common share for the third quarter of 1998 were $0.31.
11
<PAGE>
Return on average assets was .97% for the third quarter of 1998, compared
with 1.23% for the 1997 period. Return on average common shareholders' equity
for the 1998 and 1997 periods was 14.69% and 18.59%, respectively. Principal
factors contributing to these changes included the one time charges associated
with the sale of the Company's sub-prime lending affiliates; incremental net
noninterest expenses associated with the acquisition and integration of entities
acquired during 1998 and 1997; and a decrease in net interest margin. The
decrease in the net interest margin is principally due to the lower loan to
deposit ratios at those institutions acquired in the Banc One and KeyBank
transactions, which resulted in the Company having a greater percentage of its
earning assets invested initially in lower yielding investment securities.
For the nine months ended September 30, 1998, net income was $38.6 million,
an increase of $4.6 million, or 13.5%, from the $34.0 million earned during the
1997 period. This included the effect of a $265,000 after tax extraordinary
expense associated with the Company's early extinguishment of its $23 million in
principal amount of 7.75% Subordinated Notes due April 2000, which were redeemed
on March 31, 1997. Basic earnings per common share for the nine months ended
September 30, 1998, were $0.89, compared to $0.93 in 1997. Diluted earnings per
common share for the nine months ended September 30, 1998 were $0.87.
Return on average assets and return on common equity for the nine months
ended September 30, 1998 were .95% and 14.35%, respectively, as compared to the
1997 ratios of 1.36% and 18.35%, respectively.
On October 30, 1998, the Company announced that in fourth quarter of 1998
it would record approximately $5.5 million in charges related to severance and
other employee-related costs and the disposal of redundant computer equipment
and software acquired in connection with recent acquisitions, as part of an
initiative to increase the Company's operating efficiency.
On October 30, 1998, the Company redeemed all of its 9.00% Exchangeable
Subordinated Notes due August 15, 2005 at a redemption price of 103% of
principal, which will result in a one-time pre-tax charge of $345,000 in the
fourth quarter of 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income for the three months ended September 30, 1998, was
$66.9 million, an increase of $23.0 million, or 52.4%, from the net interest
income of $43.9 million earned during the 1997 period. The increase was
principally due to the increased asset base associated with the acquisitions
completed during 1998 and 1997, partially offset by a decrease in the net
interest margin to 5.07% during the third quarter of 1998, from 5.10% during the
1997 period.
Net interest income for the nine months ended September 30, 1998 was $177.5
million, an increase of $63.5 million, or 55.7% from interest income of $114.0
million earned during the 1997 period.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended September 30,
1998, was $4.4 million, an increase of $2.7 million, or 158.9%, from the $1.7
million provision during the 1997 period. This increase reflects the effect of
the Company including the sub-prime lending affiliates which were previously
recorded as discontinued operations and the Company's objective of maintaining
adequate reserve levels in recognition of significant loan growth in the
Company's subsidiaries, including those acquired in 1998 and 1997.
12
<PAGE>
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 1998, was $15.5
million, an increase of $5.8 million, or 59.8%, from the 1997 level of $9.7
million. The increase included an increase of $6.6 million earned by banks
acquired in 1998 and 1997, partially offset by a decrease in service charges on
deposit accounts of $1.6 million.
Noninterest income for the nine months ended September 30, 1998, was $42.8
million, an increase of $15.7 million, or 57.9% from the 1997 level of $27.1
million. The increase was due to an $8.8 million increase in deposit service
charges, a $1.2 million increase in insurance commissions, a $912,000 increase
in trust fees, and an increase in other income of $3.7 million, which was due
primarily to banks acquired in 1998 and 1997.
NONINTEREST EXPENSE
Noninterest expense for the three months ended September 30, 1998, was
$55.5 million, an increase of $21.1 million, or 61.3%, from the level of $34.4
million during the 1997 period. The increase was principally due to an increase
of $8.3 million, or 46.6%, in salaries and employee benefits, a significant
portion resulting from banks acquired in 1998 and 1997. Net occupancy increased
$3.7 million, or 71.2% from $5.2 million in the period ended September 30, 1997,
to $8.9 million at the end of the current period, principally due to banks
acquired in 1998 and 1997. Amortization of intangibles increased $972 million or
52.9%, from $1.7 million in the period ended September 30, 1997, to $2.6 million
in the current period, due principally to 1998 and 1997 acquisitions. The third
quarter of 1998 included $2.6 million in payments related to Company-obligated
mandatorily redeemable preferred securities, an increase of $1.3 million from
the third quarter of 1997. This resulted from the increased principal amount of
these securities which was $120 million in the 1998 period and $60 million in
1997. Acquisition, integration and conforming expenses of $1.3 million for the
three months ended September 30, 1988 related to acquisitions completed during
the third quarter. Included in these costs were charges incurred in the
underwriting and completion of the transactions; the write-off of equipment,
software, and other assets and data processing related conversion and conforming
expenditures.
Noninterest expense for the nine months ended September 30, 1998 was $151.0
million, an increase of $63.8 million, or 73.2%, from $87.2 million during the
1997 period. The increase was principally due to a $25.6 million increase in
salaries and employee benefits, which included $20.1 million at banks acquired
during 1998 and 1997. In addition, net occupancy increased $11.5 million, which
included $6.5 million at banks acquired in 1998 and 1997. The 1998 period
included $7.7 million in expenses related to Company-obligated mandatorily
redeemable preferred securities, an increase of $3.2 million from the 1997
period due to the increased principal amount. Amortization of intangibles
increased $4.2 million or 120.0% from $3.5 million during the period ended
September 30, 1997, to $7.7 million during the current period, due primarily to
1998 and 1997 acquisitions. Acquisition, integration and conforming expenses for
the nine month period ended September 30, 1998 was $2.9 million compared to
$14,000 for the 1997 period.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended September 30,
1998, was $8.0 million, an increase of $2.6 million, or 48.1%, from the 1997
level of $5.4 million, due primarily to the increase in pre-tax income resulting
from acquisitions completed since July 1997.
The provision for income taxes for the nine months ended September 30, 1998
was $19.5 million, an increase of $3.8 million, or 24.2%, from the 1997 level of
$15.7 million, due to the increase in the level of pretax income.
13
<PAGE>
YEAR 2000 CONSIDERATIONS
The Company is evaluating the potential impact of what is commonly referred
to as the "Year 2000" issue. This issue addresses the potential inability of
certain information systems to properly recognize and process dates containing
the year 2000 and beyond. If not corrected, these systems could fail or create
erroneous results. The Company has established a dedicated Year 2000 Team to
focus on all significant operational areas throughout the Company. This team has
worked with management to commence the following steps: (i) implementing a Year
2000 Assessment and Testing Plan for all items that may be affected by the Year
2000 date change; (ii) working with loan customers to help them understand the
impact of the Year 2000 on their business; (iii) communicating with third
parties that interact with the Company to ensure they are addressing the Year
2000 issue; (iv) communicating with hardware and software suppliers to ensure
Year 2000 compliance among their products; and (v) contingency and disaster
recovery planning to ensure Year 2000 problem resolution. The Company has
identified and tested the applications it believes are mission critical, and the
initial test results indicated that these systems are Year 2000 compliant. The
Company expects to complete testing and establish compliance with respect to all
of its applications by December 31, 1998, subject to possible equipment upgrades
during 1999 and ongoing communications with third parties. Regardless of the
Year 2000 compliance of the Company's systems, there can be no assurance that
the Company will not be adversely affected by the failure of others to become
Year 2000 compliant. Such risks may include potential losses related to loans
made to third parties whose businesses are adversely affected by the Year 2000
issue, the disruption or inaccuracy of data provided by non-Year 2000 compliant
third parties and business disruption caused by the failure of service
providers, such as security and data processing companies, to become Year 2000
compliant. Because of these uncertainties, there can be no assurance that the
Year 2000 issue will not have a material financial impact in any future period.
The Company estimates that its direct costs to achieve Year 2000 compliance
between the current date and the end of 1999 will consist of up to $100,000
related to writeoffs of non-compliant equipment, up to $100,000 per year in
costs of dedicated staff, and up to $200,000 per year for costs related to other
staff time devoted to Year 2000 compliance. The Company also expects capital
expenditures of up to $1 million for equipment upgrades related to compliance.
Costs and capital expenditures in these areas have not been material for
historical periods.
Statements in this section which are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995, including statements regarding
the timetable for Year 2000 compliance, the Company's costs and capital
expenditures, the success of the Company's and others' efforts to achieve
compliance, and the effects of the Year 2000 issue on the Company's future
financial condition and results of operations. These statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical results and those presently anticipated or projected.
The following important factors, among others, could affect the accuracy of
these statements: (i) the inherent uncertainty of the costs and timing of
achieving compliance on the wide variety of systems used by the Company and its
subsidiaries, (ii) the reliance on the efforts of vendors, customers, government
agencies and other third parties to achieve adequate compliance and avoid
disruption of the Company's business in early 2000 and (iii) the uncertainty of
the ultimate costs and consequences of any unanticipated disruption in the
Company's business resulting from the failure of one of the Company's
applications or of a third party's systems. The foregoing list is not
exhaustive, and the Company disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
14
<PAGE>
FINANCIAL CONDITION
LOANS
Total loans were $3.4 billion at September 30, 1998 and $2.6 billion at
December 31, 1997.
The following table presents the Company's balance of each major category
of loans:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
--------------------------------------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Loan category: (DOLLARS IN THOUSANDS)
Real estate...................... $ 1,542,874 45.55% $ 1,158,822 43.94%
Commercial....................... 907,437 26.79% 708,084 26.85%
Consumer and other............... 618,268 18.25% 499,924 18.96%
Agricultural..................... 318,667 9.41% 270,227 10.25%
-------------- ----------- -------------- -----------
Total loans........................... 3,387,246 100.00% 2,637,057 100.00%
----------- -----------
----------- -----------
Less allowance for loan losses 45,567 36,194
-------------- --------------
Total................................. $ 3,341,679 $ 2,600,863
-------------- --------------
-------------- --------------
</TABLE>
NONPERFORMING ASSETS
At September 30, 1998, nonperforming assets were $23.5 million, an increase
of $7.4 million, or 46.0%, from the $16.1 million level at December 31, 1997.
The increase was principally due to the addition of the remaining loan
portfolios of the Company's sub-prime lending subsidiaries which were reported
as discontinued operations at December 31, 1997. At September 30, 1998,
nonperforming loans as a percent of total loans was .53%, up from the December
31, 1997 level of .48%. OREO was $5.5 million at September 30, 1998, an increase
of $2.1 million from $3.4 million at December 31, 1997.
Nonperforming assets of the Company are summarized in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------------------------------
<S> <C> <C>
Loans:
Nonaccrual loans.............................. $ 17,848 $ 12,507
Restructured loans ........................... 180 140
----------- -----------
Nonperforming loans........................... 18,028 12,647
Other real estate owned................................ 5,453 3,406
----------- -----------
Nonperforming assets................................... $ 23,481 $ 16,053
----------- -----------
----------- -----------
Loans 90 days or more past due but still accruing ..... $ 2,863 $ 3,616
----------- -----------
----------- -----------
Nonperforming loans as a percentage of total loans .53% .48%
Nonperforming assets as a percentage of total assets .39% .33%
Nonperforming assets as a percentage of loans and OREO .69% .61%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
At September 30, 1998 and September 30, 1997, the allowance for loan losses
was $45.6 million and $36.1 million, respectively. Net charge-offs during the
1998 period were $4.0 million more than those incurred during the nine months
ended September 30, 1997.
15
<PAGE>
At September 30, 1998, the allowance for loan losses as a percentage of
total loans was 1.35%, a decrease from the September 30, 1997, level of 1.43%.
During the nine months ended September 30, 1998, net charge-offs increased to
$6.7 million. These charge-offs related to the Company's continued periodic
review of the existing loan portfolios; an increase in charge-offs related to
loan growth at the Company's subsidiaries, including those recently acquired;
and the addition of the remaining loan portfolios of the Company's sub-prime
lending subsidiaries which were included in discontinued operations in the 1997
period.
The following table sets forth the Company's allowance for loans losses:
<TABLE>
<CAPTION>
SEPTEMBER 30
1998 1997
-----------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period ............... $36,194 $26,215
Acquired bank allowance/other ................ 8,789 7,155
Charge-offs:
Commercial .......................... 1,855 1,282
Real estate ......................... 593 298
Agricultural ........................ 509 522
Consumer and other ................ 6,231 2,488
------- -------
Total charge-offs ............ 9,188 4,590
------- -------
Recoveries:
Commercial .......................... 665 682
Real estate ......................... 218 135
Agricultural ........................ 221 468
Consumer and other ................ 1,361 595
------- -------
Total recoveries ............... 2,465 1,880
Net charge-offs .............................. 6,723 2,710
Provision charged to operations .............. 7,307 5,426
------- -------
Balance at end of period ..................... $45,567 $36,086
------- -------
------- -------
Allowance as a percentage of total loans ..... 1.35% 1.43%
Annualized net charge-offs to average
loans outstanding ....................... 0.30% 0.17%
</TABLE>
INVESTMENTS
The investment portfolio, including available-for-sale securities and
held-to-maturity securities, increased $331 million, or 19.7%, to $2.0 billion
at September 30, 1998, from $1.7 billion at December 31, 1997. At September 30,
1998, the investment portfolio represented 33.6% of total assets, compared with
34.6% at December 31, 1997. In addition to investment securities, the Company
had investments in interest-bearing deposits of $7 million at September 30,
1998, a $6 million increase from the $1 million at December 31, 1997.
DEPOSITS
Total deposits were $4.8 billion at September 30, 1998, an increase of $1.2
billion or 33.3% from $3.6 billion at December 31, 1997. Noninterest-bearing
deposits at September 30, 1998, were $833 million, an increase of $236 million,
or 39.5%, from $597 million at December 31, 1997. The Company's core deposits as
a percent of total deposits were 87.6% and 89.0% as of September 30, 1998, and
December 31, 1997, respectively. Interest-bearing deposits were $4.0 billion at
September 30, 1998, an increase of $1 billion, or 33.3% from the $3.0 billion at
December 31, 1997.
16
<PAGE>
BORROWINGS
Short-term borrowings of the Company were $320 million as of September 30,
1998, as compared to $231 million at December 31, 1997, an increase of $89
million, or 38.5%.
Long-term debt of the Company was $119 million as of September 30, 1998, an
increase of $3 million, or 2.6%, from the $116 million as of December 31, 1997.
CAPITAL MANAGEMENT
Shareholders' equity increased $78 million, or 23.0%, to $417 million at
September 30, 1998, from $339 million at December 31, 1997. At September 30,
1998, the Company's Tier 1 capital, total risk- based capital and leverage
ratios were 9.37%, 12.25%, and 6.40%, 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, 1998, the Company had risk-weighted assets of $4 billion.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in market risk exposures that affect
the quantitative and qualitative disclosures presented as of December 31, 1997.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
None.
Item 2. Changes in Securities:
None.
Item 3. Defaults upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY FIRST BANKSHARES, INC.
Date: ------------------------------------------------
Mark A. Anderson
Vice Chairman, Chief Financial Officer, Chief
Information Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT IN FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 216,826
<INT-BEARING-DEPOSITS> 7,482
<FED-FUNDS-SOLD> 40,990
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,940,993
<INVESTMENTS-CARRYING> 69,399
<INVESTMENTS-MARKET> 69,399
<LOANS> 3,387,246
<ALLOWANCE> 45,567
<TOTAL-ASSETS> 5,981,149
<DEPOSITS> 4,829,161
<SHORT-TERM> 319,912
<LIABILITIES-OTHER> 176,082
<LONG-TERM> 119,280
120,000
0
<COMMON> 477
<OTHER-SE> 416,237
<TOTAL-LIABILITIES-AND-EQUITY> 5,981,149
<INTEREST-LOAN> 84,471
<INTEREST-INVEST> 31,876
<INTEREST-OTHER> 764
<INTEREST-TOTAL> 117,111
<INTEREST-DEPOSIT> 41,001
<INTEREST-EXPENSE> 50,191
<INTEREST-INCOME-NET> 66,920
<LOAN-LOSSES> 4,402
<SECURITIES-GAINS> 354
<EXPENSE-OTHER> 55,531
<INCOME-PRETAX> 22,489
<INCOME-PRE-EXTRAORDINARY> 14,539
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,539
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<YIELD-ACTUAL> 0
<LOANS-NON> 17,848
<LOANS-PAST> 2,863
<LOANS-TROUBLED> 180
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 36,194
<CHARGE-OFFS> 9,188
<RECOVERIES> 2,465
<ALLOWANCE-CLOSE> 45,567
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
