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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
/x/ SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from ________ to ________
COMMISSION FILE NO. 0-19368
COMMUNITY FIRST BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 46-0391436
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
520 MAIN AVENUE
FARGO, ND 58124-0001
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(Address of principal executive offices and zip code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (701) 298-5600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
8-7/8% CUMULATIVE CAPITAL SECURITIES, $25 LIQUIDATION
AMOUNT*
8.20% CUMULATIVE CAPITAL SECURITIES, $25 LIQUIDATION
AMOUNT**
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 6, 1998, assuming as market value the price of $52.75 per
share, the average between the high and low sale prices on the Nasdaq
National Market, the aggregate market value of shares held by nonaffiliates
was approximately $958 million.
As of March 6, 1998, the Company had outstanding 20,324,732 shares of Common
Stock, $.01 par value, net of treasury shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders and the Proxy Statement for
the Company's Annual Meeting of Shareholders to be held April 28, 1998, are
incorporated by reference into Parts II and III, respectively, of this Form
10-K, to the extent described in such Parts.
* The 8-7/8% Cumulative Capital Securities (the "CFB I Capital Securities")
were issued by CFB Capital I ("CFB Capital I"), a wholly owned Delaware business
trust subsidiary of the Company. The Company has also fully and unconditionally
guaranteed all of CFB Capital I's obligations under the CFB I Capital
Securities.
** The 8.20% Cumulative Capital Securities (the "CFB II Capital Securities")
were issued by CFB Capital II ("CFB Capital II"), a wholly owned Delaware
business trust subsidiary of the Company. The Company has also fully and
unconditionally guaranteed all of CFB Capital II's obligations under the CFB II
Capital Securities.
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TABLE OF CONTENTS
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Page No.
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PART I
Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . 15
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . 16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . 16
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS . . . . . . . . . . . . . . . . . . . . 16
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . . . 16
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . 16
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT . . . . . . . . . . . . . . . . . . 17
Item 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . 17
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . 17
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . 17
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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PART I
ITEM 1. BUSINESS
GENERAL
Community First Bankshares, Inc. (the "Company"), is a multi-bank holding
company that as of December 31, 1997 operated banks and bank branches (the
"Banks") in 109 communities in Arizona, Colorado, Iowa, Minnesota, Nebraska,
North Dakota, South Dakota, Wisconsin and Wyoming. Total assets of the Company
were approximately $4.9 billion as of December 31, 1997. The Company
completed a significant acquisition in January 1998 and currently has three
pending acquisitions. See "Pending Acquisitions" and "Recent Significant
Acquisitions."
The Banks are community banks that provide a full range of commercial and
consumer banking services primarily to individuals and businesses in small and
medium-sized communities and the surrounding market areas. The Company
encourages local autonomy by local Bank presidents, while providing to the Banks
the benefits of holding company affiliation. The Company maintains a subsidiary
bank phantom stock program, pursuant to which presidents of the subsidiary Banks
participate in the equity appreciation of their respective local Banks. The
Company believes this program is important to provide these individuals with a
direct incentive to improve the performance of their Banks.
COMMUNITY BANKING STRATEGY
The Company's strategy is to operate and continue to acquire banks and bank
branches in communities which generally have populations between 3,000 and
50,000 and are located in the Company's key target acquisition states of
Arizona, Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, North Dakota,
South Dakota, Wisconsin and Wyoming, and additionally in the adjacent states of
Idaho, Illinois, Missouri, New Mexico, Oklahoma and Utah (this seventeen state
area is collectively referred to as the "Acquisition Area"). Such communities
are believed to provide the Company with the opportunity for a stable,
relatively low-cost deposit base. The individual banks and bank branches sought
to be acquired by the Company generally have approximately $20 million to $150
million in assets. The Company provides the Banks with the advantages of
affiliation with a multi-bank holding company, such as access to its lines of
financial services including trust products and administration, insurance and
investment services, data processing services, credit policy formulation and
review, investment management and specialized staff support. The Company grants
substantial autonomy to managers of the Banks with respect to day-to-day
operations, customer service decisions and marketing. The Banks are encouraged
to participate in community activities, support local charities and community
development, and otherwise enhance their images in their communities.
THE BANKS
The Banks provide a full range of commercial and consumer banking services
primarily to individuals and businesses in small and medium-sized communities
and the surrounding market areas. The Banks draw most of their deposits from
and make most of their loans within their respective market areas. The Banks
owned by the Company as of December 31, 1997, were located in Arizona, Colorado,
Iowa, Minnesota, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming.
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COMMUNITIES SERVED
The Banks, as of December 31, 1997, were located in communities with
populations ranging from approximately 200 to 20,000, except for Fargo, North
Dakota, Englewood, Colorado, a suburb of Denver, and Phoenix, Arizona. Each of
the Banks serves a market area with greater population because, in many cases,
there are few or no other financial institutions within a reasonable distance
from the community in which the Bank is located. The economies of the Banks'
communities, especially those in Nebraska, North Dakota and South Dakota, depend
primarily on farming, farm service and agricultural supply businesses.
Agriculture in these communities is affected by many factors beyond the control
of the Banks, including weather, governmental policies, fluctuating commodity
prices, demand and production and natural disasters. As with other small,
nonmetropolitan communities in the Upper Midwest, many of the communities in
which the Banks presently operate have experienced and are expected to
experience no growth or a decline in population. The Company has operated
profitably in these communities. However, if reductions in population or
adverse economic trends in specific communities result in decreased
profitability in the Banks or offices located in those communities, the Company
may consider selling such Banks or offices or reducing the level of services
provided in such communities.
ACQUISITION STRATEGY
The Company intends to continue its growth by making acquisitions of
community banks and other financial institutions in selected communities in the
Acquisition Area. The Company believes it is well-positioned to acquire and
profitably operate community banks because of its experience in operating
community banks, its ability to provide centralized management to those banks
and its access to capital. The Company believes many owners of community banks
are seeking to sell their banks for a variety of reasons, including lack of
shareholder liquidity, management succession problems, the difficulty of
compliance with current multiple-layered bank regulations and increasing
competition from non-bank organizations. The Company believes there are over
2,000 community banks that are possible acquisition candidates in the
Acquisition Area.
The Company competes with individuals and institutions, including major
regional bank holding companies, for suitable acquisition candidates within the
Acquisition Area. Acquisition competitors of the Company in the Acquisition
Area range from regional bank holding companies to individual bank owners who
own or control banks in the Acquisition Area. The process of industry
consolidation is likely to accelerate as a result of the adoption of the
Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"). The IBBEA
largely eliminated restrictions on interstate banking and since June 1, 1997,
has permitted interstate branching, subject to special "opt-in" and "opt-out"
provisions which states may enact by law. Most states have adopted
implementing legislation. Certain aspects of the IBBEA were clarified and
amended in 1997 with the passage of the Riegle-Neal Clarification Act. The
Economics and Growth Regulatory Paperwork Reduction Act of 1996 ("EGRPRA")
streamlined application processes and eased regulations in several areas
facilitating acquisitions and expansion of nonbanking activities. The effect of
this legislation is likely to both facilitate the Company's acquisitions and to
increase the number of potential acquirers of banks in the Acquisition Area.
The Company has established a due diligence review process to evaluate
acquisition targets and has established acquisition parameters for target
acquisitions relating to market factors, financial performance and certain
nonfinancial factors. Market factors considered by the Company include the
size and long-term viability of the community and market area served by the
target bank, the dominance of the acquisition target (which should be the
largest or second largest financial institution in the market) and the proximity
of other existing Banks owned by the Company. In exploring markets in regions
not currently served by the Company, management looks for similarities between
the new market areas and the Company's existing market areas in
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terms of culture and economic bases. Financial analyses performed by the
Company in evaluating acquisition prospects include review of historical
performance, comparison to peers and the Company's Banks in terms of key
operating performance ratios (including earnings, staffing and loan quality) and
target ratios. The Company determines the price it is willing to pay for an
institution based on, among other factors, the anticipated ten-year average
return on invested equity capital. Nonfinancial considerations in evaluating an
acquisition prospect include the quality of the management team's skill and the
demand on management resources to integrate the target institution. Finally,
each target acquisition must undergo an extensive review of loan asset quality,
operating procedures and deposit structure before the Company commits to a
purchase. The Company's level of future acquisitions will depend, in part, on
its ability to attract and retain management level employees capable of
performing efficient review of credit quality standards of proposed acquisition
candidates. Acquisition opportunities presented to the Company that have not
met the requirements described above have not been pursued.
Because of limited growth opportunities in many of the existing markets
served by the Company, management believes future growth in the business
earnings of the Company will largely depend on consummation of acquisitions
consistent with the Company's acquisition strategy. Successful completion of
acquisitions by the Company depends upon such factors as the availability of
suitable acquisition candidates, necessary regulatory approvals and necessary
approvals of holders of the Company's and other providers of credit, compliance
with applicable capital requirements and, in the case of expansion into new
states, the availability of additional management resources required to operate
banks in widely dispersed geographical areas.
PENDING ACQUISITIONS
The Company routinely solicits and reviews acquisition opportunities and,
at any given time, may have bids outstanding or may be involved in negotiations
with the owners of financial institutions or other parties relative to a
particular financial institution, its branches or its deposit accounts.
On January 12, 1998, the Company signed a definitive merger agreement with
FNB, Inc. ("FNB"), a two-bank holding company headquartered in Greeley,
Colorado. At December 31, 1997, FNB had total assets of $118 million and
offices in Greeley and Fort Collins, Colorado. To facilitate completion of the
transaction, which is expected to be accounted for using the pooling of
interests method of accounting, the Company will issue approximately 570,000
shares of common stock to holders of FNB common stock. The transaction is
subject to regulatory approval and is expected to close during the second
quarter of 1998.
On January 8, 1998, the Company signed a definitive merger agreement with
Community Bancorp, Inc. ("CBI"), a one-bank holding company headquartered in
Thornton, Colorado. At December 31, 1997, CBI had total assets of $78 million
and offices in Thornton and Arvada, Colorado. To facilitate completion of the
transaction, which is expected to be accounted for using the pooling of
interests method of accounting, the Company will issue approximately 452,000
shares of common stock to holders of CBI common stock. The transaction is
subject to regulatory approval and is expected to close during the second
quarter of 1998.
On November 7, 1997, the Company entered into an agreement to acquire
Pioneer Bank of Longmont, Longmont, Colorado ("Pioneer"). At December 31, 1997,
Pioneer had total assets of $130 million and five banking offices in four
Colorado communities. On completion of the merger and subject to adjustments
set forth in the acquisition agreement, the Company expects to issue
approximately 700,000 shares of its common stock to the holders of Pioneer
common stock. Completion of the acquisition is subject to regulatory approvals,
approval by the Pioneer shareholders and other conditions. The transaction is
anticipated to be completed during the second quarter of 1998 and is expected to
be accounted for as a pooling of interests.
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RECENT SIGNIFICANT ACQUISITIONS
On January 23, 1998, the Company acquired 37 banking offices located in
Arizona, Colorado and Utah (the "Bank One Branches") from three subsidiary
banks of Banc One Corporation (the "Bank One Banks"). At closing, the Bank
One Branches had total deposits of approximately $730 million and loans of
approximately $61 million. The Company paid a purchase price premium of
approximately $43.8 million, equal to 6% of the deposits of the Bank One
Branches at closing. The acquisition was accounted for as an acquisition of
assets and assumption of liabilities and resulted in the recognition by the
Company of deposit-based intangibles in an amount equal to the purchase price
premium of approximately $43.8 million. Following the closing, the 25
Arizona offices and four Utah offices acquired from the Bank One Banks were
merged into the Republic bank in Phoenix, Arizona that was recently acquired
by the Company. The eight acquired Colorado offices were merged into the
Company's existing Colorado affiliate bank. In January 1998, the Company
signed an agreement to sell one of the former Bank One Branches located in
Colorado.
On December 1, 1997, the Company acquired First National Summit
Bankshares, Inc., Gunnison, Colorado ("Summit"), a bank holding company that
owned and operated a national bank with banking facilities in five Colorado
communities. At closing, Summit had total assets of approximately $90
million, total deposits of approximately $82 million and total stockholders'
equity of approximately $7 million. Upon completion of the merger, which was
accounted for as a pooling of interests, the Company issued approximately
314,800 shares of common stock to the former holders of Summit common stock
and paid approximately $1 million in cash to holders of Summit preferred
stock cancelled in the merger. The value of the Company's common stock
issued in the merger was approximately $15 million, based upon the trading
value of the Company's common stock determined pursuant to the merger
agreement.
On November 24, 1997, the Company acquired Republic National Bancorp,
Inc., Phoenix, Arizona ("Republic"), a bank holding company that owned and
operated a national bank in Phoenix, Arizona. At closing, Republic had total
assets of approximately $54 million, total deposits of approximately $49
million and total stockholders' equity of approximately $4 million. Upon
completion of the merger, which was accounted for as a pooling of interests,
the Company issued approximately 368,000 shares of common stock to the former
holders of Republic common stock. The value of the Company's common stock
issued in the merger was approximately $17.4 million, based upon the trading
value of the Company's common stock determined pursuant to the merger
agreement.
On July 14, 1997, the Company purchased KeyBank National Association,
Cheyenne, Wyoming ("KeyBank Wyoming"), from KeyCorp, its parent corporation,
("KeyCorp"), for a purchase price of $135 million. KeyBank Wyoming has been
renamed "Community First National Bank." At closing, KeyBank Wyoming had total
assets of approximately $1.1 billion and 28 banking offices located in 24
communities in Wyoming, including Cheyenne, Laramie, Casper, Sheridan and
Jackson. The Company believes its Wyoming banking network is the largest in
Wyoming, providing a full range of commercial and consumer banking services
throughout the state. The transaction was accounted for as a business
combination using the purchase method of accounting and resulted in the
recognition of goodwill by the Company of approximately $60 million.
On December 18, 1996, the Company acquired Mountain Parks Financial Corp.
("Mountain Parks"), a bank holding company that operated a state chartered bank
with full service commercial banking facilities in 17 Colorado communities. At
closing, Mountain Parks had total assets of approximately $600.0 million and
total stockholders' equity of approximately $60.9 million. Upon completion of
the merger, which was accounted for as a pooling of interest, the Company issued
approximately 5.2 million shares of common stock to the former holders of
Mountain Parks common stock. The market value of the Company's common stock
issued in the merger was approximately $142.2 million, based on the closing
price of the Company's common stock on the
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Nasdaq National Market on December 18, 1996. The Mountain Parks banking
offices are located in winter ski and summer recreational areas in the
Colorado mountains and in the greater Denver/Boulder metropolitan area.
Pursuant to commitments made with the Federal Reserve to address resulting
concentrations in certain Colorado banking markets, on April 4, 1997, the
Company sold Mountain Parks banking offices in two Colorado communities.
ADMINISTRATION OF BANKS
The Company provides policy and management direction and specialized staff
support in general areas while relying on Bank managers for day-to-day
operations, customer service decisions and community relations. The Company is
responsible for policy-related functions, such as supervisory credit review,
audits, personnel policies and internal examination activities. Resource
allocations for administrative support by the Company are balanced to provide
adequate support services for the Banks' operations, while carefully controlling
service costs charged to the Banks. The major areas of administration are as
follows:
CREDIT. The Company's lending activities are guided by the general loan
policy established by the Board of Directors. The Senior Credit Committee of
the Company has established loan approval limits for each region of the Company
and each subsidiary Bank. Amounts in excess of the individual Bank lending
authority are presented to the Regional Credit Officers. Loans above $1,500,000
per nonclassified borrower and $250,000 per classified borrower are presented to
the Senior Credit Committee for approval. The Company's credit policy
establishes guidelines for approval of all credits, including local loans and
purchased loans and loan participations. The credits of the Banks are subject
to internal review by Bank officers every 12 months. The loan portfolios of the
Banks are subject to examination by the Company's credit examination staff every
12 to 24 months, the frequency of which is based on a variety of factors,
including the credit quality of the institution. The credit examination staff
is also responsible for credit review with respect to the assets of banks to be
acquired by the Company.
FINANCE. The Board of Directors of the Company has established policies in
the areas of asset/liability management, investments, capital expenditures,
accounting procedures and capital and dividend management. Policies are
implemented and monitored for compliance by the Chief Financial Officer and the
Asset/Liability Committee of the Company.
OPERATIONS. Community First Service Corporation ("CFSC"), a subsidiary of
the Company, provides data processing and operations support services to the
Banks by contract. CFSC's system is designed to provide for all Bank and
customer data processing needs at the lowest possible cost and can be expanded
to accommodate future growth and additional service applications. The Company
believes CFSC has sufficient capacity to provide services to the banks the
Company has agreed to acquire. In addition to its own office facilities in
Fargo, North Dakota, CFSC also has a data processing facility in Golden,
Colorado. Additional expenditures for equipment, consistent with the increased
data processing volumes, would likely be necessary if additional significant
acquisitions occur during 1998.
OTHER SERVICES. The Company provides other services for the benefit of the
Banks, such as outside professional services, central human resources services,
benefits administration, marketing guidance and centralized purchasing of
supplies.
INSURANCE AGENCIES
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The Company currently owns and operates insurance agencies located in
32 communities served by the Banks through its subsidiaries, Community
Insurance, Inc. ("CII"), and Community First Insurance Agencies, Inc. ("CFIA").
These agencies are primarily engaged in the sale of property and casualty
insurance and make some sales of other types of insurance, such as life,
accident and crop hail insurance. The Company had commission revenue of
$5.4 million in 1997.
OTHER ACTIVITIES
The Company has steadily consolidated Banks located in each state into
single legal charters with multiple locations. As of December 31, 1997, the
Company had 10 separately chartered subsidiary Banks and 6 nonbank
subsidiaries. The subsidiary Banks of the Company in seven locations maintain
trust departments, but their services are more broadly available and the Company
may expand its trust activities in the future. Trust services are made available
to customers in several locations through local trust officers or by appointment
with members of the trust department. Most of the Banks also sell annuities.
Federal bank regulation permits bank holding companies to engage in other
limited activities, such as the distribution of certain types of securities, and
future changes in such regulation may further expand the types of activities in
which the Company may engage. Although the Company intends to maintain its
focus on the banking business in its targeted market areas, the Company will
consider other permitted business activities as opportunities arise.
COMPETITION
Commercial banking is highly competitive. In the conduct of certain
aspects of their business, the Banks compete with other commercial banks,
savings and loan institutions, issuers of fixed income investments, finance
corporations, credit unions and money market funds, among other types of
institutions. The Banks compete with these institutions in such areas as
obtaining new deposits, offering new types of services and setting loan rates
and interest rates on various types of deposits, as well as other aspects of the
banking business. Management believes community residents and businesses prefer
to deal with local banks and the Banks have generally been able to compete
successfully in their respective communities because of the Company's emphasis
on local ownership and the autonomy of Bank management in community relations.
At the same time, the Company provides the Banks with the advantages of
centralized sophisticated administration and the opportunity to make larger
loans and diversify their lending activity through Bank group participations.
Further, because most of the Banks have a significant market share in the
communities they serve, the Company believes the Banks can, to a degree,
influence deposit and loan pricing in their markets and are subject to less
competition based on deposit and loan pricing than would be the case in larger
metropolitan markets with more competitors. However, the Banks have experienced
increased price competition from credit unions in certain market areas in recent
periods. Recent changes in government regulation of banking, particularly the
legislation which removes restrictions on interstate banking and permits
interstate branching, or legislation in certain states to permit statewide
branching, may increase competition by both out-of-state and in-state banking
organizations and by other financial institutions. See "Supervision and
Regulation," below. The Banks compete with other financial institutions,
including government lending agencies, for high quality loans in the Banks'
market areas and for purchases of loan assets and investment assets. While
management believes the Banks will continue to compete successfully in their
communities, there is no assurance that future competition will not adversely
affect the Banks' earnings.
EMPLOYEES
The Company had 2,241 employees at December 31, 1997, including
1,681 full-time employees and 560 part-time employees. Of these individuals,
128 were employed at the holding company level, 1,841 (including
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1,381 full-time employees) were employed at the Bank level, 200 were employed by
CFSC and 72 were employed by CII and CFIA.
SUPERVISION AND REGULATION
GENERAL. In addition to a variety of generally applicable state and
federal laws governing businesses and employers, the Company and the Banks are
extensively regulated by federal and state laws applicable only to financial
institutions. Virtually all aspects of the Company's operations are subject to
specific requirements or restrictions and general regulatory oversight from laws
regulating consumer finance transactions, such as Truth In Lending Act, Home
Mortgage Disclosure Act and Equal Credit Opportunity Act, to laws regulating
collections and confidentiality, such as Fair Debt Collections Practices Act,
Fair Credit Reporting Act and Right to Financial Privacy Act. With few
exceptions, state and federal banking laws have as their principal objective
either the maintenance of the safety and soundness of the Federal Deposit
Insurance System or the protection of consumers or classes of consumers, rather
than the specific protection of security holders of the Company.
With the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the FDIC Improvement Act of 1991 ("FDICIA")
and the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"),
Congress enacted comprehensive legislation affecting the commercial banking and
thrift industries. FIRREA, among other things, abolished the Federal Savings
and Loan Insurance Corporation and established two new insurance funds under the
jurisdiction of the FDIC: the Bank Insurance Fund ("BIF"), which insures most
commercial banks, including the Banks, and the Savings Association Insurance
Fund, which insures most thrift institutions. In addition to effecting
far-reaching restructuring of the financial industry, FIRREA provided a
phased-in increase in the rate of annual insurance assessments paid by insured
depository institutions. FDICIA increased funding for the BIF and expanded
regulation of depository institutions and their affiliates, including parent
holding companies. FDICIA further provided authority for special assessments
against insured deposits and for the development of a system of assessing
deposit insurance premiums based upon the institutions's risk.
IBBEA generally liberalized multi-state expansion. Effective September 29,
1995, IBBEA significantly eased restrictions on interstate acquisition of banks
by bank holding companies. Beginning June 1, 1997, banks located in different
states may merge and operate the resulting institution as a single charter with
interstate branches. However, the legislation includes special "opt-out" and
"opt-in" provisions that individual states may adopt prior to the effective
date of interstate branching. IBBEA does NOT affect the branching laws within a
state, and imposes concentration limits limiting the resulting organization's
market share to 30% of state deposits and 10% of total United States deposits.
Congress continues to consider wide-ranging proposals for altering the
structure, regulation and competitive relationships of the nation's financial
institutions. It cannot be predicted whether or in what form any of these
proposals will be adopted or the extent to which the business of the Company may
be affected thereby.
BANK HOLDING COMPANY REGULATION. The Company is a bank holding company
within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). As a result, the Company's activities are subject to certain limitations
under the BHC Act, and transactions between the Company and the Banks and other
affiliates are subject to certain restrictions. As a registered bank holding
company, the Company is required to file semiannual reports with the Federal
Reserve Board ("FRB") and such other information as the FRB may require, and is
subject to examination by the FRB. The FRB has the authority to issue cease and
desist orders against the Company and its nonbank subsidiaries if the FRB
determines that actions by the Company are unsafe,
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unsound or violate the law. Under certain circumstances, redemptions, dividends
or distributions by the Company with respect to its equity securities may be
considered unsafe or unsound practices.
As a bank holding company, the acquisition of "control" of the Company by
an individual or a "company" is subject to the prior approval of the FRB. The
term "company" is broadly defined to include any corporation, partnership,
association or trust or similar organization, while the definition or control
for these purposes may be met by (i) the ownership, control or power to vote 10%
or more of the outstanding shares of any class of voting stock of the Company,
directly or indirectly, (ii) control over the election priority of Directors of
the Company, or (iii) the power to exercise, directly or indirectly, controlling
influence over the management or policies of the Company.
Under the BHC Act, a bank holding company must obtain prior FRB approval
before it acquires direct or indirect ownership or control of any voting shares
of any bank or other bank holding company if, after such acquisition, it will
own or control directly or indirectly more than 5% of the voting stock of the
target, unless it already owns a majority of the voting stock of the target. A
bank holding company also must obtain prior FRB approval before it acquires all
or substantially all of the assets of a bank or merges or consolidates with
another bank holding company.
A bank holding company is, with limited exceptions, prohibited from
acquiring direct or indirect ownership or control of a company that is not a
bank or a bank holding company, and must engage in the business of banking or
managing or controlling banks or furnishing services to or performing services
for its subsidiary banks. The FRB, by order or regulation, may authorize a bank
holding company to engage in or acquire stock in a company engaged in activities
so closely related to banking or managing or controlling banks as to be a proper
incident thereto. Some of the activities the FRB has determined by regulation
to be incidental to the business of banking are: making and servicing loans or
certain types of leases, engaging in discount brokerage activities, performing
certain data processing services and providing insurance brokerage services
under certain conditions and subject to certain limitations.
In reviewing any application or proposal by a bank holding company, the FRB
is required to consider the financial and managerial resources and future
prospects of the bank holding company and the banks concerned, the convenience
and needs of the community to be served, as well as the probable effect of the
transaction upon competition. Recent decisions by the FRB under the BHC Act
have underscored the importance placed by the FRB upon the record of the
applicant and its subsidiary banks in meeting the credit needs of its community
in accordance with the Community Reinvestment Act of 1977.
BANK REGULATION. The Banks are subject to detailed federal and state laws
and regulations. National bank subsidiaries of the Company are primarily
supervised by the Office of the Comptroller of the Currency (the "OCC"), a
bureau of the United States Department of Treasury. The OCC regularly examines
national banks in such areas as reserves, loans, investments, trust services,
management practices, Community Reinvestment Act compliance and other aspects of
bank operations. These examinations are designed for the protection of the
deposit insurance system and the enforcement of federal and state laws and
regulations, and not for the shareholders of the Company. In addition to
undergoing these regular examinations, national banks must furnish reports
containing detailed and accurate financial statements and schedules to the
OCC quarterly.
Bank subsidiaries of the Company that are chartered under state law are
regulated and supervised by the respective state's banking agency. In addition,
state-chartered banks, as members of the FDIC, are regulated and supervised by
the FDIC. Each of these agencies conducts regular examinations of each Bank,
generally on an alternate basis, reviewing the adequacy of the reserves, quality
of the loans and investments, propriety of
11
<PAGE>
management practices, compliance with laws and regulations, including the
Community Reinvestment Act, trust, and other aspects of Bank operations. These
examinations are designed for the protection of the deposit insurance system and
the enforcement of federal and state laws and regulations, and are not conducted
for the benefit of the shareholders of the Company.
Federal and state banking laws and regulations govern, among other things,
the scope of a bank's business, investments a bank may make, reserves a bank
must maintain, loans a bank makes and collateral it takes, the activities of a
bank with respect to mergers and consolidations and the establishment of
branches. The OCC, in the case of national banks, and the FDIC, in the case of
state-chartered, nonmember banks, are the respective primary regulatory
authorities under the Financial Institution Supervisory Act, and are thereby
provided authority under that Act to impose penalties, initiate civil and
administrative actions and take other steps intended to prevent a bank from
engaging in an unsafe or an unsound practice in the conduct of its business. In
extreme cases, the FDIC has authority to revoke deposit insurance, and may
assess civil money penalties and impose cease and desist orders against the bank
and affiliated individuals, including the bank's attorneys and accountants.
Under FDICIA, federal banking authorities are also authorized to establish
safety and soundness standards for banks, thrifts and their parent holding
companies covering a wide range of operational and managerial matters, including
asset quality, earnings, stock valuation and employee compensation.
Under current law, national and state bank subsidiaries of the Company are
subject to state law restrictions in branching, including restrictions on the
number, location and characteristics of branches. The laws vary from liberal
branching states, like North Dakota and Wisconsin, which allow banks to branch
freely, subject only to application and approval, to states like Iowa and
Nebraska, which severely restrict branching, although they allow banks to
combine and retain preexisting locations.
In June 1993, the FDIC adopted a risk-based premium schedule that increases
the assessment rates for depository institutions. Under the new schedule, which
took effect for the assessment period beginning January 1, 1994, each financial
institution is assigned to one of three capital groups: well capitalized,
adequately capitalized or undercapitalized, as defined in the regulations
implementing the prompt corrective action provisions of the FDICIA; and further
assigned to one of three subgroups within a capital group, on the basis of
supervisory evaluations by the institution's primary federal and, if applicable,
state supervisors and other information relevant to the institution's financial
condition and the risk posed to the applicable insurance fund. The actual
assessment rate applicable to a particular institution depends upon the risk
assessment classification so assigned to the institution by the FDIC. Because
the BIF has reached its required reserve level of 1.25% of insured deposits,
banks in the lowest risk classification pay no deposit insurance premiums
currently. Each of the Banks currently qualifies for the lowest level of
deposit insurance.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Donald R. Mengedoth 53 President, Chief Executive Officer and Chairman of the
Board
Mark A. Anderson 40 Executive Vice President, Chief Financial Officer, Chief
Information Officer, Secretary and Treasurer
Ronald K. Strand 51 Executive Vice President - Banking Group
12
<PAGE>
David E. Groshong 49 Executive Vice President - Financial Services
Thomas R. Anderson 42 Senior Vice President - Treasury
Randall L. Dancliff 50 Senior Vice President and Wyoming Region Manager
Cynithia U. Davis 45 Senior Vice President and Arizona/Utah Region Manager
Keith A. Dickelman 43 Senior Vice President and Eastern Colorado Region Manager
Thomas E. Hansen 45 Senior Vice President and Central Region Manager
Bruce A. Heysse 46 Senior Vice President - Acquisitions
Thomas A. Hilt 55 Senior Vice President - Operations and Administration
Gary A. Knutson 50 Senior Vice President and Integration Manager
David A. Lee 54 Senior Vice President and Eastern Region Manager
Charles A. Mausbach 46 Senior Vice President and Western Colorado Region
Manager
Harriette S. McCaul 47 Senior Vice President - Human Resources
Patricia J. Staples 42 Senior Vice President - Marketing
Craig A. Weiss 36 Senior Vice President - Finance
</TABLE>
Donald R. Mengedoth has been President, Chief Executive Officer, Chairman
of the Board and a director of the Company since its organization in 1986. He
was Senior Vice President of First Bank System, Inc. ("FBS") from 1982 to 1987
and has worked in the banking business since 1966, including management
positions in retail banking operations, human resources and commercial lending.
From 1984 to 1987, Mr. Mengedoth was Regional Managing Director of FBS. From
1979 to 1982, Mr. Mengedoth was Vice President - Operations for FBS. Prior to
that time, he was Senior Vice President of First Bank Milwaukee.
Mark A. Anderson has been Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company since its organization in 1986
and Chief Information Officer since February 1998. He was Vice President and
Regional Controller for FBS from 1984 to 1987. From 1979 to 1984, he held
various positions with FBS-affiliated banks in the finance and credit
analysis areas. Mr. Anderson is a Chartered Financial Analyst and a Certified
Management Accountant.
Ronald K. Strand has been Executive Vice President - Banking Group since
February 1993. He was previously Senior Vice President and Regional Manager for
South Dakota and North Dakota for the Company from January 1991 to February
1993. Previously, Mr. Strand had been Vice President and Regional Manager for
the Company and President, Chief Executive Officer and a director of the
Company's affiliate bank in Wahpeton, North Dakota since 1988. Prior to his
affiliation with the Company, he served as President and Chief
13
<PAGE>
Executive Officer of Norwest Bank of North Dakota, N.A., Wahpeton, from 1985
until 1988. He was employed by Norwest for a total of 15 years, having
previously worked in Norwest banks in Jamestown, North Dakota, and Moorhead,
Minnesota.
David E. Groshong has been Executive Vice President - Financial Services
since May 1996. He was previously Chairman and Chief Executive Officer of the
Company's affiliate bank in Alliance, Nebraska from May 1995 to May 1996.
Previously, Mr. Groshong had been President and Chief Executive of the Company's
affiliate bank in Fergus Falls, Minnesota since 1992 and as Senior Vice
President and Senior Loan Officer of the Fargo Bank since 1985. He was employed
by Norwest Bank of Minnesota, N.A. for a total of eight years and prior to that
worked in the consumer finance industry.
Thomas R. Anderson has been Senior Vice President - Treasury since
February 1998. He was previously Vice President/Funds Manager of the Company
from 1988 to 1997 and Funds Management Officer from 1987 to 1988. Prior to
1987, he was employed by Norwest Corporation for seven years, most recently
as a Senior Financial Analyst.
Randall L. Dancliff has been Senior Vice President and Wyoming Region
Manager since July 1997. He was President and Chief Executive Officer of
KeyBank Wyoming since April 1995 until the acquisition of KeyBank Wyoming by
the Company in July 1997. Prior to that, he served as President, Chief
Operating Officer and Chief Financial Officer of KeyBank Wyoming from 1992 to
April 1995, and as Regional Vice President of KeyBank Cheyenne from 1985 to
1991. From 1973 through 1985, he served in a variety of capacities with
First Wyoming Bank, the predecessor to KeyBank Wyoming.
Cynthia U. Davis has been Senior Vice President and Arizona/Utah Region
Manager since October 1997. From October 1987 to October 1997, she held
various positions for Banc One Corporation, including positions as Vice
President, Retail Delivery for Banc One Corporation and Vice President Region
Manager for 36 Bank One banking centers in Northern Arizona. She has a total
of 23 years of banking experience in Arizona, Idaho and California.
Keith A. Dickelman has been Senior Vice President and Eastern Colorado
Region Manager since January 1998. He was previously President of
Community First National Bank, Fergus Falls, Minnesota from 1995 to 1997 and
from 1992 to 1995 served as a Senior Loan Officer and Senior Vice President
of Community First National Bank, Fargo, North Dakota.
Thomas E. Hansen has been Senior Vice President and Central Region Manager
since April 1993. He also served as President, Chief Executive Officer and
director of the Company's affiliate bank in Fargo, North Dakota from April 1993
to December 1996. Previously, he was employed by Norwest Bank Fargo for
19 years, most recently as President.
Bruce A. Heysse has been Senior Vice President - Acquisitions since July
1996. He was Senior Vice President and Integration Manager of the Company from
November 1995 to June 1996. He was Vice President and Senior Credit Officer of
the Company from 1987 to November 1995. He began his banking career at the
Company's affiliate bank in Wahpeton, North Dakota, and had a total of 11 years
of banking experience prior to joining the Company.
Thomas A. Hilt has been Senior Vice President - Operations and
Administration of the Company since 1987 and President of Community First
Service Corporation, the Company's data processing subsidiary, since 1988. He
was Vice President and Manager - Operations Support for the Regional Division of
FBS from 1984 to 1987. Prior to 1984, he held various positions with FBS since
1967, including responsibility for systems development, programming, audit and
examination functions.
Gary A. Knutson has been Senior Vice President and Integration Manager
since July 1996 and previously was Senior Vice President and Western Region
Manager of the Company since September 1993. He was President, Chief
Executive Officer and director of the Company's affiliate bank in Wahpeton,
North Dakota from January 1991 to September 1993. He began his banking
career at the Company's affiliate bank in Lidgerwood, North Dakota, and had a
total of 14 years of banking experience prior to joining the Company.
14
<PAGE>
David A. Lee has been Senior Vice President and Eastern Region Manager of
the Company since January 1991. He had been a Region Manager of the Company
since 1988. He was President and Chief Executive Officer and a director of the
Company's affiliate bank in Little Falls from 1987 to January 1991. Mr. Lee
held various positions with FBS from 1966 to 1987.
Charles A. Mausbach has been Senior Vice President and Western Colorado
Region Manager since March 1998. He was President of Community First National
Bank, Worthington, Minnesota from October 1992 to February 1998.
Harriette S. McCaul, Ph.D., has been Senior Vice President of Human
Resources since February 1997. Previously, she was the Dean of the College
of Business Administration at North Dakota State University in Fargo, North
Dakota. She joined NDSU in 1983 and held various teaching and administrative
positions in the Business Department and human resources area. Prior to that
time, she was an instructor at Moorhead State University, Moorhead,
Minnesota, and the director of faculty and staff benefits at the University
of Kansas.
Patricia J. Staples has been Senior Vice President - Marketing since July
1994. Previously, Ms. Staples was employed as the public relations manager with
MeritCare Health System for 10 years.
Craig A. Weiss has been Senior Vice President - Finance since February
1998. He was previously Vice President Finance of the Company from 1988 to
1997 and Finance and Accounting Manager from 1987 to 1998. Prior to 1987, he
was employed by First Bank System, most recently as a Regional Financial
Analyst. Mr. Weiss is a certified public accountant.
ELECTION. The Company's officers are elected by the Board of Directors.
The officers serve until their successors are elected or until their earlier
resignation, removal or death.
ITEM 2. PROPERTIES
In January 1996, the Company formed a new subsidiary, Community First
Properties, Inc. ("CFPI"), for the purpose of acquiring and owning the space
currently occupied by the Company. CFPI owns all of the portions of the office
building not owned by the Company's Fargo Bank subsidiary at 520 Main Avenue,
Fargo, North Dakota.
The Company maintains its offices at 520 Main Avenue, Fargo, North
Dakota, consisting of approximately 34,000 square feet at an annual rental of
$409,000, payable to its subsidiary, CFPI. The Company believes these
facilities will be adequate for the foreseeable future. The Company also
utilizes office space at affiliate banks located in Denver, Colorado and
Cheyenne, Wyoming as well as leasing approximately 4,000 square feet of
office space in Phoenix, Arizona at an annual rental of approximately
$90,000. Each of the Banks owns its main office and those of its branches,
and these facilities range in size from approximately 1,200 to 36,000 square
feet. During 1997, the Company constructed and owns a 47,000 square foot
two-story building in Fargo, North Dakota which is leased to CFSC.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are subject to various
legal actions and proceedings in the normal course of business, some of which
may involve substantial claims for compensatory damages. In some cases, these
actions and proceedings relate in whole or in part to activities of banks prior
to their acquisition and may be covered by agreements of former owners of these
banks to indemnify the Company. Although litigation is subject to many
uncertainties and the ultimate exposure with respect to current matters
cannot be
15
<PAGE>
ascertained, management does not believe that the final outcome will have a
material adverse effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information as to the principal market on which the Company's common stock
is traded, market price information for the common stock of the Company, the
approximate number of holders of record as of December 31, 1997, and the
Company's dividend policy is incorporated herein by reference from the inside
back cover of the 1997 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1997,
consisting of data captioned "Financial Highlights" on page 1 of the 1997 Annual
Report to Shareholders, "Consolidated Statement of Condition--Five-Year Summary"
on page 44 of the Annual Report and "Consolidated Statement of Income-Five Year
Summary" on page 45 of the Annual Report are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 15 through 26 of the 1997 Annual Report to Shareholders is
incorporated hereby by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth on pages 25 and 26 of the 1997 Annual Report
to Shareholders under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Asset/Liability Management" is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Statements of Financial Condition of the Company as of
December 31, 1997 and 1996, and the related Consolidated Statements of Income,
Shareholders' Equity and Cash Flows for each of the three years ended
December 31, 1997, the Notes to the Consolidated Financial Statements and the
Report of Ernst & Young LLP, independent auditors, contained in the Company's
1997 Annual Report to Shareholders on pages 27 through 43 are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
16
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Company's 1998 Proxy Statement under the
caption "Election of Directors" is incorporated herein by reference.
Information regarding the executive officers of the Company is included under
separate caption in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the 1998 Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference, except that
information under the captions "Compensation Committee Report on Executive
Compensation" and "Comparative Stock Performance" is not so incorporated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the 1998 Proxy Statement under the caption
"Security Ownership of Principal Shareholders and Management" is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the 1998 Proxy Statement under the caption
"Certain Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS FORM 10-K:
1. FINANCIAL STATEMENTS. See Item 8, above.
2. FINANCIAL STATEMENT SCHEDULES. All financial statement schedules are
omitted as the required information is inapplicable or the information
is presented in the financial statements or related notes.
3. PRO FORMA FINANCIAL INFORMATION. None.
(b) REPORTS ON FORM 8-K.
None.
17
<PAGE>
(c) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
2.1 Master Agreement dated July 22, 1994, between the Registrant and Bank
of Colorado Holding Company, including as Exhibit A the form of
Purchase and Assumption Agreement executed by Colorado Community First
State Bank of Steamboat Springs and Vail Bank (incorporated by
reference to Exhibit 2.13 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994 [the "1994
Form 10-K"]).
2.2 Agreement and Plan of Merger dated as of August 12, 1994, between the
Registrant and Minowa Bancshares, Inc. (incorporated by reference to
Exhibit 2.1 to the Registrant's Registration Statement on Form S-4
[File No. 33-84746], as declared effective by the Securities and
Exchange Commission (the "Commission") on January 23, 1995).
2.3 Agreement and Plan of Merger dated as of November 28, 1994, between
the Registrant and Abbott Bank Group, Inc. (incorporated by reference
to Exhibit 10.2 to the Form 8-K report of the Registrant dated
January 20, 1995).
2.4 Restated Agreement and Plan of Merger dated as of December 6, 1994,
among the Registrant, Colorado Acquisition Corporation and First
Community Bankshares, Inc. (incorporated by reference to Exhibit 10.1
to the Form 8-K report of the Registrant dated January 20, 1995).
2.5 Stock Purchase Agreement dated as of June 7, 1995 by and among
BNCCORP, Inc., Gregory Cleveland and Tracy Scott, and the Registrant
relating to Farmers & Merchants Bank of Beach (incorporated by
reference to Exhibit 2.12 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 [the "1995
Form 10-K"]).
2.6 Agreement and Plan of Merger dated as of March 8, 1996 among the
Registrant, Trinidad Acquisition Corporation and Financial Bancorp,
Inc. (the holding company for Trinidad National Bank) (incorporated by
reference to Exhibit 2.1 to the Registrant's Registration Statement on
Form S-4 [File No. 333-6239], as declared effective by the Commission
on August 9, 1996).
18
<PAGE>
Exhibit
Number Description
- -------- -----------
2.7 Agreement and Plan of Reorganization dated as of June 25, 1996 between
the Registrant and Mountain Parks Financial Corp. (incorporated by
reference to the Appendix to the Registrant's Joint Proxy Statement
with Mountain Parks Financial Corp. included in the Registration
Statement on Form S-4 [File No. 333-14439], as declared effective by
the Commission on November 7, 1996).
2.8 Stock Purchase Agreement dated as of February 18, 1997 by and among
the Registrant, KeyCorp and Key Bank of the Rocky Mountains, Inc.
(incorporated by reference to Exhibit 2.8 to the Registrant's
Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, filed with the Commission as of May 8, 1997
[the "1996 Form 10-K"]).
2.9 Restated Agreement and Plan of Merger dated as of August 22, 1997,
including Agreement and First Amendment to Agreement dated as of the
same date, between the Registrant and First National Summit
Bankshares, Inc.(incorporated by reference to Appendices A and B to
the Proxy Statement-Prospectus contained in the Registrant's
Registration Statement on Form S-4 [File No. 333-38997] filed with the
Commission on October 29, 1997).
2.10 Restated Agreement and Plan of Merger dated as of August 28, 1997
between the Registrant and Republic National Bancorp, Inc.
(incorporated by reference to Appendix A to the Proxy
Statement-Prospectus contained in Registrant's Registration Statement
on Form S-4 [File No. 333-38225] filed with the Commission on
October 20, 1997).
2.11 Office Purchase and Assumption Agreement dated as of the 10th day of
September, 1997 by and between Bank One, Arizona, National
Association, Bank One, Colorado, National Association, Bank One, Utah,
National Association and the Registrant, (incorporated by reference to
Exhibit 2.6 to the Registrant's Registration Statement on Form S-4
[File No. 333-36091], filed with the Commission on September 22,
1997).
2.12 Agreement and Plan of Merger dated as of November 6, 1997 among the
Registrant, Community First National Bank and Pioneer Bank of Longmont
(incorporated by reference to Exhibit 2.7 to the Registrant's
Registration Statement on Form S-4 [File No. 333-37527], filed with
the Commission on November 21, 1997).
2.13 First Amendment to Agreement and Plan of Merger dated as of the 19th
day of December, 1997 by and among the Registrant, Community First
National Bank and Pioneer Bank of Longmont.
3.1 Restated Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 to the 1996 Form 10-K).
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form S-1
[File No. 33-41246], as declared effective by the Commission on
August 13, 1991 [the "1991 S-1"]).
19
<PAGE>
Exhibit
Number Description
- -------- -----------
4.1 Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Registrant (incorporated by
reference to Exhibit A to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A, filed with the Commission on January 9, 1995
[the "Form 8-A"]).
4.2 Form of Rights Agreement dated as of January 5, 1995, between the
Registrant, and Norwest Bank Minnesota, National Association, which
includes as Exhibit B thereto the form of Rights Certificate
(incorporated by reference to Exhibit 1 to the Form 8-A.)
4.3 Subordinated Indenture dated February 5, 1997, between the Registrant
and Wilmington Trust Company, as Indenture Trustee, including form of
Junior Subordinated Indenture (incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-3 [File No.
333-19921] filed with the Commission as of January 30, 1997 [the "1997
CFB Capital I Form S-3"]).
4.4 Amended and Restated Trust Agreement of CFB Capital I dated
February 5, 1997, including Form of Capital Security Certificate of
CFB Capital I (incorporated by reference to Exhibit 4.5 to the 1997
CFB Capital I Form S-3).
4.5 Capital Securities Guarantee Agreement dated as of February 5, 1997,
between the Registrant and Wilmington Trust Company as Trustee
(incorporated by reference to Exhibit 4.7 to the 1997 CFB Capital I
Form S-3).
4.6 Indenture dated June 24, 1997 relating to the Registrant's 7.30%
Subordinated Notes Due 2004 (the "New Notes") between the Registrant
and Norwest Bank Minnesota, National Association, as trustee
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-4 [File No. 333-36091] as declared
effective by the Commission on November 10, 1997 [the "1997
Subordinated Note Form S-4"]).
4.7 Registration Rights Agreement dated as of June 24, 1997, among the
Registrant, Piper Jaffray Inc. and Keefe, Bruyette & Woods, Inc.
(incorporated by reference to Exhibit 4.2 to the 1997 Subordinated
Note Form S-4).
4.8 Subordinated Indenture dated December 10, 1997, between the
Registrant and Wilmington Trust Company, as Indenture Trustee,
including form of Junior Subordinated Indenture (incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement on
Form S-3 [File No. 333-37521] as declared effective by the Commission
on December 4, 1997 [the "1997 CFB Capital II Form S-3"]).
4.9 Amended and Restated Trust Agreement of CFB Capital I dated
December 10, 1997, including Form of Capital Security Certificate of
CFB Capital II (incorporated by reference to Exhibit 4.5 to the 1997
CFB Capital II Form S-3).
20
<PAGE>
Exhibit
Number Description
- -------- -----------
4.10 Capital Securities Guarantee Agreement dated as of December 10, 1997,
between the Registrant and Wilmington Trust Company as Trustee
(incorporated by reference to Exhibit 4.7 to the 1997 CFB Capital II
Form S-3).
10.1 1997 Annual Incentive Plan for Holding Company Management.
10.2 Restated 1987 Stock Option Plan (incorporated by reference to Exhibit
10.7 to the Registrant's Registration Statement on Form S-8 [File No.
33-46744], as declared effective by the Commission on May 6, 1992).*
10.3 Form of Tax Sharing Agreement between the Registrant and each of its
subsidiary Banks (incorporated by reference to Exhibit 10.3 to the
1995 Form 10-K).
10.4 Form of Service Agreement for Data Processing between Community First
Service Corporation and each of the subsidiary Banks of the Registrant
(incorporated by reference to Exhibit 10.4 to the 1995 Form 10-K).
10.5 Form of Bank Services Agreement between the Registrant and each of its
subsidiary Banks (incorporated by reference to Exhibit 10.5 to the
1995 Form 10-K).
10.6 Form of Agency Agreement between the Registrant and each of its
subsidiary Banks, and Assignment of Agency Agreement and Second
Assignment of Agency Agreement, which assign the Registrant's interest
in the Agency Agreement to Community First Financial, Inc. (relating
to the Registrant's subsidiary Banks) (incorporated by reference to
Exhibit 10.6 to the 1995 Form 10-K).
10.7 Lease dated April 27, 1993, between Community First Properties, Inc.
(formerly Fargo Tower Partners) and the Registrant (incorporated by
reference to Exhibit 10.11 to the 1994 10-K).
10.8 Promissory Note dated July 14, 1997 (Term Note) in the principal
amount of $30,000,000, issued to Norwest Bank Minnesota, National
Association ("Norwest"), as Agent, on behalf of Harris Trust and
Savings Bank ("Harris"), Bank of America National Trust and Savings
Association ("Bank of America") and Norwest.
10.9 Promissory Notes dated July 14, 1997 (Current Notes), each in the
principal amount of $8,333,333.33, issued to each of Harris, Bank
of America, and Norwest.
10.10 Credit Agreement dated July 14, 1997 among the Company, Harris,
Bank of America, Norwest as a lender, and Norwest as Agent.
21
<PAGE>
Exhibit
Number Description
- -------- -----------
10.11 Form of Indemnification Agreement entered into by and between the
Registrant and the Registrant's officers and directors (incorporated
by reference to Exhibit 10.33 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 [the "1993 Form 10-K"]).
10.12 1996 Stock Option Plan, as approved by the Board of Directors on
February 6, 1996 (incorporated by reference to Exhibit 10.15 to the
1995 Form 10-K).*
10.13 Supplemental Executive Retirement Plan, effective as of August 1,
1995.*
13.1 Annual Report to Shareholders.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
27 Financial Data Schedule
</TABLE>
________________
*Executive compensation plans and arrangements.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNITY FIRST BANKSHARES, INC.
("Registrant")
Dated: March 10, 1998 By/s/ Donald R. Mengedoth
-------------------------------------
Donald R. Mengedoth
President, Chief Executive
Officer and Chairman of the
Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant, in
the capacities and on the dates indicated.
Signature and Title Date
- ------------------- -----
/s/ Donald R. Mengedoth March 10, 1998
- ---------------------------------------
Donald R. Mengedoth
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Mark A. Anderson March 10, 1998
- ---------------------------------------
Mark A. Anderson
Executive Vice President, Chief
Financial Officer, Secretary, Treasurer
and Chief Information Officer (Principal
Financial and Accounting Officer)
/s/ Patricia A. Adam March 10, 1998
- ---------------------------------------
Patricia A. Adam, Director
/s/ James T. Anderson March 10, 1998
- ---------------------------------------
James T. Anderson, Director
/s/ Patrick E. Benedict March 10, 1998
- ---------------------------------------
Patrick E. Benedict, Director
23
<PAGE>
Signature and Title Date
- ------------------- -----
/s/ Patrick Delaney March 10, 1998
- ---------------------------------------
Patrick Delaney, Director
March 10, 1998
- ---------------------------------------
John H. Flittie, Director
/s/ Darrell G. Knudson March 10, 1998
- ---------------------------------------
Darrell G. Knudson, Director
/s/ Thomas C. Wold March 10, 1998
- ---------------------------------------
Thomas C. Wold, Director
/s/ Harvey L. Wollman March 10, 1998
- ---------------------------------------
Harvey L. Wollman, Director
/s/ Dennis M. Mathisen March 10, 1998
- ---------------------------------------
Dennis M. Mathisen, Director
24
<PAGE>
EXHIBIT INDEX
Exhibit No. Decscription
- ----------- ------------
2.13 First Amendment to Agreement and Plan of Merger dated as of
the 19th day of December, 1997 by and among the Registrant,
Community First National Bank and Pioneer Bank of Longmont
10.1 1997 Annual Incentive Plan for Holding Company Management
10.8 Promissory Note dated July 14, 1997 (Term Note) in the
principal amount of $30,000,000, issued to Norwest Bank
Minnesota, National Association ("Norwest"), as Agent, on
behalf of Harris Trust and Savings Bank ("Harris"), Bank
of America National Trust and Savings Association ("Bank
of America") and Norwest.
10.9 Promissory Notes dated July 14, 1997 (Current Notes),
each in the principal amount of $8,333,333.33, issued to
each of Harris, Bank of America, and Norwest.
10.10 Credit Agreement dated July 14, 1997 among the Company,
Harris, Bank of America, Norwest as a lender, and Norwest
as Agent.
13.1 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
<PAGE>
EXHIBIT 2.13
FIRST AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER is dated as of the
19th day of December, 1997 and made and entered into by and among COMMUNITY
FIRST BANKSHARES, INC., a Delaware corporation ("CFB"), COMMUNITY FIRST NATIONAL
BANK, a de novo national banking association, ("Acquisition Subsidiary") and
PIONEER BANK OF LONGMONT, a Colorado banking corporation ("Pioneer").
WHEREAS, the parties hereto are parties to an Agreement and Plan of Merger
dated November 6, 1997 (the "Merger Agreement"); and
WHEREAS, the parties desire to make certain changes to the Merger
Agreement, as hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound hereby, the parties hereto agree as follows:
1. AMENDMENT OF SECTION 2.1(c)(ii) OF THE MERGER AGREEMENT. Section
2.1(c)(ii) of the Merger Agreement is amended and restated in its entirety as
follows:
(ii) If the CFB Trading Value is greater than $52.50 per share,
then the Exchange Rate shall be reduced so that the product of the CFB
Trading Value multiplied by the Exchange Rate shall be $36,750,000.
2. AMENDMENT OF SECTION 7.1(c) OF THE MERGER AGREEMENT. Section 7.1(c)
of the Merger Agreement is amended and restated in its entirety as follows:
(c) by either CFB or Pioneer if the Merger shall not have been
consummated on or before May 30, 1998, unless the failure of
consummation shall be due to the failure of the party seeking to
terminate to perform or observe in all material respects the covenants
and agreements hereunder to be performed or observed by such party; or
Except as hereinabove set forth, there are no other changes to the Merger
Agreement, and the same is expressly ratified and confirmed.
<PAGE>
IN WITNESS WHEREOF, CFB, Acquisition Subsidiary and Pioneer have
caused this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first above written.
COMMUNITY FIRST BANKSHARES, INC.
By: /s/ Mark A. Anderson
------------------------------------
Name: Mark A. Anderson
Title: Executive Vice President
COMMUNITY FIRST NATIONAL BANK
By: /s/ Mark A. Anderson
------------------------------------
Name: Mark A. Anderson
Title: Executive Vice President
PIONEER BANK OF LONGMONT
By: /s/ Daniel L. Allen
------------------------------------
Name: Daniel L. Allen
Title: President and Chief Executive Officer
2
<PAGE>
EXHIBIT 10.1
COMMUNITY FIRST BANKSHARES, INC.
ANNUAL INCENTIVE PLAN
1997
<PAGE>
<TABLE>
<CAPTION>
1997 AIP
GROUP TARGET INCENTIVE MAXIMUM
- ----- ---------------- -------
<S> <C> <C> <C>
I CEO 40% 80%
II EVP'S 30% 60%
III SVP'S 20% 40%
IV VP'S 10% 20%
</TABLE>
SPLIT 50% INTERNAL & 50% EXTERNAL
<TABLE>
<CAPTION>
TARGET INTERNAL EXTERNAL
------ -------- --------
<S> <C> <C> <C>
I 40% 20% 20%
II 30% 15% 15%
III 20% 10% 10%
IV 10% 5% 5%
</TABLE>
1
<PAGE>
INTERNAL AWARD CALCULATION
Based on performance versus plan EPS as target.
No award if less than 90% of plan.
Double internal amount @ 115% of plan (see schedule).
Round up at .5 (plan) and down at < .5.
<TABLE>
<CAPTION>
Award % of Base Salary
Fully Diluted ---------------------------------
% of Plan EPS I II III IV
- ---------- ---- - -- --- --
<S> <C> <C> <C> <C> <C>
Under 90 2.16 0 0 0 0
91 2.18 2.0 1.5 1.0 .5
92 2.20 4.0 3.0 2.0 1.0
93 2.23 6.0 4.5 3.0 1.5
94 2.25 8.0 6.0 4.0 2.0
95 2.27 10.0 7.5 5.0 2.5
96 2.29 12.0 9.0 6.0 3.0
97 2.31 14.0 10.5 7.0 3.5
98 2.33 16.0 12.0 8.0 4.0
99 2.35 18.0 13.5 9.0 4.5
100 2.37 20.0 15.0 10.0 5.0
101 2.39 21.3 16.0 10.7 5.3
102 2.41 22.7 17.0 11.3 5.7
103 2.43 24.0 18.0 12.0 6.0
104 2.45 25.3 19.0 12.7 6.3
105 2.47 26.7 20.0 13.3 6.7
106 2.49 28.0 21.0 14.0 7.0
107 2.51 29.3 22.0 14.7 7.3
108 2.53 30.7 23.0 15.3 7.7
109 2.55 32.0 24.0 16.0 8.0
110 2.57 33.3 25.0 16.7 8.3
111 2.59 34.7 26.0 17.3 8.7
112 2.61 36.0 27.0 18.0 9.0
113 2.63 37.3 28.0 18.7 9.3
114 2.65 38.7 29.0 19.3 9.7
115+ 2.67 40.0 30.0 20.0 10.0
</TABLE>
2
<PAGE>
EXTERNAL AWARD CALCULATION
SNL peer group (20 banks) for CURRENT PERFORMANCE YEAR based on group as of
December 31, 1995.
Combines incentive for ROE and growth (see matrix).
SNL 20 BANK GROUP
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Percentile 75th or higher 100% 150% 200%
- --------------------------------------------------------------------------------
ROE 50th 50% 100% 150%
- --------------------------------------------------------------------------------
49th or lower 0% 50% 100%
- --------------------------------------------------------------------------------
49th or lower 50th 75th or higher
- --------------------------------------------------------------------------------
</TABLE>
Percentile asset growth rate
External award calculation:
<TABLE>
<CAPTION>
% OF SALARY AT PERFORMANCE LEVEL
-----------------------------------
TARGET 50% 100% 150% 200%
------ --- ---- ---- ----
<S> <C> <C> <C> <C>
I 20% 10% 20% 30% 40%
II 15% 7.5% 15% 22.5% 30%
III 10% 5% 10% 15% 20%
IV 5% 2.5% 5% 7.5% 10%
</TABLE>
The SELECTED PEER GROUP reflects our selection of the NINETEEN OTHER
INSTITUTIONS most like the subject institution to be used as a peer group in
comparing relative compensation levels. For banks with assets of less than $5
billion, the automated process searches in sequence for:
1. Banks in the same state within 40% of total assets.
2. Banks in the same region within 40% of total assets.
3. Banks in the same state within 80% of total assets.
4. Banks in the same region within 80% of total assets.
5. Any bank within 40% of total assets.
6. Any bank within 80% of total assets.
7. Banks closest in asset size.
If at any point in the sequence nineteen banks are found, the sequence stops and
those banks form the Selected Peer Group. If step six is reached and there are
still not nineteen other banks, the banks closest in asset size anywhere in the
country are chosen to round out the peer group.
3
<PAGE>
PROMISSORY NOTE
$30,000,000.00 July 14, 1997
FOR VALUE RECEIVED, the undersigned, COMMUNITY FIRST BANKSHARES, INC., a
Delaware corporation with offices in Fargo, North Dakota, promises to pay to
the order of Norwest Bank Minnesota, National Association, as agent ("Agent")
on behalf of Harris Trust And Savings Bank ("Harris"), Bank Of America
National Trust And Savings Association ("B of A") and Norwest Bank Minnesota,
National Association (as a lender, "Norwest") (Harris, B of A and Norwest
hereinafter referred to as the "Banks") at the Agent's Norwest Center Office,
or at any other place designated at any time by the holder hereof, in lawful
money of the United States of America, the principal sum of THIRTY MILLION
AND NO/100 DOLLARS ($30,000,000.00), together with interest on the unpaid
balance hereof from the date hereof until this Note is fully paid at annual
rates determined in accordance with the provisions of the Credit Agreement
defined below. Interest on this Note shall be calculated on the basis of
actual number of days elapsed in a 360-day year.
This Note constitutes the Term Note issued pursuant to the provisions of
that certain Credit Agreement of even date herewith (the "Credit Agreement")
made between the undersigned, the Banks and the Agent. Reference is hereby
made to the Credit Agreement for statements of the terms pursuant to which
accrued interest on this Note is payable. Reference is also hereby made to
the Credit Agreement for statements of the terms pursuant to which the
indebtedness evidenced hereby was created, may be prepaid voluntarily and may
be accelerated.
The loan evidenced by this Note is comprised of Tranche A, in the amount
of $6,000,000.00, and Tranche B, in the amount of $24,000,000.00.
The principal of this Note shall be repayable as follows:
A. The principal of Tranche A shall be repayable as follows:
Six (6) semi-annual installments, each in the amount of
$1,000,000.00, commencing January 31, 1998 and continuing
on the 31st day of each consecutive July and January
thereafter through and including July 31, 2000, at which
time all then-remaining outstanding principal of Tranche A
shall be due and payable.
B. The principal of Tranche B shall be repayable as follows:
Six (6) semi-annual installments, each in the amount of
$875,000.00, commencing January 31, 1998 and continuing
on the 31st day of each consecutive July and January
thereafter through and including July 31, 2000; plus,
nine (9) semi-annual installments each in the amount of
$1,875,000.00, commencing January 31, 2001 and continuing
on the 31st day of each consecutive July and January
thereafter through and
Page 1 of 2
<PAGE>
including January 31, 2005; plus, one (1) final installment
in an amount equal to all then-remaining unpaid principal
of Tranche B shall be due and payable on July 31, 2005.
This Note replaces, but shall not be deemed payment or satisfaction of,
that certain Promissory Note of even date made by the undersigned in the face
amount of $30,000,000.00 payable to the Agent on behalf of the Banks, and
which contained an incomplete name for B of A.
Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorney's fees and legal expenses, incurred
by the holder hereof in the event this Note is not duly paid. The holder
hereof may change any terms of payment of this Note, including extensions of
time and renewals, and release any security for, or any party to, this Note,
without notifying or releasing any accommodation maker, endorser or guarantor
from liability in connection with this Note. Presentment or other demand for
payment, notice of dishonor and protest are hereby waived by the undersigned
and each endorser or guarantor. This Note shall be governed by the
substantive laws of the State of Minnesota.
COMMUNITY FIRST BANKSHARES, INC.
By: /s/ Mark A. Anderson
------------------------------------
Mark A. Anderson,
Executive Vice President,
Chief Financial Officer and Secretary
By: /s/ Donald R. Mengedoth
------------------------------------
Donald R. Mengedoth,
President and Chief Executive Officer
Page 2 of 2
<PAGE>
PROMISSORY NOTE
$8,333,333.33 July 14, 1997
FOR VALUE RECEIVED, the undersigned, COMMUNITY FIRST BANKSHARES, INC., a
Delaware corporation with offices in Fargo, North Dakota, promises to pay on
July 13, 1998 to the order of Harris Trust And Savings Bank (the "Bank") at
the Norwest Center Office of the Bank's agent, Norwest Bank Minnesota,
National Association, or at any other place designated at any time by the
holder hereof, in lawful money of the United States of America, the principal
sum of EIGHT MILLION THREE HUNDRED THIRTY-THREE THOUSAND THREE HUNDRED
THIRTY-THREE AND 33/100 DOLLARS ($8,333,333.33), or so much thereof as is
disbursed and remains outstanding hereunder as shown by the Bank's liability
record on the dates payments are due hereunder, together with interest on the
unpaid balance hereof from the date hereof until this Note is fully paid at
annual rates determined in accordance with the provisions of the Credit
Agreement defined below. Interest on this Note shall be calculated on the
basis of actual number of days elapsed (i) in a 365-day year in the case of
the Base Rate Borrowings and Federal Funds Borrowings (as defined in the
Credit Agreement), and (ii) in a 360-day year in the case of Eurodollar
Borrowings (as defined in the Credit Agreement).
This Note constitutes a Current Note issued pursuant to the provisions
of that certain Credit Agreement of even date herewith (the "Credit
Agreement") made between the undersigned, the Bank, Bank of America National
Trust And Savings Association, and Norwest Bank Minnesota, National
Association (as lender and as agent). Reference is hereby made to the Credit
Agreement for statements of the terms pursuant to which accrued interest on
this Note is payable. Reference is also hereby made to the Credit Agreement
for statements of the terms pursuant to which the indebtedness evidenced
hereby was created, may be prepaid voluntarily, may be reborrowed and may be
accelerated.
This Note replaces, but shall not be deemed payment or satisfaction of,
that certain Promissory Note of even date made by the undersigned in the face
amount of $8,333,333.33 payable to the Bank and which bore a maturity date of
July 31, 1998.
Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses, incurred
by the holder hereof in the event this Note is not duly paid. The holder
hereof may change any terms of payment of this Note, including extensions of
time and renewals, and release any security for, or any party to, this Note,
without notifying or releasing any accommodation maker, endorser or guarantor
from liability in connection with this Note. Presentment or other demand for
payment, notice of dishonor and protest are hereby waived by the undersigned
and each endorser or guarantor. This Note shall be governed by the
substantive laws of the State of Minnesota.
COMMUNITY FIRST BANKSHARES, INC.
By: /s/ Mark A. Anderson
------------------------------------
Mark A. Anderson,
Executive Vice President,
Chief Financial Officer and Secretary
By: /s/ Donald R. Mengedoth
------------------------------------
Donald R. Mengedoth,
President and Chief Executive Officer
<PAGE>
PROMISSORY NOTE
$8,333,333.33 July 14, 1997
FOR VALUE RECEIVED, the undersigned, COMMUNITY FIRST BANKSHARES, INC., a
Delaware corporation with offices in Fargo, North Dakota, promises to pay on
July 13, 1998 to the order of Bank Of America National Trust And Savings
Association (the "Bank") at the Norwest Center Office of the Bank's agent,
Norwest Bank Minnesota, National Association, or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America, the principal sum of EIGHT MILLION THREE HUNDRED
THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE AND 33/100 DOLLARS
($8,333,333.33), or so much thereof as is disbursed and remains outstanding
hereunder as shown by the Bank's liability record on the dates payments are
due hereunder, together with interest on the unpaid balance hereof from the
date hereof until this Note is fully paid at annual rates determined in
accordance with the provisions of the Credit Agreement defined below.
Interest on this Note shall be calculated on the basis of actual number of
days elapsed (i) in a 365-day year in the case of the Base Rate Borrowings
and Federal Funds Borrowings (as defined in the Credit Agreement), and (ii)
in a 360-day year in the case of Eurodollar Borrowings (as defined in the
Credit Agreement).
This Note constitutes a Current Note issued pursuant to the provisions
of that certain Credit Agreement of even date herewith (the "Credit
Agreement") made between the undersigned, the Bank, Harris Trust And Savings
Bank, and Norwest Bank Minnesota, National Association (as lender and as
agent). Reference is hereby made to the Credit Agreement for statements of
the terms pursuant to which accrued interest on this Note is payable.
Reference is also hereby made to the Credit Agreement for statements of the
terms pursuant to which the indebtedness evidenced hereby was created, may be
prepaid voluntarily, may be reborrowed and may be accelerated.
This Note replaces, but shall not be deemed payment or satisfaction of,
that certain Promissory Note of even date made by the undersigned in the face
amount of $8,333,333.33 payable to the Bank and which bore a maturity date of
July 31, 1998.
Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses, incurred
by the holder hereof in the event this Note is not duly paid. The holder
hereof may change any terms of payment of this Note, including extensions of
time and renewals, and release any security for, or any party to, this Note,
without notifying or releasing any accommodation maker, endorser or guarantor
from liability in connection with this Note. Presentment or other demand for
payment, notice of dishonor and protest are hereby waived by the undersigned
and each endorser or guarantor. This Note shall be governed by the
substantive laws of the State of Minnesota.
COMMUNITY FIRST BANKSHARES, INC.
By: /s/ Mark A. Anderson
------------------------------------
Mark A. Anderson,
Executive Vice President,
Chief Financial Officer and Secretary
By: /s/ Donald R. Mengedoth
------------------------------------
Donald R. Mengedoth,
President and Chief Executive Officer
<PAGE>
PROMISSORY NOTE
$8,333,333.33 July 14, 1997
FOR VALUE RECEIVED, the undersigned, COMMUNITY FIRST BANKSHARES, INC., a
Delaware corporation with offices in Fargo, North Dakota, promises to pay on
July 13, 1998 to the order of Norwest Bank Minnesota, National Association
(the "Bank") at the Bank's Norwest Center Office, or at any other place
designated at any time by the holder hereof, in lawful money of the United
States of America, the principal sum of EIGHT MILLION THREE HUNDRED
THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE AND 33/100 DOLLARS
($8,333,333.33), or so much thereof as is disbursed and remains outstanding
hereunder as shown by the Bank's liability record on the dates payments are
due hereunder, together with interest on the unpaid balance hereof from the
date hereof until this Note is fully paid at annual rates determined in
accordance with the provisions of the Credit Agreement defined below.
Interest on this Note shall be calculated on the basis of actual number of
days elapsed (i) in a 365-day year in the case of the Base Rate Borrowings
and Federal Funds Borrowings (as defined in the Credit Agreement), and (ii)
in a 360-day year in the case of Eurodollar Borrowings (as defined in the
Credit Agreement).
This Note constitutes a Current Note issued pursuant to the provisions
of that certain Credit Agreement of even date herewith (the "Credit
Agreement") made between the undersigned, the Bank (as lender and agent),
Bank Of America National Trust And Savings Association, and Harris Trust And
Savings Bank. Reference is hereby made to the Credit Agreement for
statements of the terms pursuant to which accrued interest on this Note is
payable. Reference is also hereby made to the Credit Agreement for
statements of the terms pursuant to which the indebtedness evidenced hereby
was created, may be prepaid voluntarily, may be reborrowed and may be
accelerated.
This Note replaces, but shall not be deemed payment or satisfaction of,
that certain Promissory Note of even date made by the undersigned in the face
amount of $8,333,333.33 payable to the Bank and which bore a maturity date of
July 31, 1998.
Unless prohibited by law, the undersigned agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses, incurred
by the holder hereof in the event this Note is not duly paid. The holder
hereof may change any terms of payment of this Note, including extensions of
time and renewals, and release any security for, or any party to, this Note,
without notifying or releasing any accommodation maker, endorser or guarantor
from liability in connection with this Note. Presentment or other demand for
payment, notice of dishonor and protest are hereby waived by the undersigned
and each endorser or guarantor. This Note shall be governed by the
substantive laws of the State of Minnesota.
COMMUNITY FIRST BANKSHARES, INC.
By: /s/ Mark A. Anderson
------------------------------------
Mark A. Anderson,
Executive Vice President,
Chief Financial Officer and Secretary
By: /s/ Donald R. Mengedoth
------------------------------------
Donald R. Mengedoth,
President and Chief Executive Officer
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is made as of the 14th day of July, 1997, and
is by and among COMMUNITY FIRST BANKSHARES, INC., a Delaware corporation with
offices located in Fargo, North Dakota (the "Borrower"), HARRIS TRUST AND
SAVINGS BANK ("Harris"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION ("B of A"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
("Norwest"; Harris, B of A and Norwest each referred to herein as a "Bank"
and collectively as "Banks"), and Norwest as agent for the Banks (in such
capacity, the "Agent").
RECITALS:
WHEREAS, the Borrower has requested the Banks (i) to establish a
revolving line of credit for the benefit of the Borrower in the amount of
$25,000,000.00, and (ii) to make a non-revolving term loan to the Borrower in
the amount of $30,000,000.00;
WHEREAS, the Banks are willing to grant said requests, subject to the
provisions of this Credit Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein, the parties agree as follows:
SECTION 1 DEFINITIONS
In addition to those terms defined in the above Recitals, as used
herein:
1.1 "Advance" shall mean an advance of funds under the Credit.
1.2 "Agreement" shall mean this Credit Agreement and all amendments and
supplements hereto which may from time to time become effective hereafter.
1.3 "Bank Group" shall mean the Borrower and the Subsidiary Banks.
1.4 "Base Rate" shall mean the "base" or "prime" rate of interest
established by Norwest as in effect and announced from time to time.
1.5 "Base Rate Borrowing" shall mean those Advances, and those portions
of the Term Loan, bearing interest at all times at a variable rate determined
by reference to the Base Rate.
1.6 "Borrowed Money" shall mean funds obtained by incurring contractual
indebtedness, but shall not include money borrowed from any Bank.
1.7 "Business Day" shall mean (i) for all purposes other than those
described in the following clause (ii), any day on which the Agent is open
for transacting substantially all of its commercial business, and (ii) with
respect to all notices and determinations in connection with, and payments of
principal of and interest on, Eurodollar Borrowings, any Business Day
described in preceding clause (i) on which trading by and between banks in
United States Dollar deposits in the London Interbank Eurodollar market is
transacted.
<PAGE>
1.8 "Closing Date" shall mean the date on which this Agreement is fully
executed and delivered to the Agent.
1.9 "Core Capital" shall mean the sum of the consolidated total equity
of the Bank Group plus capital and trust preferred securities.
1.10 "Credit" shall mean a revolving line of credit established by the
Banks for the benefit of the Borrower in the aggregate amount of
$25,000,000.00.
1.11 "Credit Expiration Date" shall mean July 13, 1998.
1.12 "Credit Percentages" shall mean, relative to any Bank, the
percentages identified as such set forth opposite the signature block for
such Bank on the last page of this Agreement.
1.13 "Current Notes" shall mean the promissory notes of the Borrower
substantially in the form of attached Exhibits A-1, A-2 and A-3, evidencing
Advances under the Credit.
1.14 "Eurodollar Borrowing" shall mean those Advances, and those
portions of the Term Loan, bearing interest at all times during the relevant
Interest Period, at a fixed rate determined by reference to the Eurodollar
Rate.
1.15 "Eurodollar Rate" shall mean, with respect to any Interest Period
for any Eurodollar Borrowing, the rate per annum (rounded up to the nearest
one-sixteenth of one percent) equal to the offered quotation to the Agent
in the London Interbank Eurodollar market for United States Dollar deposits
for delivery on the first day of such Interest Period, for the number of days
in such Interest Period, and in an amount comparable to the principal amount
of the related Eurodollar Borrowing to be outstanding during such Interest
Period, determined as of approximately 12:00 Noon, Minneapolis time, two
Business Days before the beginning of such Interest Period.
1.16 "Events of Default" shall mean any and all events of default
described in Section 8 hereof.
1.17 "Existing Harris Note" shall mean that certain Promissory Note
dated May 11, 1995 made by the Borrower in the face amount of $10,000,000.00
payable to Harris.
1.18 "Existing Norwest Term Note" shall mean that certain Promissory
Note dated January 2, 1997 made by the Borrower in the face amount of
$23,000,000.00 payable to Norwest.
1.19 "Federal Funds Borrowing" shall mean those Advances, and those
portions of the Term Loan, bearing interest at all times at a variable rate
determined by reference to the Federal Funds Rate.
1.20 "Federal Funds Rate" shall mean the overnight market rate quoted to
the Agent at approximately 12:00 Noon, Minneapolis time, each Business Day by
dealers in the Federal
-2-
<PAGE>
Funds market for the offering of dollars to the Agent for deposit, as such
rate may increase or decrease from time to time.
1.21 "GAAP" shall mean Generally Accepted Accounting Principles applied
on a basis consistent with those reflected in the financial statements
referred to in Section 5.8 hereof.
1.22 "Interest Payment Date" shall mean (i) as to any Eurodollar
Borrowing in respect of which an Interest Period of one, two or three months
has been selected, the last day of such Interest Period, and (ii) as to any
Eurodollar Borrowing in respect of which an Interest Period of six months has
been selected, the last day of the first three month period falling within
such Interest Period and the last day of such Interest Period.
1.23 "Interest Period" means, with respect to any Eurodollar Borrowing,
(a) initially, the period commencing on, as the case may be, the date on
which such Eurodollar Borrowing is made or the date on which such Eurodollar
Borrowing results from the conversion of a Base Rate Borrowing or a Federal
Funds Borrowing, and ending one, two, three or six months thereafter, as
selected in a notice of borrowing, continuance or conversion as provided in
Sections 2.1, 2.3, 2.4 or 3.3 hereof, and (b) thereafter, each period
commencing on the last day of the immediately preceding Interest Period and
ending one, two, three or six months thereafter, as selected by irrevocable
notice to the Agent (which notice must be received by the Agent before 12:00
Noon, Minneapolis time, three Business Days before the last day of the then
current Interest Period with respect to such Eurodollar Borrowing); provided
however, that (i) if any Interest Period would otherwise end on a day that
is not a Business Day, that Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension would be to carry
such Interest Period into another calendar month, in which event such
Interest Period shall end on the immediately preceding Business Day, (ii) the
Borrower may not select an Interest Period that would otherwise extend beyond
the Credit Expiration Date (with respect to the Credit), or the Term Loan
Maturity Date (with respect to the Term Loan), (iii) if no notice is given
with respect to selection on an Interest Period as provided above, the
affected Eurodollar Borrowing shall be converted to a Base Rate Borrowing on
the last day of the Interest Period then in effect, and (iv) any Interest
Period that begins on the last Business Day of a calendar month (or on a date
for which there is no numerically corresponding day in the calendar month at
the end of such Interest Period) shall end on the last Business Day of a
calendar month.
1.24 "Key Bank/Wyoming" shall mean Key Bank National Association
(Wyoming).
1.25 "Majority Banks" shall mean any group of Banks which, in the
aggregate, has commitments of 66.67% or more of the aggregate amount of the
Credit and the Term Loan.
1.26 "Old Harris Loan Agreement" shall mean that certain letter loan
agreement dated May 11, 1995 (as amended) made between the Borrower and
Harris.
1.27 "Old Norwest Loan Agreement" shall mean that certain letter loan
agreement dated May 11, 1995 (as amended) made between the Borrower and
Norwest.
1.28 "Permitted Liens" shall mean (i) liens in favor of Norwest as agent
for the Banks on a pro rata basis, (ii) liens existing as of the Closing Date
and disclosed to the Banks in writing, (iii) liens for taxes not delinquent
or which the Borrower is contesting in good faith in a manner
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that prevents enforcement of the matters being contested and for which
adequate reserves have been provided, and (iv) purchase money liens securing
indebtedness otherwise permitted under this Agreement, but only extending to
the goods so acquired.
1.29 "Reserve Adjusted Eurodollar Rate" shall mean, for any Interest Period,
a rate per annum (rounded upward, if necessary, to the next higher 1/16 of
1%) equal to the rate obtained by dividing (i) the Eurodollar Rate for such
Interest Period by (ii) a percentage equal to 1 minus the Reserve Requirement
in effect from time to time during such Interest Period.
1.30 "Reserve Requirement" shall mean, relative to the Interest Period
applicable to any Eurodollar Borrowing, a percentage (expressed as a decimal)
equal to the aggregate maximum reserve requirement (including all basic,
supplemental, marginal and other reserves and taking into account any
transitional adjustments or other scheduled changes in reserve requirements
during such Interest Period) on the first day of such Interest Period, as
specified under F.R.S. Board Regulation D or any other F.R.S. Board
regulation then in effect which prescribes reserve requirements applicable
to non-personal time deposits (as currently defined in such Regulation D),
applicable to the class of banks of which the Banks are members, on deposits
of the type used as a reference in determining the Reserve Adjusted
Eurodollar Rate and having a maturity approximately equal to such Interest
Period.
1.31 "Subsidiary Banks" shall mean each bank (including without limitation,
Key Bank/Wyoming) for which 51% or more of its voting stock is controlled
directly, or indirectly via a subsidiary, by the Borrower.
1.32 "Tangible Equity Capital" shall mean the sum of perpetual preferred
stock, common stock, surplus and undivided profits, capital reserves, and net
unrealized holding gains (and losses) on "available-for-sale" securities, as
disclosed in the Subsidiary Banks' Call Reports.
1.33 "Term Loan" shall mean a non-revolving term loan made by the Banks to
the Borrower in an aggregate amount not exceeding $30,000,000.00.
1.34 "Term Loan Maturity Date" shall mean July 31, 2005.
1.35 "Term Loan Percentages" shall mean, relative to any Bank, the
percentages identified as such set forth opposite the signature block for
such Bank on the last page of this Agreement.
1.36 "Term Note" shall mean a promissory note of the Borrower substantially
in the form of attached Exhibit B, evidencing the Term Loan.
1.37 "Tier I Core Capital" shall mean the core capital elements set forth by
the Federal Reserve Board in 12 CFR Parts 208 and 225.
1.38 "Tier 2 Supplementary Capital" shall mean the allowance for loan and
lease losses, as disclosed in the Subsidiary Banks' Call Reports.
1.39 "Total Liabilities" shall mean the aggregate amount of the Borrower's
total liabilities, less capital and trust preferred securities to the extent
included as total liabilities.
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1.40 "Tranche A" shall have the meaning ascribed to it in Section 3.3 hereof.
1.41 "Tranche B" shall have the meaning ascribed to it in Section 3.3 hereof.
SECTION 2 THE CREDIT
2.1 Subject to the other provisions of this Agreement, each Bank shall make
Advances to the Borrower under the Credit from time to time from the
effective date hereof until the Credit Expiration Date in aggregate principal
amounts not exceeding such Bank's Credit Percentage of TWENTY-FIVE MILLION
AND NO/100 DOLLARS ($25,000,000.00), at any one time outstanding. Each
Advance will be requested to the Agent in writing by an authorized officer of
the Borrower. The proceeds of the initial Advance shall be used for the
exclusive purpose of paying off all indebtedness evidenced by the Existing
Harris Note. Each request (other than the request for the initial Advance)
shall be accompanied by a Notice of Borrowing, substantially in the form of
attached Exhibit C, stating (among other things) that the proceeds of the
requested Advance will be used only to pay commercial paper notes at
maturity. Each Advance shall be made on a Business Day, and shall be
comprised of either a Base Rate Borrowing, a Federal Funds Borrowing, or
(provided there exists no Event of Default) a Eurodollar Borrowing, as
requested by the Borrower. Any Advance for which the Borrower fails to
specify at the time of the related request either a Base Rate Borrowing, a
Federal Funds Borrowing or a Eurodollar Borrowing shall be a Base Rate
Borrowing. Requests for Advances must be received by the Agent no later than
12:00 Noon, Minneapolis time, on the day of an Advance comprised of a Base
Rate Borrowing or a Federal Funds Borrowing, and no later than 12:00 Noon,
Minneapolis time, on the third Business Day immediately preceding an Advance
comprised of a Eurodollar Borrowing. The person making the request may ask
the Agent to quote an indication of the Eurodollar Rate which would be
applicable to the Advance for an Interest Period specified by such person. If
the person does not immediately accept the quoted Eurodollar Rate, the
related Advance shall be a Base Rate Borrowing. If the quoted Eurodollar Rate
is immediately accepted, the requested Advance shall be a Eurodollar
Borrowing; provided, however, that each Advance comprised of a Eurodollar
Borrowing shall be in the amount of $5,000,000.00, or a greater amount in
increments of $1,000,000.00. Each request for an advance shall be deemed a
representation and warranty by the Borrower that the representations and
warranties set forth in Section 5 hereof are true as of the date of such
request. Each Advance will be evidenced by a notation on each Bank's records,
which shall be conclusive evidence of such Advance, and by the related
Current Note. Within the limits of the Credit and subject to the terms and
conditions hereof, the Borrower may borrow, prepay pursuant to Section 2.11
hereof and reborrow pursuant to this Section 2.1.
2.2 The Agent shall notify each Bank of each request for an Advance by
telephone or fax no later than 1:00 p.m., Minneapolis time on the day on which
the Agent received the request. Subject to the notice requirements of Section
2.1 hereof and to the further provisions of this Section 2.2, the Agent will
make the Advance to the Borrower no later than 4:30 p.m., Minneapolis time on
the Business Day requested by the Borrower. On or before 3:30 p.m.,
Minneapolis time, on such Business Day, each Bank shall deposit with the
Agent same-day funds in an amount equal to such Bank's Percentage of the
related Advance. Such deposit will be made to an account which the Agent
shall specify from time to time by notice to the Banks. To the extent funds
are received from the Banks in accordance with this Section 2.2, the Agent
shall
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make such funds available to the Borrower by wire transfer to the account(s)
the Borrower shall have designated to the Agent at or before the time of the
related request.
2.3 Eurodollar Borrowings may be continued as such upon the expiration of
an Interest Period with respect thereto by compliance with the notice
provisions set forth in Sections 1.23 and 2.1 hereof; provided, however, that
Eurodollar Borrowings may not be continued as such when any Event of Default
exists, but (subject to the Bank's rights under Section 8 hereof) shall be
automatically converted to Base Rate Borrowings on the last day of the
existing Interest Period. If the Borrower shall fail to notify the Bank of
its desire to continue a Eurodollar Borrowing as described in the first
sentence of this Section 2.3, such borrowing shall be automatically converted
to a Base Rate Borrowing on the last day of the existing Interest Period.
2.4 For so long as there exists no Event of Default, and subject to the
dollar restrictions specified in the eighth sentence of Section 2.1 hereof,
the Borrower may elect to convert any Base Rate Borrowing or Federal Funds
Borrowing to a Eurodollar Borrowing by compliance with the notice provisions
set forth in Sections 1.23 and 2.1 hereof. The Borrower may elect to convert
any Eurodollar Borrowing to a Base Rate Borrowing or Federal Funds Borrowing
on the last day of the related Interest Period by compliance with the notice
provisions set forth in Sections 1.23 and 2.1 hereof.
2.5 Subject to the provisions of Section 2.7 hereof, interest on that
portion of the outstanding principal of the Current Note comprised of Base
Rate Borrowings shall be calculated at an annual rate equal to the Base Rate
in effect from time to time, and shall change as and when the Base Rate
changes. Subject to the provisions of Section 2.7 hereof, interest on that
portion of the outstanding principal of the Current Note comprised of Federal
Funds Borrowings shall be calculated at annual rate equal to one and
three-quarters percent (1.75%) in excess of the Federal Funds Rate in effect
from time to time, and shall change as and when the Federal Funds Rate
changes. Interest shall be calculated on the basis of the actual number of
days elapsed in a year of 365 days.
2.6 Subject to the provisions of Section 2.7 hereof, interest on the unpaid
principal of Eurodollar Borrowings shall be calculated for each Interest
Period at a fixed annual rate equal to the sum of the Reserve Adjusted
Eurodollar Rate determined for such Interest Period plus one and
three-quarters percent (1.75%). Interest shall be calculated on the basis of
the actual number of days elapsed in a year of 360 days.
2.7 Notwithstanding the provisions of Sections 2.5 and 2.6 hereof, for so
long as there exists any Event of Default, interest on the Current Notes
shall accrue at an annual rate of two percent (2.0%) in excess of the rate
which would otherwise apply to the Current Notes.
2.8 Interest on the unpaid principal of Base Rate Borrowings and Federal
Funds Borrowings shall be payable monthly, commencing July 31, 1997, and
continuing on the last day of each succeeding month, and on the Credit
Expiration Date.
2.9 Interest on the unpaid principal of each Eurodollar Borrowing shall be
payable in arrears on the related Interest Payment Date.
2.10 The principal of the Current Notes shall be repayable on the Credit
Expiration Date.
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2.11 The Borrower may at any time prepay Base Rate Borrowings and Federal
Funds Borrowings in whole or from time to time in part without premium or
penalty. The Borrower may prepay any Eurodollar Borrowing only in its
entirety and only on the last day of the relevant Interest Period.
2.12 If the Agent or any Bank determines (which determination shall be
conclusive and binding upon the Borrower) that by reason of circumstances
affecting the Interbank Eurodollar market, adequate and reasonable means do
not exist for asserting the Eurodollar Rate for any Interest Period with
respect to (i) a proposed Eurodollar Borrowing or (ii) the continuation of
Eurodollar Borrowings beyond the expiration of the then-current Interest
Period with respect thereto, the Agent shall forthwith give immediate notice
of such determination to the Borrower at least one Business Day before, as
the case may be, the requested borrowing date for such Eurodollar Borrowings
or the last day of such Interest Period. If such notice is given, (i) any
requested Eurodollar Borrowing shall be made as Base Rate Borrowing, and (ii)
any outstanding Eurodollar Borrowings shall be converted, on the last day of
the then-current Interest Period with respect thereto, to Base Rate
Borrowings. Until such notice has been withdrawn by the Agent, no further
Eurodollar Borrowings shall be made, nor shall the Borrower have the right to
convert Base Rate Borrowings or Federal Funds Borrowings into Eurodollar
Borrowings.
2.13 Notwithstanding any other provision hereof, if any law, regulation,
treaty or directive or any change therein or in the interpretation or
application thereof by any governmental authority, agency or instrumentality
or any court makes it unlawful for any Bank to make or maintain Eurodollar
Borrowings as contemplated by this Agreement, such Bank and the Agent shall
give notice (by telephone confirmed in writing) thereof to the Borrower, and
(i) such Bank's commitment to make Eurodollar Borrowings shall forthwith be
canceled, (ii) each then-outstanding Eurodollar Borrowing (if any) shall
automatically be converted to a Base Rate Borrowing on the last day of the
then-current Interest Period for such Eurodollar Borrowing or within such
earlier period as required by law, and (iii) such Bank shall thereafter make
any requested Eurodollar Borrowing available as a Base Rate Borrowing. The
Borrower hereby agrees promptly to pay such Bank, upon demand, any additional
amount necessary to compensate such Bank for any costs incurred by such Bank
in making any conversion of Eurodollar Borrowings in accordance with this
Section 2.13, including (but not limited to) any interest or fees payable by
such Bank to lenders of funds obtained by it in order to make or maintain
such Eurodollar Borrowings (the Bank's notice of such costs, as certified to
the Borrower, to be conclusive absent manifest error).
2.14 The Borrower shall pay the Agent, quarterly in advance on behalf of the
Banks, a facility fee of one-quarter of one percent (0.25%) of the amount of
the Credit, based on actual number of days elapsed in a year of 365 days.
SECTION 3 THE TERM LOAN
3.1 Subject to the other provisions of this Agreement, the Banks, through
the Agent, shall make the Term Loan to the Borrower in an aggregate amount
not exceeding $30,000,000.00, which shall be available in a single draw on or
before August 15, 1997. The Borrower hereby acknowledges that, if said single
draw is in an amount less than $30,000,000.00, the Banks have no commitment
to fund at a later date the unfunded portion of
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the Term Loan. The amount of the Term Loan shall not exceed the sum of (i)
all outstanding indebtedness evidenced by the Existing Norwest Term Note
(which shall be paid off with a portion of the proceeds of the Term Loan),
plus (ii) the Borrower's purchase price for the acquisition of 100% of the
capital stock in Key Bank/Wyoming. The Term Loan shall be non-revolving, and
evidenced by the Term Note. The Borrower shall give the Agent not less then
two days prior written notice of the day on which the Borrower desires the
funding of the Term Loan.
3.2 The Agent shall promptly notify each Bank of the Borrower's request for
the funding of the Term Loan, and the amount of the Term Loan. Subject to the
further provisions of this Section 3.2, the Agent will fund the Term Loan no
later than 4:30 p.m., Minneapolis time, on the Business Day requested by the
Borrower. On or before 3:30 p.m., Minneapolis time, on such Business Day,
each Bank shall deposit with the Agent same-day funds constituting such
Bank's Term Loan Percentage of the Term Loan. Such deposit will be made to an
account which the Agent shall specify by notice to the Banks. To the extent
funds are received from the Banks in accordance with this Section 3.2, the
Agent shall make such funds available to the Borrower by wire transfer to the
account(s) the Borrower shall have designated to the Agent at or before the
time of the related request.
3.3 The Term Loan shall be comprised of Tranche A, in the amount of
$6,000,000.00, and Tranche B, in the amount of $24,000,000.00. The Term Loan
shall be comprised of Base Rate Borrowings, Federal Funds Borrowings, and/or
Eurodollar Borrowings; provided, however, that Eurodollar Borrowings shall be
in the amount of $5,000,000.00, or a greater amount in increments of
$1,000,000.00; provided, further, that no Eurodollar borrowing may be in an
amount, or for an Interest Period, which would cause the Borrower to make a
prepayment of such Eurodollar Borrowing prior to the last day of such
Interest Period in order to comply with the principal repayment schedule set
forth in Section 3.7 hereof. Subject to the provisions of Section 3.4 hereof,
interest on that portion of the unpaid principal of the Term Note comprised
of a Base Rate Borrowing shall be calculated at an annual rate equal to the
Base Rate in effect from time to time, and shall change as and when the Base
Rate changes; interest on that portion of the unpaid principal of the Term
Note comprised of a Federal Funds Borrowing shall be calculated at an annual
rate equal to two percent (2.0%) in excess of the Federal Funds Rate in
effect from time to time, and shall change as and when the Federal Funds Rate
changes; and, interest on that portion of the unpaid principal of the Term
Note comprised of a Eurodollar Borrowing shall be calculated for each
Interest Period at a fixed annual rate equal to the sum of the Reserve
Adjusted Eurodollar Rate determined for such Interest Period plus two percent
(2.0%). Reference is hereby made to Sections 1.23, 2.1, 2.3 and 2.4 for
statements of the terms relating to notice requirements for the creation,
continuance or conversion of Base Rate Borrowings, Federal Funds Borrowings
and Eurodollar Borrowings. Interest on the Term Note shall be calculated on
basis of the actual number of days elapsed in a year of 360 days.
3.4 Notwithstanding the provisions of Section 3.3 hereof, for so long as
there exists any Events of Default, interest on the Term Note shall accrue at
an annual rate of two percent (2.0%) in excess of the rate which would
otherwise apply to the Term Note.
3.5 Interest on the unpaid principal of Base Rate Borrowings and Federal
Funds Borrowings shall be payable quarterly, commencing September 30,
1997, and continuing on the last day succeeding calendar quarter, and on the
Term Loan Maturity Date.
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3.6 Interest on the unpaid principal of each Eurodollar shall be payable in
arrears on the related Interest Payment Date.
3.7 The principal of the Term Note shall be repayable as follows:
A. The principal of Tranche A shall be repayable as follows:
Six (6) semi-annual installments, each in the amount of
$1,000,000.00, commencing January 31, 1998 and
continuing on the 31st day of each consecutive July and
January thereafter through and including July 31, 2000,
at which time all then-remaining outstanding principal of
Tranche A shall be due and payable.
B. The principal of Tranche B shall be repayable as follows:
Six (6) semi-annual installments, each in the amount of
$875,000.00, commencing January 31, 1998 and continuing
on the 31st day of each consecutive July and January
thereafter through and including July 31, 2000; plus,
nine (9) semi-annual installments each in the amount of
$1,875,000.00, commencing January 31, 2005; plus, one
(2) final installment in an amount equal to all
then-remaining unpaid principal of Tranche B shall be due
and payable on the Term Loan Maturity Date.
3.8 The Borrower may at any time prepay Base Rate Borrowings and Federal
Funds Borrowings in whole or from time to time in part without premium or
penalty. Reference is hereby made to Section 2.11 for statements of the terms
pursuant to which Eurodollar Borrowings may be prepaid. Prepayments shall be
applied to scheduled installments in chronological order of their maturities.
SECTION 4 CONDITIONS PRECEDENT
4.1 The Borrower shall deliver the following to the Agent, in form and
content acceptable to the Agent, on or before the Closing Date:
A. A copy, certified as of the most recent date practicable by the
Secretary of State of Delaware, of the Borrower's Certificate of
Incorporation and all amendments thereto, together with a certificate
(as of the Closing Date) of an officer of the Borrower to the effect
that such Certificate of Incorporation has not been amended since the
date of certification by the Secretary of State;
B. A certified (as of the Closing Date) copy of the Borrower's
By-laws;
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C. A Certificate, as of the most recent date practicable, of
the Secretaries of State of Delaware and North Dakota as to the
good standing of the Borrower;
D. A certified (as of the Closing Date) copy of resolutions
of the Borrower's board of directors authorizing the execution,
delivery and performance of this Agreement, the Current Notes, the
Term Note, and each other document to be delivered pursuant hereto;
E. A certificate (as of the Closing Date) of an officer of
the Borrower as to the incumbency and signatures of the officers
of the Borrower signing this Agreement, the Current Notes, the
Term Note, and each other document to be delivered pursuant hereto;
F. The Current Notes, duly executed by the Borrower;
G. The Term Note, duly executed by the Borrower;
H. A Certificate, duly executed by an officer of Harris,
indicating the aggregate amount of principal indebtedness of the
Existing Harris Note, and accrued but unpaid interest thereon,
which will be paid in full with the proceeds of the initial
Advance under the Credit; and,
I. A Certificate, duly executed by an officer of Norwest,
indicating the aggregate amount of principal indebtedness of the
Existing Norwest Term Note, and accrued but unpaid interest
thereon, which will be paid in full with a portion of the proceeds
of the Term Loan;
J. All instruments and documents comprising subordinated debt
issued by the Borrower and remaining unpaid as of the Closing
Date; and,
K. Photocopies, certified as true and complete by the
corporate secretary of the Borrower, of the definitive purchase
agreement (and all other documentation and approvals to be
executed or issued pursuant to the terms of such definitive
agreement) relating to Borrower's acquisition of 100% of the
outstanding shares of capital stock in Key Bank/Wyoming.
4.2 The Banks shall not be obligated to fund any requested Advance, or
to fund the Term Loan, unless:
A. The representations and warranties contained in Section 5
hereof are true and accurate on and as of such date; and,
B. No Event of Default, and no event which might become an
Event of Default after the lapse of time or the giving of notice
and the lapse of time, has occurred and is continuing or will
exist upon the date of such funding.
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SECTION 5 REPRESENTATIONS AND WARRANTIES
To induce the Banks to enter into this Agreement, the Borrower
represents and warrants to the Banks as follows:
5.1 The Borrower is a corporation, duly organized, existing and in good
standing under the laws of the State of Delaware.
5.2 The Borrower is authorized to transact business in the states of
Delaware and North Dakota and in any other state where Borrower has been
advised by its legal counsel to register as a foreign corporation.
5.3 Each Subsidiary Bank is authorized to transact business in the
respective state where its banking office is located.
5.4 The execution, delivery and performance of this Agreement, the Current
Notes, and the Term Note by the Borrower are within its corporate powers,
have been duly authorized, and are not in contravention of law, or the terms
of the Borrower's Certificate of Incorporation or By-laws, or of any
undertaking to which the Borrower is a party or by which it is bound.
5.5 The property of the Borrower is not subject to any lien except liens
disclosed in writing to the Banks prior to the Closing Date.
5.6 No litigation or governmental proceeding is pending or, to the knowledge
of the officers of the Borrower, threatened against the Borrower which could
have a material adverse effect on the financial condition or business of the
Borrower.
5.7 All authorizations of governmental agencies, bodies or authorities which
are necessary to permit the transactions contemplated by this letter agreement
have been obtained and are in full force and effect, and no further approval,
consent, order or authorization of or designation, registration, declaration
or filing with any governmental authority is required in connection with
consummation of the transactions contemplated by this letter agreement.
5.8 As of the date of this Agreement, there exists no event of default
under the Old Harris Loan Agreement or the Old Norwest Loan Agreement, nor
does there exist any event which, with the giving of notice or the passage of
time (or both), could become such an event of default.
5.9 All financial statements delivered to the Banks by or on behalf of
Borrower, including any schedules and notes pertaining thereto, have been
prepared in accordance with GAAP consistently applied, and fully and fairly
present the financial condition of the Borrower at the dates thereof and the
results of operations for the periods covered thereby, and there have been no
material adverse changes in the consolidated financial condition or business
of the Borrower from March 31, 1997 to the date hereof.
5.10 The Borrower's use of the proceeds of the Advances and the Term Loan
will not result in a violation of Regulation U issued by the Board of
Governors of the Federal Reserve System.
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SECTION 6 AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, for so long as the Credit
remains in existence or any indebtedness remains outstanding under the
Current Notes or the Term Note, unless the Majority Banks (via the Agent)
shall otherwise consent in writing, it will:
6.1 Pay when due (and cause each other member of the Bank Group to pay when
due) all taxes assessed against it or its respective property, except to the
extent and for so long as contested in good faith in a manner that prevents
enforcement of the matters being contested for which adequate reserves have
been provided.
6.2 Maintain (and cause each other member of the Bank Group to maintain) its
respective corporate existence and comply in all material respects with all
laws and regulations applicable thereto.
6.3 Furnish directly to the Banks:
A. As soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, the annual financial statements
of the Borrower, with the unqualified opinion of certified public
accountants acceptable to the Agent, all such statements to be prepared
on a basis consistent with the accounting practices reflected in any
previously submitted financial statement. All such financial statements
shall be prepared on a consolidated and consolidating basis for the
Borrower and each other member of the Bank Group.
B. As soon as available, and in any event within 90 days after the
end of each fiscal year of the Borrower, the Annual Report of Domestic
Bank Holding Companies (FR Y-6) required by the Federal Reserve Bank.
C. As soon as available, and in any event within 60 days after the
end of each fiscal quarter of the Borrower, the complete Consolidated
Report for Multi-Bank Holding Companies (FR Y-9C) required to be filed
by the Borrower with the Federal Reserve Bank in the Federal Reserve
District where the Borrower is located.
D. As soon as available, and in any event within 60 days after the
end of each fiscal quarter of the Borrower, the complete Parent Company
Only Financial Statement for Multi-Bank Holding Companies (FR Y-9LP)
required by the Federal Reserve Bank.
E. As soon as available, and in any event within 45 days after the
end of each quarter of each fiscal year of the Borrower, a Borrower's
Compliance Certificate (attached hereto as Exhibit D) of the Secretary
or Treasurer of the Borrower (i) certifying that to the best of his
knowledge, no Event of Default or event which with the giving of notice
or lapse of time, or both, would constitute an Event of Default has
occurred and is continuing or, if an Event of Default or such event has
occurred and is continuing, a statement as to the nature thereof and the
action which is proposed to be taken with respect thereto, and (ii) with
computations
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demonstrating compliance with the covenants contained in Sections
7.1 through 7.6 hereof.
F. As soon as available, and in any event within 45 days
after the end of each fiscal quarter of each Subsidiary Bank, the
complete Consolidated Report of Condition and Report of Income
(FFIEC 034)(the "Call Reports") prepared by the Subsidiary Banks at
the end of such fiscal quarter in compliance with the requirements
of any federal or state regulatory agency which has authority to
examine such Subsidiary Banks, all prepared in accordance with the
requirements imposed by the applicable regulatory authorities and
applied on a basis consistent with the accounting practices
reflected in any previous call reports and similar statements.
G. Within 45 days after the end of each fiscal quarter of the
Subsidiary Banks, a summary for the Bank Group as a whole, of the
Watch List or Problem Loan Reports internally generated by the
Borrower.
H. Immediately after obtaining knowledge thereof, notice in
writing of any litigation wherein any person asserts any claim
against any member of the Bank Group in excess of $500,000.00, and
notice in writing of any proceedings before any governmental or
regulatory agency involving any member of the Bank Group which, if
decided adversely for any member of the Bank Group, would have a
material adverse affect upon the business or operations of any
member of the Bank Group (including without limitation, the
issuance or proposed issuance of any Memorandum of Understanding,
Cease and Desist Order, or other regulatory action, agreement or
understanding with respect to any member of the Bank Group by any
federal or state regulatory agency having jurisdiction or control
over any member of the Bank Group).
I. Prompt notice in writing of any negotiations to sell more
than 5% of the capital stock or assets of any member of the Bank
Group, together with copies of any buy/sell agreement.
J. A copy of the Annual Board of Directors Examination Report
published by any member of the Bank Group, if so requested by the
Agent or the Banks.
K. As soon as available, but without duplication of any other
requirements set forth in this Section 6.3, such other information
respecting the financial condition and results of operation of any
member of the Bank Group (i) as required by law to be furnished to
any regulatory authority having jurisdiction over any member of the
Bank Group (including without limitation 10Q and 10K reports), and
(ii) as the Agent or any Bank may from time to time reasonably
request; provided, however, that the provisions of this Section
6.3(K) shall not apply to any information or reports which are
prohibited from disclosure pursuant to applicable law or
regulation.
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L. Prompt notice in writing of any changes of the Borrower's
executive management personnel.
M. Promptly upon knowledge thereof, notice to the Agent in
writing of the occurrence of any event which has or might, after
the lapse of time or the giving of notice and the lapse of time,
become an Event of Default.
6.4 Maintain (and cause each other member of the Bank Group to maintain)
its equipment, real estate and other properties in good condition and repair
(normal wear and tear excepted), and pay and discharge or cause to be paid
and discharged when due, the cost of repairs to or maintenance of the same,
and will pay or cause to be paid all rental or mortgage payments due on such
real estate.
6.5 Cause its properties (and the properties of each other member of the
Bank Group) of an insurable nature to be adequately insured by reputable and
solvent insurance companies against loss or damages customarily insured
against by persons operating similar properties, and similarly situated, and
carry such other insurance (including blanket bond coverage, errors and
omissions coverage, and business interruption insurance) as usually carried
by persons engaged in the same or similar businesses and similarly situated.
6.6 Keep true, complete and accurate books, records and accounts in
accordance with GAAP.
6.7 Cause each Subsidiary Bank to be and remain categorized as "well
capitalized," as defined by the regulatory agencies having jurisdiction over
the Subsidiary Banks.
SECTION 7 NEGATIVE COVENANTS
Without the written consent of the Majority Banks (via the Agent),
for so long as the Credit remains in existence or any indebtedness remains
outstanding under the Current Notes or the Term Note, the Borrower will not:
7.1 Permit the consolidated Tier 1 Core Capital of the Bank Group to be
less than the greater of (i) 5.25% of the difference of consolidated total
assets minus consolidated intangible assets and all goodwill, or (ii) the
minimum required by any regulatory agency having jurisdiction over the Bank
Group so that they are considered by such agency to be well capitalized.
7.2 Permit the consolidated Tier 1 Core Capital of the Bank Group less
consolidated intangible assets and all goodwill to be less than the greater
of (i) $200,000,000.00, or (ii) the minimum amount required by any regulatory
agency having jurisdiction over the Bank Group so that they are considered by
such agency to be well capitalized.
7.3 Permit the consolidated amount of the Bank Group's non-performing
assets to be greater than the sum of 15% of the Bank Group's consolidated
Tier 1 Core Capital plus the Bank Group's consolidated Tier 2 Supplementary
Capital at any time.
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7.4 Permit the Bank Group's consolidated net income as a percentage of
its consolidated total assets to be less than 1.0% as of the end of each
fiscal quarter, based upon a moving four-quarter average, including the
current fiscal quarter reported plus the three immediately preceding fiscal
quarters.
7.5 Permit the difference between the consolidated book value of the
Subsidiary Banks' securities portfolio, minus the consolidated market value
of those securities classified in the "held-to-maturity" category, when
expressed as an unrealized securities loss, to be more than 15% of the
Subsidiary Banks' consolidated Tangible Equity Capital as of the end of any
fiscal quarter.
7.6 Permit its ratio of Total Liabilities to Core Capital to be greater
than 40% as of the end of any fiscal quarter.
7.7 Grant or suffer a lien upon any of its personal property assets
(including without limitation stock in any Subsidiary Bank), other than
Permitted Liens.
7.8 Enter into any transaction of merger or consolidation, or transfer,
sell, assign, lease or otherwise dispose of (other than in the ordinary
course of business) all or a substantial part of its properties or assets, or
any of its notes or accounts receivable, or any stock or any assets or
properties necessary or desirable for the proper conduct of its business, or
change the nature of its business, or wind up, liquidate or dissolve, or
agree to do any of the foregoing.
7.9 Purchase any stock or other securities of, or make any loans or
advances of credit to, or make any investments or acquire any controlling
interest whatsoever in, any other corporation, bank or non-bank institution
other than the Subsidiary Banks existing as such as of the Closing Date,
except in the ordinary course of business where such purchase, loan, advance,
investment or acquisition is specifically authorized by any federal or state
regulatory agency having jurisdiction or control over the Borrower or the
Subsidiary Banks, provided that the Agent and the Banks will not unreasonably
withhold consent so long as the proforma effect of such action does not
create a violation of this Agreement.
7.10 Repurchase or retire any stock of the Subsidiary Banks, or pay a
dividend with respect to any class of its stock, if the proforma effect of
such repurchase, retirement or dividend payment would be a violation of this
Agreement.
7.11 Issue any debt or equity instruments of any type or class other than
common stock and debt expressly subordinated (on written terms acceptable to
the Banks) to indebtedness owned to the Banks.
7.12 Make any modification to any instrument creating or evidencing
subordinated debt, or make any prepayment of subordinated debt.
7.13 Assume, guarantee, endorse or otherwise become directly or indirectly
liable in connection with the obligations of any person or entity, except for
the endorsement of negotiable instruments in the ordinary course of business,
guaranties of lease obligations of the Borrower's subsidiaries in the
ordinary course of business, and existing guaranties in favor of Community
First Service Corporation, Community First Properties, Inc.,
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Community Insurance, Inc., or any other subsidiary of which the Borrower
owns, directly or indirectly, at least 80% of the common stock.
7.14 Incur any indebtedness other than (i) subordinated indebtedness
referred to in Section 7.11 hereof, (ii) unsecured indebtedness owed to
Norwest as of the Closing Date, and (iii) other indebtedness acceptable to
the Majority Banks.
SECTION 8 EVENTS OF DEFAULT
8.1 Upon the occurrence of any of the following Events of Default
A. Default in any payment of interest or of principal on any
Current Note or the Term Note or the when due, and continuance
thereof for 10 calendar days;
B. The failure of the Borrower to pay any fee when due in
accordance with the provisions of this Agreement, and continuance of
such failure for 10 calendar days;
C. Default in the observance or performance of any one or
more of the covenants set forth in Section 6.7 or in Section 7 hereof;
D. Default in the observance or performance of any other
agreement of the Borrower set forth herein (i.e., other than those
addressed in Sections 8.1(A), 8.1(B) or 8.1(C) hereof), and
continuance thereof for 30 calendar days;
E. Default in any payment of interest or of principal on any
other promissory note (i.e., other than the Current Notes and the
Term Note) made by the Borrower and held by any of the Banks, and
continuance thereof for 10 calendar days;
F. Default by the Borrower in the payment of any other
indebtedness for Borrowed Money in an amount exceeding $500,000.00 or
in the observance or performance of any term, covenant or agreement
of the Borrower in any agreement relating to any such indebtedness of
the Borrower, the effect of which default is to permit the holder of
such indebtedness to declare the same due prior to the date fixed for
its payment under the terms thereof;
G. Any judgment or judgments, writ or writs, or warrant or
warrants of attachment, or any similar process or processes, the
aggregate amount of which (after reduction by the amount covered by
insurance) exceeds $500,000.00, shall be entered or filed against the
Borrower or any Subsidiary Bank or against any of its property and
which remains unvacated, unbonded, unstayed or unsatisfied for a
period of 30 calendar days;
H. Any representation or warranty made by the Borrower
herein, or in any statement or certificate furnished by the Borrower
hereunder, is untrue in any material respect; or,
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I. The issuance or proposed issuance, against any member of
the Bank Group, of any cease and desist order, memorandum of
understanding or capital maintenance agreement by any federal or
state regulatory agency having jurisdiction or control over such
member; provided, however, that this Section 8.1(I) shall not apply
to supervisory actions outstanding against any institution as of
the date of acquisition of such institution by the Borrower;
then, or at any time thereafter, unless such Event of Default is remedied, the
Majority Banks (via the Agent) may, by notice in writing to the Borrower,
terminate the Credit and declare the Current Notes and the Term Note to be
due and payable, or any or all of the foregoing, whereupon the Credit shall
terminate forthwith and the Current Notes and the Term Note shall immediately
become due and payable, or any or all of the foregoing, as the case may be.
8.2 Upon the occurrence of any of the following Events of Default:
Any member of the Bank Group becomes insolvent or bankrupt, or
makes an appointment for the benefit of creditors or consents to
the appointment of a custodian, trustee or receiver for itself or
for the greater part of its properties; or a custodian, trustee or
receiver is appointed for any member of the Bank Group or for the
greater part of its properties without its consent, and is not
discharged within 60 calendar days; or bankruptcy, reorganization
or liquidation proceedings are instituted by or against any member
of the Bank Group and, if instituted against it, are consented to
by it or remain undismissed for 60 calendar days;
then the Credit shall automatically terminate and the Current Notes and the
Term Note shall automatically become immediately due and payable, without
notice or demand.
8.3 In additional to its other obligations as set forth in this
Agreement, if the indebtedness evidenced by the Current Notes or the Term
Note is accelerated pursuant to Sections 8.1 or 8.2 hereof, the Borrower
shall immediately pay the Banks a premium in respect of Eurodollar Borrowings
outstanding as of such date. The premium on each such Eurodollar Borrowing
shall be calculated as follows:
The amount of interest that would have accrued on the Eurodollar
Borrowing (from the date of acceleration to the last day of the
relevant Interest Period) computed at an annual rate equal to (i)
the rate then in effect with respect to the Eurodollar Borrowing,
MINUS (ii) the yield (including both interest and discount) on a
hypothetical United States Treasury Security that could be
purchased on the date of acceleration and maturing on (or about)
the last day of the relevant Interest Period, PROVIDED that no
premium shall be payable (and no credit or rebate shall be given) if
the yield described in clause (ii) above exceeds the rate described
in clause (i).
SECTION 9 THE AGENT
9.1 Each Bank hereby appoints Norwest as its Agent under and for the
purpose of this Agreement, the Current Notes, the Term Note, and each other
related document. Each Bank authorizes the Agent to act on behalf of such
Bank under this Agreement, the Current Notes, the
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Term Note, and each other related document and, in the absence of other
written instructions from the Majority Banks received from time to time by
the Agent (with respect to which the Agent agrees that it will comply, except
as otherwise provided in this Section 9 or as otherwise advised by counsel
that such compliance would be unlawful), to exercise such powers hereunder
and thereunder as are specially delegated to or required of the Agent by the
terms hereof and thereof, together with such powers as may be reasonably
incidental thereto. Notwithstanding any other provision in this Agreement,
the Agent shall not, without the prior written consent of EACH Bank, (i)
increase the amount of the Credit, the Credit Percentages, the amount of the
Term Loan, or the Term Loan Percentages, (ii) modify any interest rate or fee
applicable to the Current Notes or the Term Note, (iii) modify the Credit
Expiration Date, the Term Loan Maturity Date, the last day of any Interest
Period, or the date on which any payment in respect of the Current Notes or
the Term Note is due, (iv) forgive all or any portion of any payment of
principal or interest due under the Current Notes or the Term Note, or (v)
modify any provision of this sentence. All other provisions set forth in this
Agreement, other than those specified in the immediately preceding sentence,
may be modified only with the approval of the Majority Banks. The Agent is
hereby expressly authorized by the Banks without hereby limiting any implied
authority, (i) to receive on behalf of the Banks all payments of principal of
the interest on the Advances and the Term Loan, and all other amounts due to
the Banks hereunder, and promptly to distribute to each Bank its proper share
of each payment so received, and (ii) to give notice on behalf of each of the
Banks to the Borrower of any Event of Default specified in this Agreement of
which the Agent has actual knowledge acquired in connection with its agency
hereunder. Each Bank hereby indemnifies (which indemnity shall survive any
termination of this Agreement) the Agent, in its capacity as Agent, PRO RATA
according to such Bank's Credit Percentage and Term Loan Percentage, from and
against any and all liabilities, obligations, losses, damages, claims, costs
or expenses of any kind or nature whatsoever which may at any time be imposed
on, incurred by, or asserted against, the Agent in any way relating to or
arising out of this Agreement, the Current Notes, the Term Note, and any
other related document, including reasonable attorney's fees, and as to which
the Agent is not reimbursed by the Borrower; provided, however, that no Bank
shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, claims, costs or expenses which are determined
by a court of competent jurisdiction in a final proceeding to have resulted
solely from the Agent's gross negligence or willful misconduct. The Agent
shall not be required to take any action hereunder, under the Current Notes,
the Term Note, or under any other related document, or to prosecute or defend
any suit in respect of this Agreement, the Current Notes, the Term Note, or
any other related document, unless it is indemnified hereunder to its
satisfaction. If any indemnity in favor of the Agent shall be or become, in
the Agent's determination, inadequate, the Agent may call for additional
indemnification from the Banks and cease to do the acts indemnified against
hereunder until such additional indemnity is given.
9.2 Unless the Agent shall have been notified by telephone, confirmed
in writing, by any Bank by 3:00 p.m., Minneapolis time, on the day of the
making of any Advance (or the funding of the Term Loan) that such Bank will
not make available the amount which would constitute its Credit Percentage of
such Advance (or its Term Loan Percentage of the Term Loan) on the date
specified therefor, the Agent may assume that such Bank has made such amount
available to the Agent and, in reliance upon such assumption, make available
to the Borrower a corresponding amount. If and to the extent that such Bank
shall not have made such amount available to the Agent, such Bank and
Borrower severally agree to repay the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the
date the Agent made
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such amount available to the Borrower to the date such amount is repaid to
the Agent, at the interest rate applicable at the time of such Advance.
9.3 Neither the Agent nor any of its directors, officers, employees or
agents shall be liable to any Bank for any action taken or omitted to be
taken by the Agent under this Agreement or any other related document, or in
connection herewith or therewith, except for its own willful misconduct or
gross negligence, nor responsible for any recitals or warranties herein or
therein, nor for the effectiveness, enforceability, validity or due execution
of this Agreement or any other related document, nor for the creation,
perfection or priority of any liens purported to be created by any related
documents, or the validity, genuineness, enforceability, existence, value or
sufficiency of any collateral security, nor to make any inquiry respecting
the performance by the Borrower of its obligations hereunder or under any
other related document. Any such inquiry which may be made by the Agent shall
not obligate it to make any further inquiry or to take any action. The Agent
shall be entitled to rely upon advice of counsel concerning legal matters and
upon any notice, consent, certificate, statement or writing which the Agent
believes to be genuine and to have been presented by a proper person.
9.4 The Agent may resign as such at any time upon at least 30 days' prior
notice to the Borrower and all Banks. If the Agent at any time shall resign,
the Majority Banks may appoint another Bank as a successor Agent which shall
thereupon become the Agent hereunder. If no successor Agent shall have been
so appointed by the Majority Banks, and shall have accepted such appointment,
within 30 days after the retiring Agents' giving notice of resignation, then
the retiring Agent may, on behalf of the Banks, appoint a successor Agent,
which shall be one of the Banks or a commercial banking institution organized
under the laws of the United States (or any state thereof) or a U.S. branch
or agency of a commercial banking institution, and having a combined capital
and surplus of at least $500,000,000. Upon the acceptance of any appointment
as agent hereunder by a successor Agent, such successor Agent shall be
entitled to receive from any retiring Agent such documents of transfer and
assignment as such successor Agent may reasonably request, and shall
thereupon succeed to and become vested with all rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligation under this Agreement. After any retiring
Agent's resignation hereunder as the Agent, the provisions of this Section 9
shall continue to inure to its benefit as to any actions taken or omitted to
be taken by it while it was the Agent under this Agreement.
9.5 Norwest shall have the same rights and powers with respect to (i) loans
made by it or any of its affiliates, and (ii) promissory notes held by it or
any of its affiliates as any other Bank and may prosecute the same as if it
were not the Agent. Norwest and its affiliates may accept deposits from, lend
money to, and generally engage in any kind of business with the Borrower or
any affiliate of the Borrower as if Norwest were not the Agent hereunder.
9.6 Each Bank acknowledges that it has, independently of the Agent and each
other Bank, and based on such Bank's review of the financial information of
the Borrower, this Agreement, the other related documents (the terms and
provisions of which being satisfactory to such Bank) and such other
documents, information and investigations as such Bank has deemed
appropriate, made its own credit decision to enter into this Agreement. Each
Bank also acknowledges that it will, independently of the Agent and each
other Bank, and based on such other documents, information and investigations
as it shall deem appropriate at any time,
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continue to make its own credit decisions as to exercising or not exercising
from time to time any rights and privileges available to it under this
Agreement or any other related document.
9.7 Except as permitted under the terms and conditions of this Section 9.7
or, with respect to participations, under Section 9.8 hereof, no Bank may
sell, assign or transfer its rights or obligations under this Agreement or
its interest in any Current Note or the Term Note. Any Bank, at any time upon
at least five (5) Business Days' prior written notice to the Agent and the
Borrower, may assign such Bank's Current Note or its interest in the Term
Note, or a portion thereof (so long as any such portion is not less than
$2,500,000.00 and is in equal percentages of such assigning Bank's interest
in the Credit and the Term Loan), to a domestic bank (an "Applicant") on any
date (the "Adjustment Date") selected by such Bank, but only so long as the
Borrowers and the Agent shall have provided their prior written approval of
such proposed Applicant, which prior written approval will not be
unreasonably withheld. Notwithstanding the foregoing, (i) assignments may be
made by a Bank to another Bank already a party to this Agreement in an amount
not less than $1,000,000.00, and (ii) no such consent of the Borrower shall
be required to sale of an interest to an affiliate of a Bank or, in any
event, if an Event of Default shall exist. Upon receipt of such approval and
to confirm the status of each additional Bank as a party to this Agreement
and to evidence the assignment in accordance herewith:
A. The Agent, the Borrower, the assigning Bank and such Applicant
shall, on or before the Adjustment Date, execute and deliver to the
Agent an Assignment Certificate in substantially the form of Exhibit E
(an "Assignment Certificate");
B. The affected Borrower will execute and deliver to the Agent, for
delivery by the Agent in accordance with the terms of the Assignment
Certificate, (i) a new Current Note payable to the order of the
Applicant in an amount corresponding to the applicable commitment
acquired by such Applicant, (ii) an amendment to the Term Note to
reflect the assignment of the interest in the Term Loan, and (iii) a new
Current Note payable to the order of the assigning Bank in an amount
corresponding to the retained Credit Percentage. Such new notes shall be
in an aggregate principal amount equal to the aggregate principal
amount of the notes to be replaced by such new notes, shall be dated the
effective date of such assignment and shall otherwise be in the form of
the notes to be replaced thereby. Such new notes shall be issued in
substitution for, but not in satisfaction or payment of, the notes being
replaced thereby and such new notes shall be treated as notes for
purposes of this Agreement; and,
C. The assigning Bank shall pay to the applicable Agent an
administrative fee of $2,500.00.
Upon the execution and delivery of such Assignment Certificate and such new
Current Notes and amendment to the Term Note, and effective as of the
effective date thereof, (i) this Agreement shall be deemed to be amended to
the extent, and only to the extent, necessary to reflect the addition of such
additional Bank and the resulting adjustment of the Credit Percentages and
Term Loan Percentages arising therefrom, (ii) the assigning Bank shall be
relieved of all obligations hereunder to the extent of the reduction of the
assigning Bank's Credit Percentages and Term Loan Percentage, and (iii) the
Applicant shall become a party hereto and shall be entitled to all rights,
benefits and privileges accorded to a Bank herein and in each other document
or instrument executed pursuant hereto and subject to all obligations of a
Bank
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hereunder, including, without limitation, the right to approve or disapprove
actions which, in accordance with the terms hereof, require the approval of
the Majority Banks or all Banks. Promptly after the execution of any
Assignment Certificate, a copy thereof shall be delivered by the Agent to
each Bank and to the Borrowers. In order to facilitate the addition of
additional Banks hereto, the Borrower and the Banks shall cooperate fully
with the Agent in connection therewith and shall provide all reasonable
assistance requested by the Agent relating thereto, including, without
limitation, the furnishing of such written materials and financial
information regarding the Borrower as the Agent may reasonably request, the
execution of such documents as the Agent may reasonably request with respect
thereto, and the participation by officers of the Borrower, and the Banks in
a meeting or teleconference call with any Applicant upon the request of the
Agent.
9.8 In addition to the rights granted in Section 9.7 hereof, each Bank
may grant participations in all or a portion of its Current Note or its
interest in the Term Note to any domestic or foreign commercial bank (having
a branch office in the United States), insurance company, financial
institution or an affiliate of such Bank. No holder of any such
participation, however, shall be entitled to require any Bank to take or omit
to take any action hereunder except those actions described in Section 9.1
hereof requiring consent of all Banks. The Banks shall not, as among the
Borrowers, the Agent and the Banks, be relived of any of their respective
obligations hereunder as a result of any such grant of a participation. The
Borrowers hereby acknowledge and agree that any participation described in
this Section 9.8 may rely upon, and possess all rights under, any opinions,
certificates, or other instruments or documents delivered under or in
connection with any Loan Document. Except as set forth in this Section 9.8,
no Bank may grant any participation in the Credit or the Term Loan.
9.9 Each Bank hereby agrees with each other Bank that if such Bank
shall receive and retain any payment, whether by set-off or application of
deposit balances or otherwise ("Set-off"), in respect of any Advance or the
Term Loan, in excess of its ratable-share of payments based on its Credit
Percentage and its Term Loan Percentage, then such Bank shall purchase for
cash at face value, but without recourse, ratably from each of the other
Banks such amount of the Advances or Term Loan, or participations therein,
held by each such other Banks (or interest therein) as shall be necessary to
cause such Bank to share such excess payment ratably with all the other
Banks; provided, however, that if any such purchase is made by any Bank, and
if such excess payment or part thereof is thereafter recovered from such
purchasing Bank, the related purchases from the other Banks shall be
rescinded ratably and the purchase price restored as to the portion of such
excess payment so recovered, but without interest.
SECTION 10 MISCELLANEOUS
10.1 The provisions of this Agreement shall be in addition to those of
any guaranty, pledge or security agreement, note or other evidence of
liability held by the Banks, all of which shall be construed as complementary
to each other. Nothing herein contained shall prevent the Banks from
enforcing any or all of the rights and remedies available to them at law, in
equity or by agreement.
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10.2 From time to time, the Borrower will execute and deliver (or cause
to be executed and delivered) to the Agent such additional documents and will
provide such additional information as the Banks may reasonably require to
carry out the terms of this Agreement and be informed of the status and
affairs of the Borrower and the other members of the Bank Group.
10.3 The Borrower will pay all expenses, including the reasonable fees
and expenses of legal counsel for each of the Banks, including without
limitation the allocated costs of in-house counsel, incurred in connection
with the administration, amendment, modification or enforcement of this
Agreement, the Current Notes, the Term Note, and the other documents
described herein.
10.4 Any notices or consents required or permitted by this Agreement
shall be in writing and shall be deemed delivered if delivered in person or
if sent by United States mail, postage prepaid, or telegraph or telex, as
follows, unless such address is changed by written notice hereunder:
A. If to the Borrower:
Community First Bankshares, Inc.
P.O. Box 6022
Fargo, North Dakota 58108-6022
Attention: Mark A. Anderson, Executive Vice President
B. If to the Agent:
Norwest Bank Minnesota, National Association
Norwest Center
Sixth Street & Marquette Avenue
Minneapolis, Minnesota 55479-0015
Attention: Justin D. Stets, Vice President
C. If to the Banks:
The address set forth below the signature line for
each Bank.
10.5 The Banks shall have the right at all times to enforce the
provisions of this Agreement, the Current Notes, the Term Note, and the other
documents described herein in strict accordance with the terms hereof and
thereof, notwithstanding any conduct or custom on the part of the Banks in
refraining from so doing at any time or times. The failure of the Banks at
any time or times to enforce its rights under such provisions, strictly in
accordance with the same, shall not be construed as having created a custom
in any way or manner contrary to specific provisions of this Agreement or as
having in any way or manner modified or waived the same. All rights and
remedies of the Bank are cumulative and concurrent and the exercise of one
right or remedy shall not be deemed a waiver or release of any other right or
remedy.
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10.6 The Borrower hereby acknowledges and agrees that, upon the full
payment of the Existing Harris Note, as contemplated by Section 2.1 hereof,
and upon the full payment of the Existing Norwest Term Note, as contemplated
by Section 3.1 hereof, the Old Harris Loan Agreement and the Old Norwest Loan
Agreement, and the respective credit facilities described therein, shall be
deemed terminated.
10.7 This Agreement shall inure to the benefit of, and shall be binding
upon, the respective successors and permitted assigns of the parties hereto.
The Borrower has no right to assign any of its rights or obligations
hereunder without the prior written consent of each of the Banks. This
Agreement, and the documents executed and delivered pursuant hereto,
constitute the entire agreement between the parties, and may be amended only
by a writing signed on behalf of each party. This Agreement supersedes and
replaces the Old Harris Loan Agreement and the Old Northwest Loan Agreement.
10.8 If any provision of this Agreement shall be held invalid under any
applicable laws, such invalidity shall not affect any other provision of
this Agreement that can be given effect without the invalid provision, and,
to this end, the provisions hereof are severable.
10.9 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but which taken together shall
constitute one and the same instrument.
10.10 The substantive laws of the State of Minnesota shall govern the
construction of this Agreement and the rights and remedies of the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
NORWEST BANK MINNESOTA, COMMUNITY FIRST
NATIONAL ASSOCIATION, Agent BANKSHARES, INC.
By: By: /s/ Mark Anderson
------------------------------- --------------------------------
Justin D. Stets, Vice President Mark A. Anderson,
Executive Vice President, Chief
Financial Officer, and Secretary
By: /s/ Donald R. Mengedoth
--------------------------------
Donald R. Mengedoth
President and Chief Executive
Officer
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HARRIS TRUST AND SAVINGS BANK Credit Percentage 33.33%
Term Loan Percentage - Tranche A 0%
By: Term Loan Percentage - Tranche B 50%
-------------------------------
David J. Konrad,
Vice President
Financial Institutions
111 West Monroe Street
P.O. Box 755
Chicago, Illinois 60609-0755
Attention: David J. Konrad,
Vice President
Telephone: (312) 461-7112
Fax: (312) 765-8353
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION Credit Percentage 33.33%
Term Loan Percentage - Tranche A 0%
By: Term Loan Percentage - Tranche B 50%
-------------------------------
Justin D. Stets, Vice President
Sixth and Marquette
Minneapolis, Minnesota 55479-0015
Attention: Justin D. Stets,
Vice President
Telephone: (612) 667-4766
Fax: (612) 667-3510
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BANK OF AMERICA NATIONAL TRUST Credit Percentage 33.33%
AND SAVINGS ASSOCIATION Term Loan Percentage - Tranche A 100%
Term Loan Percentage - Tranche B 0%
By:
-------------------------------
Emilia M. Barton,
Vice President
555 South Flower Street
9th Floor, Mail Code 38900
Los Angeles, California 90071
Attention: Emilia M. Barton,
Vice President
Telephone: (213) 228-6237
Fax: (213) 228-6474
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COMMUNITY FIRST BANKSHARES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
THIS INSTRUMENT, establishing the Community First Bankshares, Inc.
Supplemental Executive Retirement Plan, is made and entered into by Community
First Bankshares, Inc., a Delaware corporation, as shall be effective as of
August 1, 1995.
1. PURPOSE OF PLAN. The purpose of this Plan is to provide
Participants with supplemental retirement benefits as set forth herein.
2. DEFINITIONS.
2.1 BOARD. "Board" is the Board of Directors of Community First
Bankshares, Inc.
2.2 CFB. "CFB" is Community First Bankshares, Inc., a Delaware
corporation, and affiliates of CFB which are under common control with CFB under
the provisions of Section 414 of the Code.
2.3 CODE. The "Code" is the Internal Revenue Code of 1986, as amended.
2.4 COVERED COMPENSATION. "Covered Compensation" is the base pay of a
Participant for a calendar year. For a Board member, "Covered Compensation" is
Directors' fees.
2.5 DEFERRED COMPENSATION. "Deferred Compensation" is the Participant's
Covered Compensation or Incentive Pay which the Participant has elected to have
treated as Deferred Compensation under Article 3 of this Plan, in addition to
CFB contributions to the Plan.
2.6 ESOP. "ESOP" is the Community First Bankshares, Inc. Employee Stock
Ownership Plan and Trust.
2.7 401(k) RETIREMENT PLAN. "401(k) Retirement Plan" is the Community
First Bankshares, Inc. 401(k) Retirement Plan and Trust.
<PAGE>
2.8 INCENTIVE PAY. "Incentive Pay" is the award or bonus payable to a
Participant under the CFB incentive plan or otherwise, as determined annually by
the Board.
2.9 PARTICIPANT. "Participant" is any executive or management level
employee of CFB who is an officer and who is a highly compensated employee, as
defined in Internal Revenue Code Section 414(s) or any Board member.
Participants shall be selected by the Board. Each such employee shall continue
to be eligible to contribute to this Plan until such employee ceases to be an
employee or Board member as described above; provided, however, that the
employee shall continue to be a Participant in this Plan until his or her
benefits are fully paid. The Board, from time to time, may provide by
resolution for additional positions that will qualify for participation in this
Plan.
2.10 PLAN. "Plan" is the Community First Bankshares, Inc. Supplemental
Executive Retirement Plan.
2.11 PLAN ADMINISTRATOR. "Plan Administrator" is the Board, and the Vice
President of Finance and Vice President of Human Resources of CFB are authorized
to perform general administrative functions under the Plan on behalf of the Plan
Administrator.
3. SUPPLEMENTAL BENEFITS.
3.1 COVERED COMPENSATION. Each Participant may elect to contribute up
to 25% of the Participant's Covered Compensation earned subsequent to the date
of such election as Deferred Compensation to the Plan. Each Participant may
also elect to contribute any or all of the following amounts to the Plan as
Deferred Compensation:
(a) the amount by which such Participant's elective and matching
contributions are reduced under the 401(k) Retirement, in order to cause
such Plan to comply with the limitations set forth in Code Sections
401(k)(3) and/or 401(m)(2);
(b) the amount by which such Participant's elective contributions
are limited under the 401(k) Retirement by the restriction of Covered
Compensation under such Plan to $150,000 (or such figure as adjusted) under
Code Section 401(a)(17);
(c) the amount by which such Participant's elective contributions
are limited under the 401(k) Retirement Plan by restrictions on Covered
Compensation under such Plan resulting from anti-discrimination standards
under Code Sections 401(a)(5)(B) and 414(s); and
(d) the amount by which such Participant elective contributions to
the 401(k) Retirement Plan exceed the limitation in Code Section 402(g).
-2-
<PAGE>
3.2 INCENTIVE PAY. In addition to an election under Section 3.1, each
Participant may elect to contribute up to 100% of the Participant's Incentive
Pay awarded subsequent to the date of such election as Deferred Compensation to
the Plan.
3.3 ELECTION. Any election of Deferred Compensation pursuant to
Sections 3.1 or 3.2 shall be in writing, shall be made at least six (6) months
prior to the beginning of the succeeding calendar year and shall be applicable
to Covered Compensation and Incentive Pay earned for such calendar year. Such
election shall remain in effect for and shall be irrevocable during the calendar
year. A new election may be made for each subsequent calendar year at least six
(6) months prior to the beginning of each such calendar year. In the absence of
a timely election, the Participant's written election for the preceding calendar
year shall apply to the succeeding calendar year.
For the initial calendar year of this Plan, or for employees who become
Participants during a calendar year, an election of Deferred Compensation may be
made within thirty (30) days after the effective date of this Plan or the
effective date of the employee's designation as a Participant, respectively.
3.4 CFB CONTRIBUTION. CFB may, but shall not be obligated to,
contribute to the Plan an amount equal to that portion of each Participant's
Covered Compensation and, if applicable, Incentive Pay, contributed to this Plan
that
(a) CFB would otherwise match under the provisions of the 401(k)
Retirement Plan but for the legal limitations identified in Section 3.1 of
this Plan; or
(b) CFB would allocate to the Participant's account in the ESOP
but for legal limitations identified in Section 3.1(b) of this Plan.
The purpose of this provision is to provide Participants with substantially
identical benefits to those that would be provided to them under the terms of
the 401(k) Retirement Plan and/or the ESOP except for limitations imposed by the
Code. The contributions, if any, made by CFB under this Section shall be
administered in accordance with the terms of this Plan.
3.5 ACCOUNTING. On the date that an amount of Deferred Compensation
under Section 3.1, 3.2 or 3.4 would otherwise be paid to the Participant, the
401(k) Retirement Plan or the ESOP, the amount of such Deferred Compensation
shall be credited to an account on the books of CFB. No Participant shall
derive any rights or benefits in or to any assets of CFB solely from the
establishment or maintenance of such accounts on the books of CFB.
3.6 VESTING. Each Participant shall have a fully vested and
nonforfeitable interest in his or her amounts of Deferred Compensation
contributed to the Plan. The Participant's vested interest in CFB contributions
pursuant to Section 3.4(a) shall be determined in accordance with
-3-
<PAGE>
the relevant vesting provisions of the 401(k) Retirement Plan. The
Participant's vested interest in CFB contributions pursuant to Section 3.4(b)
shall be determined in accordance with the vesting provisions of the ESOP.
4. INVESTMENT OF DEFERRALS. The initial amounts of Deferred
Compensation shall be invested by the Plan Administrator or the trustee of the
grantor trust established under Section 7 in a manner commensurate with the
following sentence. Following approval of the Plan by the shareholders of CFB,
all amounts contributed to the Plan as Deferred Compensation or CFB
contributions shall be invested in CFB common stock by the Plan Administrator,
or by the trustee of the grantor trust established under Section 7, as soon as
practicable following receipt by the Plan or grantor trust, including amounts
contributed to the Plan prior to such approval. Account adjustments shall be
determined and reported to Participants by CFB at least annually, and CFB's
determination shall be final.
5. DISTRIBUTIONS FROM ACCOUNTS.
5.1 DISTRIBUTION TIMING. The Participant shall determine the time of
distribution of the vested amount of his or her Deferred Compensation in the
election form.
5.2 DISTRIBUTION METHOD. The Participant shall elect to have the vested
amount of his or her Deferred Compensation distributed in CFB common stock
and/or cash in one of the forms below in the election form:
(a) a single lump sum; or
(b) distribution in equal annual installments over a period of
years established by the Plan Administrator.
5.3 CHANGE IN ELECTION. Elections made under Sections 5.1 and 5.2 may
be changed by the Participant, provided that no election shall be changed
subsequent to the commencement of distributions from the Plan, and any election
change shall be made at least six (6) months prior to the calendar year in which
a distribution is to be made or commence, and before the distribution becomes
fully ascertainable in amount. A change in distributing timing or method shall
be subject to approval by the Plan Administrator.
5.4 DISTRIBUTION TO BENEFICIARY. If the Participant is deceased, the
distribution shall be payable to the beneficiary of the Participant at the time
and in the form payable to the Participant hereunder. However, the Plan
Administrator, in its discretion, may accelerate the payment of benefits under
this Plan to the Participant's beneficiary.
6. FIDUCIARY DUTIES. The Board shall have full power to construe,
interpret and administer this Plan, including to make any determination required
under this Plan and to make such rules and regulations as it deems advisable for
the operation of this Plan. A majority of the
-4-
<PAGE>
Board shall constitute a quorum. No member of the Board shall participate in
any action to determine his or her individual rights or benefits under this Plan
that does not apply equally to all Participants in the Plan. Actions of the
Board shall be by a majority of persons constituting a quorum and eligible to
vote on an issue. Meetings may be held in person or by telephone. Action by
the Board may be taken in writing without a meeting provided such action is
executed by all disinterested members of the Board. To the extent it is
feasible to do so, determinations, rules and regulations of the Board under this
Plan shall be consistent with similar determinations, rules and regulations of
the 401(k) Retirement Plan. All determinations of the Board shall be final.
7. FUNDING. Nothing in this Plan shall be construed as permitting the
Participant, beneficiary or estate to claim any security for the fulfilling of
the obligations of CFB hereunder, and the Participant, beneficiary and estate
shall look only to the general assets of CFB for the satisfaction of CFB's
obligations. If CFB should invest in property to fund its obligations under
this Plan, either through the creation of a grantor trust or otherwise, CFB
shall be the sole owner of such property, and the Participant, beneficiary and
estate shall have no rights in said property.
8. DESIGNATION OF BENEFICIARY. Each Participant shall file with the
Administrator, on form prescribed by CFB, a written designation of the person or
persons to receive the benefits under this Plan. This right shall include the
right to name and change primary and contingent beneficiaries, but any
designation of beneficiaries shall be effective only when filed by the
Participant in writing with the Administrator during the Participant's lifetime.
In the absence of such written designation or if the beneficiary so named
predeceased the Participant, the Participant's beneficiary shall be the same
person(s) designated as such under the terms of the 401(k) Retirement Plan.
9. CLAIMS PROCEDURE.
9.1 CLAIMS PROCEDURE AND REVIEW. A Participant or beneficiary (the
"claimant") may make a claim for Plan benefits within the time and in the manner
described herein. Such claim shall be made within 60 days after the claim
arises by filing a written request with the Vice President of Human Resources of
CFB, on behalf of the Plan Administrator. The claim shall be determined by the
Plan Administrator within a reasonable time after the receipt of the written
claim. Notice of the Plan Administrator's decision shall be communicated to the
claimant in writing. If the claim is denied, the notice shall include the
specific reasons for the denial (including reference to pertinent Plan
provisions), a description of any additional material or information necessary
for the Plan Administrator to reconsider the claim, the reasons for any of such
additional material or information, and an explanation of the review procedure.
9.2 APPEAL. The claimant or his or her duly authorized representative
may, within 90 days after receiving such written notice, request the president
of CFB to review the Plan Administrator's decision. The president shall afford
the claimant a hearing and the opportunity to review all pertinent documents and
submit issues and comments orally and in writing and shall
-5-
<PAGE>
render a review decision in writing within 120 days after receipt of request for
review. The review proceeding shall be conducted in accordance with the rules
and regulations adopted from time to time by the president.
10. MISCELLANEOUS.
10.1 LIABILITY. No officer of CFB shall be personally liable by virtue
of any contract, agreement or other instrument made or executed by him or on his
behalf as an officer, nor for any mistake or judgment made by himself or any
other officer, nor for any negligence, omission or wrongdoing of any other
officer or of anyone employed by CFB, nor for any loss, unless resulting from
his own gross negligence or willful misconduct. In addition, CFB does not
assure or guarantee the tax consequences of benefits provided hereunder or other
matters beyond its control.
10.2 TITLE TO ASSETS. No Participant or former Participant shall have
any legal or equitable right or interest in any of the funds set aside by CFB or
in any assets in which CFB may invest, from time to time, to fund this Plan.
10.3 AMENDMENTS. CFB reserves the right to amend or modify, in whole or
in part, any or all of the provisions of this Plan at any time by a written
instrument; provided, however, that no amendment or modification shall be made
which will deprive any Participant or any Participant's beneficiary of any
vested benefits to which he or she is entitled under the Plan.
10.4 TERMINATION. Continuation of the Plan is not assumed as a
contractual obligation of CFB and the right is reserved by CFB to at any time
reduce, suspend or discontinue the Plan. However, no such reduction, suspension
or discontinuance shall deprive any Participant or beneficiary of any benefits
that become vested under the Plan.
10.5 ASSIGNMENT AND LEVY. The Plan is for the benefit and protection of
Participants and their beneficiaries and the rights, privileges and benefits
herein conferred shall not, to the extent permitted by law, be subject to
alienation, assignment, pledge, levy, attachment, garnishment or other legal
process or in any manner anticipated, encumbered, committed, withdrawn or
surrendered, and neither shall the same be subject or liable in any way for
debts, contracts, or agreements or other claims of creditors of such
Participants or their beneficiaries whether such claims are now contracted or
which may hereafter be contracted or incurred.
10.6 PARTICIPANT'S RIGHTS. The establishment of this Plan shall not
create any legal or equitable right against CFB unless such right is
specifically provided for in this Plan. Furthermore, nothing in this Plan shall
be construed as giving a Participant the right to be retained in the employment
of CFB, and a Participant shall remain subject to discharge at any time to the
same extent as if this Plan had not been adopted.
-6-
<PAGE>
10.7 INCOMPETENCY. Every person receiving or claiming benefits under
this Plan shall be conclusively presumed to be mentally competent until the date
on which the Administrator receives a written notice in a form and manner
acceptable to the Plan Administrator that such person is incompetent and that a
guardian, conservator or other person legally vested with the care of his estate
has been appointed. In such event, the Plan Administrator may direct payments
of benefits to such guardian, conservator or other person legally vested with
the care of his estate and any such payments so made shall be a complete
discharge of the Plan Administrator to the extent so made.
10.8 NOTICES. Notices required by this Plan to be given to CFB or a
Participant shall be in writing and shall be considered to have been duly given
or served if personally delivered, or sent by first class, certified or
registered mail.
10.9 SEVERABILITY. The invalidity or partial invalidity of any portion
of this Plan shall not invalidate the remainder thereof, and said remainder
shall remain in full force and effect.
10.10 RELEASE. Any payment to or for the benefit of any Participant or
his beneficiaries in accordance with the provisions hereof shall, to the extent
thereof, be in full satisfaction of all claims hereunder against CFB.
10.11 GOVERNING LAW. Construction and administration of this Plan shall
be governed by the laws of the State of North Dakota, except to the extent
preempted by federal law.
COMMUNITY FIRST BANKSHARES, INC.
By
-----------------------------------
Its
----------------------------------
-7-
<PAGE>
EXHIBIT 13.1
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
BEST OF BOTH WORLDS 1
LETTER TO SHAREHOLDERS 3
REGIONAL REVIEW 4
FINANCIAL REVIEW 14
AFFILIATED BANKS 47
BOARD OF DIRECTORS 54
SENIOR OFFICERS 55
CORPORATE INFORMATION 56
</TABLE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(In thousands, except per share data) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
EARNINGS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income.................... $ 278,597 $ 229,426 $ 192,868 $ 143,237 $ 121,146
Total interest expense................... $ 117,253 95,234 82,891 53,468 47,271
Net interest income...................... 161,344 134,192 109,977 89,769 73,875
Net income............................... 46,552 32,510 29,953 22,729 18,614
PER COMMON AND COMMON EQUIVALENT SHARE
- ----------------------------------------------------------------------------------------------------
Basic earnings per share................. $ 2.52 $ 1.87 $ 1.85 $ 1.50 $ 1.35
Diluted earnings per share............... 2.44 1.79 1.75 1.43 1.30
Net book value........................... 16.70 12.92 12.01 9.69 9.10
Dividends paid........................... .70 .58 .48 .44 .40
AT YEAR-END
- ----------------------------------------------------------------------------------------------------
Total assets............................. $4,855,526 $3,116,398 $2,769,976 $2,130,619 $1,883,794
Total loans.............................. 2,637,057 2,064,108 1,767,193 1,330,146 1,037,666
Allowance for loan losses................ 36,194 26,215 22,712 17,333 14,332
Total deposits........................... 3,619,334 2,537,440 2,359,716 1,794,565 1,627,989
Common equity............................ 339,294 221,583 181,004 134,701 125,071
KEY PERFORMANCE RATIOS
- ----------------------------------------------------------------------------------------------------
Return on average common equity.......... 18.13% 15.69% 18.19% 16.77% 16.64%
Return on average assets................. 1.31% 1.13% 1.24% 1.13% 1.10%
Net interest margin...................... 5.17% 5.32% 5.06% 4.95% 4.74%
Dividend payout ratio.................... 28.69% 32.40% 27.43% 30.77% 30.77%
Average common equity to average assets.. 7.21% 6.87% 6.43% 6.43% 6.59%
Nonperforming assets to period-end
loans and OREO......................... 0.61% 0.70% 0.31% 0.34% 0.62%
Allowance for loan losses to period-end
loans.................................. 1.37% 1.27% 1.29% 1.30% 1.38%
Allowance for loan losses to
nonperforming loans.................... 286.19% 200.68% 608.09% 537.12% 295.99%
Net charge-offs to aveage loans.......... 0.24% 0.22% 0.17% 0.00% 0.08%
Tier I capital........................... 10.65% 8.88% 8.51% 10.64% 10.16%
Total risk-based capital................. 14.24% 11.10% 11.18% 13.46% 13.44%
Leverage ratio........................... 7.25% 6.62% 6.10% 7.12% 6.12%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
BASIS OF PRESENTATION
The following represents management's discussion and analysis of Community
First Bankshares, Inc.'s (the "Company") financial condition as of December
31, 1997 and 1996, and its results of operations for the years ended December
31, 1997, 1996, and 1995. This discussion should be read in conjunction with
the consolidated financial statements and related footnotes and the five year
summary of selected financial data. The information has been restated to
reflect significant mergers accounted for as a pooling-of-interests as if
they had occurred at the beginning of the first period presented. Purchases
have been reflected in the Company's results of operations for all periods
following the acquisition and are reflected in the Company's financial
condition at all dates subsequent to the acquisition.
MERGER AND ACQUISITION ACTIVITY
The Company has made a number of acquisitions during these periods. Each of
these acquisitions has had an effect upon the Company's results of operations
and financial condition.
On December 18, 1996, the Company issued approximately 5.2 million shares
of common stock to acquire Mountain Parks Financial Corporation ("Mountain
Parks"), a one-bank holding company headquartered in Denver, Colorado. At
acquisition, Mountain Parks had approximately $600 million in assets at
seventeen banking offices located in Colorado. On February 22, 1995, the
Company issued approximately 2.4 million shares of common stock to acquire
Minowa Bancshares, Inc. ("Minowa"), a three-bank holding company
headquartered in Decorah, Iowa. At acquisition, Minowa had approximately $224
million in assets at three banks located in Iowa and Minnesota. On July 3,
1995, the Company issued approximately 1.2 million shares to acquire First
Community Bankshares, Inc. ("First Community"), a five-bank holding company
headquartered in Fort Morgan, Colorado. At acquisition, First Community had
total assets of $153 million at its five Colorado banks. All three
acquisitions were accounted for using the pooling of interests method.
Also during the periods presented, the Company made the following
acquisitions of banks (or associated holding companies), each of which was
accounted for as a purchase, except the acquisitions in Trinidad, Colorado,
Gunnison, Colorado, and Phoenix, Arizona, each of which was accounted for as
a pooling of interests. Because the pooling acquisitions were not material to
the Company's financial condition or operating results, the Company's
financial information has not been restated to reflect these mergers.
<TABLE>
<CAPTION>
Acquisition Location of Bank or Total Assets at Date of
Month and Year Name of Acquired Entity Acquisition (In Millions)
- --------------------------------------------------------------------------
<S> <C> <C>
December 1997 Gunnison, Colorado $ 90
November 1997 Phoenix, Arizona $ 54
July 1997 Cheyenne, Wyoming $ 1,100
October 1996 Trinidad, Colorado $ 70
July 1996 Kiowa, Colorado $ 58
July 1996 Englewood, Colorado $ 19
October 1995 Beach, North Dakota $ 44
September 1995 Aurora, Colorado $ 41
July 1995 Louisville, Colorado $ 36
July 1995 Boulder, Colorado $ 60
May 1995 Alliance, Nebraska $ 293
- --------------------------------------------------------------------------
</TABLE>
On July 14, 1997, the Company completed the purchase of KeyBank N.A.
(Wyoming), ("KeyBank") from KeyCorp of Cleveland, Ohio. At the time of
acquisition, KeyBank had total assets of $1.1 billion in banking offices in
24 Wyoming communities. The purchase price of the transaction, which was
accounted for as a purchase, was $135 million and resulted in the recognition
of goodwill of approximately $60 million. The purchase price was funded
through a combination of proceeds from the issuance of $60 million 8.875%
Cumulative Capital Securities by a business subsidiary of the Company in
February 1997, partial proceeds from the Company's issuance of $60 million
7.30% Subordinated Notes, and retained earnings of the Company.
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 will
be accounted for as a purchase of certain assets and assumption of certain
liabilities and resulted in the recognition of approximately $44 million of
deposit premium. The purchase was funded through a combination of net
proceeds from the issuance of 1,000,000 shares of common stock in December
1997 and the proceeds of the issuance of $60 million 8.20% Cumulative Capital
Securities by a business trust subsidiary in December 1997.
On January 14, 1998, the Company signed a definitive merger agreement
with FNB, Inc. ("FNB"), a two-bank holding company headquartered in Greeley,
Colorado. At December 31, 1997, FNB had total assets of $118 million at
offices in Greeley and Fort Collins, Colorado. To facilitate completion of
the transaction, which is expected to be accounted for using the pooling of
interests method of accounting, the Company will issue approximately 570,000
shares of common stock to holders of FNB common stock. The transaction is
subject to regulatory approval and is expected to close during the second
quarter of 1998.
On January 9, 1998, the Company signed a definitive merger agreement with
Community Bancorp, Inc. ("CBI"), a one-bank, holding company headquartered in
Thornton, Colorado. At December 31, 1997, CBI had total assets of $78 million
at offices in Thornton and Arvada, Colorado. To facilitate completion of the
transaction, which is expected to be accounted for using the pooling of
interests method of accounting, the Company will issue approximately 452,000
shares of common stock to holders of CBI common stock. The transaction is
subject to regulatory approval and is expected to close during the second
quarter of 1998.
On November 7, 1997, the Company signed a definitive merger agreement
with Pioneer Bank of Longmont ("Longmont"), Longmont, Colorado. At December
31, 1997, Longmont had total assets of $130 million and banking offices in
four Colorado communities. To facilitate completion of the transaction, which
is expected to be accounted for using the pooling of interests method of
accounting, the Company will issue approximately 700,000 shares of common
stock to holders of Longmont common stock. The transaction is subject to
regulatory approval and is expected to close during the second quarter of
1998.
OVERVIEW
For the year ended December 31, 1997, the Company reported net income of
$46.6 million, an increase of $14.1 million, or 43.4%, from the $32.5 million
earned during 1996. Diluted earnings per share were $2.44, compared to $1.79
in 1996 and $1.75 in 1995. Return on average assets was 1.31% for 1997,
compared with 1.13% for 1996. Return on average common shareholders' equity
for 1997 and 1996 was 18.13% and 15.69%, respectively. Factors contributing
to these changes included
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
approximately $6.3 million of incremental net income provided by entities
acquired during 1997 and 1996.
For the year ended December 31, 1996, the Company reported net income of
$32.5 million, an increase of $2.5 million, or 8.3% from the $30.0 million
earned during 1995. Diluted earnings per share were $1.79, compared to $1.75 in
1995. Return on average assets was 1.13% for 1996, compared with 1.24% for 1995.
Return on average common shareholders' equity for 1996 and 1995 was 15.69% and
18.19%, respectively. Factors contributing to these changes included
approximately $1.4 million of incremental net income provided by entities
acquired during 1996 and 1995.
During 1997, the Company made the determination to dispose of its sub-prime
lending affiliates, Mountain Parks Financial Services, Inc. ("MPFS") and Equity
Lending, inc. ("ELI"). Both MPFS, which purchases auto contracts and ELI, which
originates residential, non-conforming mortgages were acquired by the Company in
December 1996 through the merger with Mountain Parks Financial Corporation. The
Company has accounted for these entities as discontinued operations on the
consolidated financial statements. At December 31, 1997, the net balance sheet
effect of $72 million from these entities has been included as an Other Asset.
The Company recognized income of $967,000 net of tax, from these entities during
1997.
Total assets were $4,856 million and $3,116 million at December 31, 1997
and 1996, respectively. The increase of $1,740 million, or 55.8%, during
1997 was principally due to the 1997 acquisitions of the banks in Wyoming,
Phoenix, and Gunnison, as well as loan growth in the Company's subsidiary banks.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The principal source of the Company's earnings is net interest income, the
difference between total interest income on earning assets such as loans and
investments and interest paid on deposits and other interest-bearing
liabilities. The net interest margin is net interest income, on a tax-equivalent
basis, expressed as a percentage of average earning assets. The margin is
affected by volume and mix of earning assets and interest-bearing liabilities,
the level of interest free funding sources, interest rate environment, and
income tax rates. As discussed later, management actively monitors its interest
rate sensitivity and seeks to balance assets and liabilities to minimize the
impact of changes in the interest rate environment.
The following table presents the Company's average balance sheets, interest
earned or paid and the related yields and rates on major categories of the
Company's earning assets and interest-bearing liabilities on a tax equivalent
basis for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INTEREST
AVERAGE YIELDS AND AVERAGE YIELDS AND
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATES BALANCE INTEREST RATES
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1) (2) .................................. $2,264,150 $219,843 9.71% $1,873,073 $185,005 9.88%
Investment securities (2) ...................... 942,974 63,362 6.72% 727,822 48,579 6.67%
Other earning assets ........................... 16,720 866 5.18% 17,324 960 5.47%
-------------------------------------------------------------------------
Total earning assets ....................... 3,223,844 284,071 8.81% 2,618,219 234,544 8.96%
Noninterest-earning assets ..................... 337,729 248,560
-------------------------------------------------------------------------
Total assets ............................... $3,561,573 $2,866,779
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing checking ...................... $ 367,683 6,536 1.78% $ 445,501 $ 8,702 1.95%
Savings deposits ............................... 731,751 19,870 2.72% 444,333 11,534 2.60%
Time deposits .................................. 1,385,924 75,873 5.47% 1,114,617 61,419 5.51%
Short-term borrowings .......................... 177,190 9,236 5.21% 168,311 9,247 5.49%
Long-term borrowings ........................... 76,595 5,738 7.49% 60,433 4,332 7.17%
-------------------------------------------------------------------------
Total interest-bearing liabilities ......... 2,739,143 117,253 4.28% 2,233,195 95,234 4.26%
Demand deposits ................................ 463,601 378,325
Noninterest-bearing liabilities ................ 39,786 35,365
Trust Owned Preferred Securities ............... 57,699 --
Preferred shareholders' equity ................. 4,506 22,999
Common shareholders' equity .................... 256,838 196,895
-------------------------------------------------------------------------
............................................... 822,430 633,584
-------------------------------------------------------------------------
Total liabilities and shareholders' equity ..... $3,561,573 $2,866,779
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net interest income ............................ $166,818 $139,310
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net interest spread ............................ 4.53% 4.70%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net interest margin ............................ 5.17% 5.32%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1995
- ------------------------------------------------------------------------------------
INTEREST
AVERAGE YIELDS AND
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATES
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Loans (1) (2) .................................. $1,545,497 $151,154 9.78%
Investment securities (2) ...................... 656,435 43,009 6.55%
Other earning assets ........................... 29,369 1,710 5.82%
-----------------------------------
Total earning assets ....................... 2,231,301 195,873 8.78%
Noninterest-earning assets ..................... 192,912
-----------------------------------
Total assets ............................... $2,424,213
-----------------------------------
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing checking ...................... $ 406,080 $ 8,805 2.17%
Savings deposits ............................... 349,522 9,748 2.79%
Time deposits .................................. 963,594 53,227 5.52%
Short-term borrowings .......................... 111,784 6,184 5.53%
Long-term borrowings ........................... 65,379 4,927 7.54%
-----------------------------------
Total interest-bearing liabilities ......... 1,896,359 82,891 4.37%
Demand deposits ................................ 317,806
Noninterest-bearing liabilities ................ 31,189
Trust Owned Preferred Securities ............... --
Preferred shareholders' equity ................. 23,000
Common shareholders' equity .................... 155,859
-----------------------------------
............................................... 527,854
-----------------------------------
Total liabilities and shareholders' equity ..... $2,424,213
-----------------------------------
-----------------------------------
Net interest income ............................ $112,982
-----------------------------------
-----------------------------------
Net interest spread ............................ 4.41%
-----------------------------------
-----------------------------------
Net interest margin ............................ 5.06%
-----------------------------------
-----------------------------------
- ------------------------------------------------------------------------------------
</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 1997, 1996, AND 1995.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
The following table presents the components of changes in net interest income by
volume and rate on a tax equivalent basis. The net change attributable to the
combined impact of volume and rate has been allocated solely to the change in
volume:
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
---------------------------------------------------------------------
(IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1) (2) .......................................... $38,627 $(3,789) $34,838 $32,038 $ 1,813 $33,851
Investment securities (2) .............................. 14,360 423 14,783 4,677 893 5,570
Other earning assets ................................... (33) (61) (94) (701) (62) (763)
--------------------------------------------------------------------
Total interest income ...................................... 52,954 (3,427) 49,527 36,014 2,644 38,658
--------------------------------------------------------------------
Interest expense:
Savings deposits and interest-bearing checking ......... 5,941 229 6,170 3,499 (1,816) 1,683
Time deposits .......................................... 14,949 (495) 14,454 8,342 (150) 8,192
Short-term borrowings .................................. 488 (499) (11) 3,127 (64) 3,063
Long-term borrowings ................................... 1,159 247 1,406 (373) (222) (595)
--------------------------------------------------------------------
Total interest expense .................................... 22,537 (518) 22,019 14,595 (2,252) 12,343
--------------------------------------------------------------------
Increase (decrease) in net interest income ................. $30,417 $(2,909) $27,508 $21,419 $ 4,896 $26,315
--------------------------------------------------------------------
--------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES LOAN FEES.
(2) INTEREST INCOME IS PRESENTED ON A TAX EQUIVALENT BASIS.
Net interest income on a tax equivalent basis in 1997 was $166.8 million, a
$27.5 million increase from 1996. The increase was primarily due to a 23.1%
increase in earning assets partially offset by a 15 basis point reduction in the
net interest margin. The increase in earning assets was due to six bank
acquisitions completed by the Company between the third quarter of 1996 and
December 1997, and loan growth in existing markets. Net interest income on a tax
equivalent basis in 1996 was $139.3 million, a $26.3 million increase from 1995.
The increase was primarily due to a 17.3% increase in earning assets and a 26
basis point increase in the net interest margin. The increase was primarily
influenced by bank acquisitions completed by the Company and loan growth in
existing markets.
The net interest margin was 5.17%, 5.32%, and 5.06% in 1997, 1996 and 1995,
respectively. This decrease in margin was due to a 17 basis point decrease in
the yield spread between 1996 and 1997, and a change in the mix of earning
assets to lower-yielding loans. Average loans to average earning assets changed
from 69.3% in 1995, to 71.5% in 1996, and 70.2% in 1997.
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 1997 was $5.4 million, a decrease of $1.4 million
or 20.6%, from the $6.8 million provision during 1996. The decreased loan loss
provision was principally due to the Company's decision to dispose of its
sub-prime lending affiliates and subsequently accounting for these entities as
discontinued operations. 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 1996 was $6.8 million, an increase of $4.1
million, or 151.9% from the 1995 provision of $2.7 million.
NONINTEREST INCOME
The Company continues to expand noninterest income associated with the Company's
community banking operations. The primary sources of noninterest income consist
of service charges on deposit accounts, service fees on checking accounts,
insurance commissions and fees for trust services. Management regularly weighs
opportunities to increase noninterest income by considering the delivery of
financial products and services in its markets.
Noninterest income for 1997 was $36.6 million, an increase of $9.2 million,
or 33.6%, from the $27.4 million earned in 1996. The increase was principally
due to an increase in service charges on deposit accounts in 1997 to $17.0
million from the $12.3 million in 1996, an increase of $4.7 million, or 38.2%.
The increase is attributed to $2.7 million in service charges on deposit
accounts at banks acquired during 1997 and $494,000 at banks acquired during
1996.
Noninterest income for 1996 was $27.4 million, an increase of $4.9 million,
or 21.8%, from the $22.5 million earned in 1995. The increase was principally
due to an increase in service charges on deposit accounts in 1996 from $10.1
million earned during 1995 to $12.3 million earned in 1996, an increase of $2.2
million, or 21.8%.
NONINTEREST EXPENSE
Noninterest expenses consist of salaries and benefits, occupancy, equipment and
other expenses such as legal and postage necessary for the operation of the
Company. Management is committed to improving the quality of service while
controlling such costs through improved efficiency and consolidation of certain
activities to achieve economies of scale.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
The following table presents the components of noninterest expense for
the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits ................. $ 64,868 $ 54,870 $42,796
Net occupancy .................................. 19,139 15,085 10,563
FDIC insurance ................................. 357 669 2,532
Legal and accounting ........................... 1,710 1,989 1,311
Other professional service ..................... 2,378 1,892 2,700
Acquisition expenses ........................... 398 2,928 768
Data processing and loan servicing fees ........ 1,290 1,506 1,607
Permanent impairment of equity
method investment ............................ -- 940 --
Minority interest .............................. (55) 222 175
Company-obligated mandatorily redeemable
preferred securities of CFB Capital I & II ... 5,108 -- --
Amortization of Intangibles .................... 5,519 3,362 2,551
Other .......................................... 24,478 20,825 17,590
-------------------------------
Total noninterest expense .................. $ 125,190 $104,288 $82,593
-------------------------------
-------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Noninterest expense for 1997 was $125.2 million, an increase of $20.9
million, or 20.0%, from the level of $104.3 million during 1996. The increase
was principally due to an increase of $10.0 million, or 18.2%, in salaries
and employee benefits, of which $5.8 million was due to the 1997 acquisitions
and $1.7 million was due to the banks acquired during 1996. Net occupancy
expense increased $4.1 million to $19.1 million, $2.1 million due to 1997 and
1996 acquisitions. Acquisition expenses of $398,000 were incurred in 1997 in
conjunction with the acquisitions of Republic and Summit. Intangibles expense
increased $2.2 million, or 64.2%, due to the additional intangible assets
recognized in connection with the Company's acquisitions. Other noninterest
expense was $24.5 million, an increase of $3.7 million, or 17.8%, from $20.8
million during 1996.
Noninterest expense increased $21.7 million to $104.3 million in 1996.
The increase was principally due to an increase in salaries and employee
benefits, net occupancy expense, and acquisition and related expenses. The
$12.1 million increase in salaries and employee benefits reflects $4.6
million in additional expenses related to acquisitions completed by the
Company in 1995 and 1996. The $4.5 million increase in net occupancy is also
due primarily to acquisitions completed by the Company. Legal and accounting
fees increased $678,000, or 51.7%, from $1,311,000 to $1,989,000 during 1996.
The Company incurred acquisition expenses of $2.9 million in 1996 in
connection with the mergers with Mountain Parks and Financial Bancorp. These
expenses relate to legal, accounting and other professional services expenses
incurred to complete the mergers. In addition, the Company incurred
noninterest expenses of $1.0 million to facilitate the integration of certain
operating activities of Mountain Parks into those of the Company. During
1996, the Company recorded a $940,000 writedown in the value of its
investment in an unconsolidated subsidiary, which was divested to satisfy
regulators' competitive issues related to the Mountain Parks merger.
Amortization of intangibles increased $811,000, or 31.8%, due to intangible
assets, such as goodwill, noncompete agreements and insurance agency customer
policy expirations recorded in connection with the Company's acquisitions.
Other noninterest expense was $20.8 million, an increase of $3.2 million, or
18.2%, from $17.6 million in 1995. Federal Deposit Insurance Corporation
("FDIC") insurance expense decreased $1.9 million as a result of a reduction
in the insurance assessment rate paid by most affiliate banks from a rate of
$.23 per $100 to $.04 per $100 of qualifying deposits. This was partially
offset by increased deposits obtained through 1996 and 1995 bank acquisitions
and an increase in average deposits for 1996 to $2,383 million from $2,037
million in 1995, an increase of $346 million, or 17.0%.
PROVISION FOR INCOME TAXES
The Company records a provision for income taxes currently payable and for
taxes payable in the future because of differences in the timing of
recognition of certain items for financial statement and income tax purposes.
The effective income tax rate differs from the statutory rate primarily due
to tax-exempt income from loans, and investments and state income taxes. The
effective tax rate was 31.9%, 35.6%, and 36.4% for 1997, 1996, and 1995,
respectively.
YEAR 2000 ISSUE
The Company is evaluating the potential impact of what is commonly referred
to as the "Year 2000" issue, concerning the 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 is in the process of determining which of its systems,
if any, may present Year 2000 issues, the magnitude of these issues, and the
steps that may be necessary to correct them. Therefore, the potential
liabilities and costs associated with Year 2000 compliance cannot be
estimated at this time. 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.
FINANCIAL CONDITION
INVESTMENT OF FUNDS
LOANS
At December 31, 1997, total loans were $2.6 billion, an increase of $573
million, or 27.8%, from the December 31, 1996, level of $2.1 billion. A
significant portion of this increase is attributable to in-market loan growth
in the Company's existing markets. In addition, the purchase of three banking
institutions in 1997 added $536 million in loans.
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 $208 million at December 31,
1997, compared to $202 million at December 31, 1996. 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 1998.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
The following table presents the Company's balance of each major category of
loans at the dates indicated:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
(DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan category:
Real estate ............ $1,158,822 43.94% $ 871,432 42.22% $ 744,477 42.13% $ 544,809 40.96% $ 403,716 38.90%
Commercial ............. 708,084 26.85% 624,456 30.25% 527,620 29.86% 397,869 29.91% 316,565 30.51%
Consumer and other ..... 499,924 18.96% 346,139 16.77% 270,459 15.30% 225,256 16.93% 170,271 16.41%
Agricultural ........... 270,227 10.25% 222,081 10.76% 224,637 12.71% 162,212 12.20% 147,114 14.18%
---------------------------------------------------------------------------------------------------------
Total loans ............. 2,637,057 100.00% 2,064,108 100.00% 1,767,193 100.00% 1,330,146 100.00% 1,037,666 100.00%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Less allowance for
loan losses ............ (36,194) (26,215) (22,712) (17,333) (14,332)
---------------------------------------------------------------------------------------------------------
Total ................... $2,600,863 $2,037,893 $1,744,481 $1,312,813 $1,023,334
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
GENERAL. The Company's loan mix remained relatively constant from 1996 to
1997. Real estate loans continued to be the largest category of loans,
representing 43.9% of the total loan portfolio.
REAL ESTATE LOANS. A significant portion of the Company's real estate loan
portfolio consists of residential real estate first mortgages that have been
underwritten and documented to meet secondary mortgage requirements.
Substantially all of the Company's real estate loans are based in the
Company's primary market area. As of December 31, 1997, $464 million, or
40.0%, of the Company's real estate loan portfolio consisted of residential
real estate loans, $137 million, or 11.8%, were secured by farmland, $363
million, or 31.4%, represented commercial and other real estate loans and
$195 million, or 16.8%, 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.
CONSUMER AND OTHER LOANS. Loans classified as consumer and other loans
include automobile, personal loans, consumer lines of credit and overdrafts.
The consumer loan portfolio also includes dealer-generated installment
contracts for consumer goods, including automobiles and major home
appliances. The majority of these indirect loans are installment loans with
fixed interest rates.
AGRICULTURAL LOANS. Agricultural loans are made principally to farmers and
ranchers. The Company provides short-term credit for operating loans and
intermediate-term loans for machinery purchases and other improvements.
INVESTMENTS
Management augments the quality of the loan portfolio by maintaining a high
quality investment portfolio oriented toward U.S. Treasury, U.S. Government
agency and government guaranteed mortgage-backed securities. The investment
portfolio also provides the opportunity to structure maturities and repricing
timetables in a flexible manner and to meet applicable requirements for
pledging securities, which are principally adjustable rate, and
collateralized mortgage obligations, which are primarily floating rate
securities, as tools in managing its interest rate exposure and enhancing its
net interest margin.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
The following table sets forth the composition of the Company's
held-to-maturity securities portfolio at amortized cost as of the dates
indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
BOOK VALUE AT DECEMBER 31,
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury ............................... $ -- $ -- $ --
U.S. Government agencies .................... 228 879 3,318
Mortgage-backed securities .................. 67,959 86,506 106,429
Collateralized mortgage obligations ......... -- -- --
State and political securities .............. 48,064 56,694 55,267
Other securities ............................ 64,261 78,269 65,806
---------- -------- --------
Total ....................................... $ 180,512 $222,348 $230,820
---------- -------- --------
---------- -------- --------
- --------------------------------------------------------------------------------
</TABLE>
The following table sets forth the composition of the Company's
available-for-sale securities portfolio at estimated fair value as of the
dates indicated:
<TABLE>
<CAPTION>
BOOK VALUE AT DECEMBER 31,
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury ............................... $ 147,126 $120,193 $154,508
U.S. Government agencies .................... 266,696 85,311 121,588
Mortgage-backed securities .................. 829,943 236,833 143,359
Collateralized mortgage obligations ......... 108,103 43,259 58,053
State and political securities .............. 68,677 15,122 1,443
Other securities ............................ 78,332 6,170 7,571
---------- -------- --------
Total ....................................... $1,498,877 $506,888 $486,522
---------- -------- --------
---------- -------- --------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES AT DECEMBER 31, 1997, MATURING IN
- -----------------------------------------------------------------------------------------------------------------------------------
OVER ONE YEAR OVER 5 YEARS
ONE YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS OVER 10 YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies .... $ -- -- $ -- -- $ -- -- $ 228 7.25% $ 228 7.25%
Mortgage-backed securities .. 780 8.51% 7,262 7.54% 29,653 6.43% 30,264 6.63% 67,959 6.66%
Municipal bonds ............. 3,958 7.13% 8,342 7.54% 18,834 8.13% 16,930 8.20% 48,064 7.97%
Other ....................... -- -- 62 10.03% -- -- 64,199 7.99% 64,261 7.99%
------- ----- ------- ------ ------- ----- -------- ----- -------- -----
Total ....................... $ 4,738 7.36% $15,666 7.55% $48,487 7.09% $111,621 7.65% $180,512 7.48%
------- ----- ------- ------ ------- ----- -------- ----- -------- -----
------- ----- ------- ------ ------- ----- -------- ----- -------- -----
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INTEREST YIELDS ON INVESTMENTS ARE PRESENTED ON A TAX EQUIVALENT BASIS TO
REFLECT THE TAX EXEMPT NATURE OF CURRENT ASSETS. YIELDS ARE BASED ON A
35% INCREMENTAL TAX RATE AND A 3.51% COST OF FUNDS.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES AT DECEMBER 31, 1997, MATURING IN
- -----------------------------------------------------------------------------------------------------------------------------------
OVER ONE YEAR OVER 5 YEARS
ONE YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS OVER 10 YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury ............... $ 27,956 5.78% $119,170 6.28% $ -- -- $ -- -- $ 147,126 6.19%
U.S. Government agencies .... 54,585 5.59% 166,783 6.12% 44,330 6.45% 998 7.27% 266,696 6.07%
Mortgage-backed securities .. 4,019 7.30% 8,242 6.88% 33,482 7.41% 784,200 6.81% 829,943 6.84%
Collateralized mortgage
obligations .............. 97 5.95% 2,905 6.47% 13,041 6.35% 92,060 6.38% 108,103 6.38%
Municipal bonds ............. 8,180 7.28% 30,550 7.59% 7,055 8.79% 22,892 7.57% 68,677 7.67%
Other ....................... 30,434 6.36% 731 6.63% 43 7.05% 47,124 7.44% 78,332 7.01%
------- ----- ------- ------ ------- ----- -------- ----- -------- -----
Total ....................... $125,271 5.98% $328,381 6.34% $ 97,951 6.93% $947,274 6.82% $1,498,877 6.65%
------- ----- ------- ------ ------- ----- -------- ----- -------- -----
------- ----- ------- ------ ------- ----- -------- ----- -------- -----
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) INTEREST YIELDS ON INVESTMENTS ARE PRESENTED ON A TAX EQUIVALENT BASIS
TO REFLECT THE TAX EXEMPT NATURE OF CURRENT ASSETS. YIELDS ARE BASED
ON A 35% INCREMENTAL TAX RATE AND A 3.51% COST OF FUNDS.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
The Company's investments, including available-for-sale and
held-to-maturity securities, increased $950 million, or 130.3%, to $1,679
million at December 31, 1997, from $729 million at December 31, 1996. This
increase was due to the addition of $496 million of securities obtained
through 1997 bank acquisitions and offset by maturing securities which were
not replaced, in response to loan demand. At December 31, 1997, the Company's
investments represented 34.6% of total assets, compared to 23.4% at December
31, 1996.
CREDIT EXPERIENCE
The Company's lending activities are guided by the general loan policy
established by the Board of Directors. The Senior Credit Committee of the
Company has established loan approval limits for each region of the Company
and each subsidiary bank. The limits established for each bank range from
$50,000 to $300,000 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 Arizona, Colorado, Iowa, Minnesota, Nebraska,
Wisconsin, Wyoming and the Dakotas have lending authority of $750,000 per
nonclassified borrower when a second regional credit officer or the
respective regional managing officer concurs. Loans above $1,500,000 per
nonclassified borrower and $250,000 per classified borrower are presented to
the Senior Credit Committee for approval.
Although the Company has a diversified loan portfolio, the economic
health of the Company's primary trade area and the ability of many of the
bank's borrowers to repay their loans (including real estate and commercial
loans, as well as agricultural loans) is dependent to a large extent on the
health of the agricultural sector of the economy. The Company has identified
and implemented strategies to deal with these factors, including an emphasis
on quality local loan growth and the diversification and performance of its
earning asset portfolios.
NONPERFORMING ASSETS
The Company follows regulatory guidelines with respect to classifying loans
on a nonaccrual basis. Loans are placed on nonaccrual when they become past
due over 90 days or when the collection of interest or principal is
considered unlikely. The Company does not return a loan to accrual status
until it is brought current with respect to both principal and interest and
future principal payments are no longer in doubt. When a loan is placed on
nonaccrual status, any previously accrued and uncollected interest is
reversed. Interest income of $364,000 on nonaccrual loans would have been
recorded during 1997 if the loans had been current in accordance with their
original terms. During 1997, the Company recorded interest income of $361,000
related to loans that were on nonaccrual status as of December 31, 1997.
The Company considers nonperforming assets to include all nonaccrual loans,
restructured loans defined as troubled debt restructurings under SFAS No. 15 and
other real estate owned ("OREO").
Nonperforming assets of the Company are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans:
Nonaccrual loans ........................................... $ 12,507 $ 12,796 $ 3,252 $ 3,087 $ 3,742
Restructured loans ......................................... 140 267 483 140 1,100
----------- ---------- ---------- ----------- ----------
Nonperforming loans ........................................ 12,647 13,063 3,735 3,227 4,842
OREO ........................................................... 3,406 1,426 1,701 1,265 1,622
----------- ---------- ---------- ----------- ----------
Nonperforming assets ....................................... $ 16,053 $ 14,489 $ 5,436 $ 4,492 $ 6,464
----------- ---------- ---------- ----------- ----------
Loans 90 days or more past due but still accruing .............. $ 3,616 $ 1,956 $ 779 $ 722 $ 761
----------- ---------- ---------- ----------- ----------
Nonperforming loans as a percentage of total loans ............. 0.48% 0.63% 0.21% 0.24% 0.47%
Nonperforming assets as a percentage of total assets ........... 0.33% 0.46% 0.20% 0.21% 0.34%
Nonperforming assets as a percentage of total loans and OREO ... 0.61% 0.70% 0.31% 0.34% 0.62%
Total loans .................................................... $ 2,637,057 $2,064,108 $1,767,193 $ 1,330,146 $1,037,666
Total assets ................................................... $ 4,855,526 $3,116,398 $2,769,976 $ 2,130,619 $1,883,794
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming assets were $16.1 million at December 31, 1997, an increase
of $1.6 million, or 11.0%, from $14.5 million at December 31, 1996.
Nonperforming loans decreased by $416,000. OREO increased $2.0 million, or
142.9%, from $1.4 million at December 31, 1996 to $3.4 million at December
31, 1997. The ratio of nonperforming assets to total assets at December 31,
1997, was .33%, compared to .46% at December 31, 1996.
Nonperforming assets were $14.5 million at December 31, 1996, an increase
of $9.1 million, or 168.5% from $5.4 million at December 31, 1995.
Nonperforming loans increased by $9.3 million due principally to an increase
in nonaccrual loans at the former Mountain Parks Bank of $7.6 million,
including $4.6 million in the specialty lending area. At December 31, 1997,
the Company has announced its intent to discontinue the operations of this
subsidiary.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
ALLOWANCE FOR LOAN LOSSES
The current level of the allowance for loan losses is a result of management's
assessment of the risks within the portfolio based on the information revealed
in credit reporting processes. The Company utilizes a risk-rating system on all
loans, including purchased loans, and a monthly credit review and reporting
process that results in the calculation of the guidelines reserves based on the
risk within the portfolio. This assessment of risk takes into account the
composition of the loan portfolio, previous loan experience, current economic
conditions and other factors that, in managements' judgment, deserve
recognition. Regulators have reviewed the Company's methodology for determining
allowance requirements and have made no recommendations for increases in the
allowances during the five-year period ended December 31, 1997.
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, 1997.
The following table sets forth the Company's allowance for loan losses as of
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ................... $ 26,215 $ 22,712 $ 17,333 $ 14,332 $ 11,196
Allowance of acquired companies ................ 10,065 784 5,230 1,153 1,714
Charge-offs:
Real estate ................................ 1,284 1,087 303 109 303
Commercial ................................. 1,462 1,176 1,285 484 617
Consumer and other ......................... 4,385 2,265 1,502 584 461
Agricultural ............................... 726 443 373 38 58
-------------------------------------------------------------------
Total charge-offs .......................... 7,857 4,971 3,463 1,215 1,439
Recoveries:
Real estate ................................ 248 269 63 549 162
Commercial ................................. 559 225 245 247 325
Consumer and other ......................... 965 361 536 218 188
Agricultural ............................... 647 78 57 210 37
-------------------------------------------------------------------
Total recoveries ........................... 2,419 933 901 1,224 712
-------------------------------------------------------------------
Net charge-offs ................................ 5,438 4,038 2,562 (9) 727
Provision charged to operations ................ 5,352 6,757 2,711 1,839 2,149
-------------------------------------------------------------------
Balance at end of year ......................... $ 36,194 $ 26,215 $ 22,712 $ 17,333 $ 14,332
-------------------------------------------------------------------
-------------------------------------------------------------------
Allowance as a percentage of total loans ....... 1.37% 1.27% 1.29% 1.30% 1.38%
Net charge-offs to average loans outstanding ... 0.24% 0.22% 0.17% -- 0.08%
Total loans .................................... $2,637,057 $2,064,108 $1,767,193 $1,330,146 $1,037,666
Average loans .................................. $2,264,150 $1,873,073 $1,545,497 $1,171,925 $ 909,890
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the allowance for loan losses was $36.2 million, an
increase of $10.0 million from the December 31, 1996, level of $26.2 million.
The Company's 1997 acquisitions accounted for $10.4 million of the change, with
the remaining change due to maintaining an adequate reserve in recognition of
the Company's loan growth and the increase in net charge-offs during 1997. At
December 31, 1997, the allowance for loan losses as a percentage of total loans
was 1.37%, as compared to 1.27% at December 31, 1996.
At December 31, 1996, the allowance for loan losses was $26.2 million, an
increase of $3.5 million from the December 31, 1995, level of $22.7 million.
The Company's 1996 acquisitions accounted for $784,000 of the increase, with
the remaining increase due to maintaining an adequate reserve in recognition of
the Company's loan growth during 1996. At December 31, 1996, the allowance for
loan losses as a percentage of total loans was 1.27%, as compared to 1.29% at
December 31, 1995. This decrease was attributed to strong loan growth and
improvement in loan portfolio credit quality at the Company's bank subsidiaries.
During 1997, net charge-offs were $5.4 million, an increase of $1.4 million
from the net charge-offs of $4.0 million in 1996. The principal causes for the
increase were the increase of real estate loan net charge-offs of $218,000; the
decrease in commercial loan net charge-offs of $48,000; the decrease in
agricultural loan net charge-offs of $286,000; and an increase in consumer loan
and other loan net charge-offs of $1,516,000. The Company's provision for loan
loss was $5.4 million in 1997 and $6.8 million in 1996.
During 1996, net charge-offs were $4.0 million, an increase of $1.4 million
from the $2.6 million during 1995. The increase included an increase of
$938,000 in consumer and other loan net charge-offs and a $578,000 increase in
real estate loan net charge offs. The Company's provision for loan loss
increased from $2.7 million in 1995 to $6.8 million in 1996.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
The following table sets forth the allocation of the allowance for loan losses
to various loan categories, as well as the allocation as a percentage of loans
outstanding in each category, as of the dates indicated:
<TABLE>
<CAPTION>
ALLOWANCE AS A PERCENT OF LOANS OUTSTANDING
ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, BY CATEGORY AT DECEMBER 31,
---------------------------------------------- ------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate ................... $ 5,820 $ 4,059 $ 4,208 $ 3,252 $ 2,801 0.50% 0.47% .57% 0.60% 0.69%
Commercial .................... 5,603 4,781 4,400 3,605 3,509 0.79% 0.77% .83% 0.91% 1.11%
Consumer and other ............ 3,677 1,997 1,690 1,614 1,346 0.74% 0.58% .62% 0.72% 0.79%
Agricultural .................. 2,091 2,056 1,615 1,737 1,529 0.77% 0.93% .72% 1.07% 1.04%
----------------------------------------------- ---------------------------------------
Total Allocated Allowance ..... 17,191 12,893 11,913 10,208 9,185 0.65% 0.62% 0.67% 0.77% 0.89%
Total Unallocated Allowance ... 19,003 13,322 10,799 7,125 5,147 0.72% 0.65% 0.62% 0.53% 0.49%
----------------------------------------------- ---------------------------------------
Total Allowance ............... $36,194 $26,215 $22,712 $17,333 $14,332 1.37% 1.27% 1.29% 1.30% 1.38%
----------------------------------------------- ---------------------------------------
----------------------------------------------- ---------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SOURCE OF FUNDS
DEPOSITS
The Company's major source of funds is provided by core deposits from
individuals, businesses, and local government units. Core deposits consist of
all noninterest-bearing deposits, interest-bearing savings and checking
accounts and time deposits of less than $100,000.
The following table sets forth a summary of the deposits of the Company at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, (IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest-bearing ....................... $ 597,333 $ 431,078 $ 398,314
Interest-bearing:
Savings and checking accounts ........... 1,371,546 964,829 873,025
Time accounts less than $100,000 ........ 1,252,164 907,658 885,857
Time accounts greater than $100,000 ..... 398,291 233,875 202,520
---------- ---------- ----------
Total deposits ............................ $3,619,334 $2,537,440 $2,359,716
---------- ---------- ----------
</TABLE>
Total deposits at December 31, 1997, were $3,619 million, an increase of
$1,082 million, or 42.6%, from $2,537 million at December 31, 1996. The
Company's core deposits as a percentage of total deposits were 89.0% and 90.8%
as of December 31, 1997 and December 31, 1996, respectively. The increase in
total deposits was primarily due to the 1997 bank acquisitions, with aggregate
total deposits of $1,063 million as of the respective acquisition dates.
At December 31, 1997, $398 million, or 11.0% of total deposits were in time
accounts greater than $100,000. The increase of $164 million, or 70.1%, from
$234 million at December 31, 1996, was due to $155 million of deposits obtained
through the institutions acquired during 1997. Management believes virtually
all the deposits in excess of $100,000 are with persons or entities that hold
other deposit relationships with the banks. Maturities of deposits in excess of
$100,000 at December 31, 1997 were (in thousands):
<TABLE>
<S> <C>
Maturing in less than three months $161,669
Maturing in three to six months 80,544
Maturing in six to twelve months 115,413
Maturing in over twelve months 40,665
--------
Total deposits in excess of $100,000 $398,291
--------
--------
</TABLE>
In addition to the availability of core deposits, management has determined
it may, in the future employ a brokered deposit program in an effort to attract
lower cost sources of funds. The Company intends to continue to expand its core
deposit base through acquisitions.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
SHORT-TERM BORROWINGS
Short-term borrowings include securities sold under agreements to repurchase,
commercial paper, Federal Home Loan Bank advances and federal funds
purchased. These funds are used to fund the growth in loans and securities
and manage the Company's rate sensitivity risk. They are subject to
short-term price swings as the Company's needs change or the overall market
rates for short-term investment funds change.
The Company's subsidiary banks had arrangements with the Federal Home
Loan Bank that provide for borrowing up to $410 million. As of December 31,
1997, $216 million advances were outstanding. The Company also had a $11
million balance outstanding on its $25 million short-term commercial paper
arrangement at December 31, 1997. The $26 million increase in short-term
borrowings from December 31, 1996 is due to strong loan demand at the
Company's bank subsidiaries.
The following table sets forth a summary of the short-term borrowings of
the Company during 1997, 1996, and 1995, and as of the end of each such
period:
<TABLE>
<CAPTION>
AVERAGE MAXIMUM WEIGHTED AVERAGE
DAILY OUTSTANDING AVERAGE INTEREST
OUTSTANDING AMOUNT AT ANY INTEREST RATE AT
(IN THOUSANDS) AT YEAR-END OUTSTANDING MONTH-END RATE YEAR-END
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Federal funds purchased and securities sold
under agreements to repurchase ........................... $ 43,002 $ 67,144 $ 55,218 5.33% 3.14%
Commercial paper ........................................... 11,167 8,812 23,346 5.91% 5.78%
FHLB advances .............................................. 216,300 98,774 267,120 5.06% 5.70%
Other ...................................................... 3,104 2,460 4,731 5.24% 6.02%
------------------------
Total .................................................. $ 273,573 $ 177,190 $ 273,573 5.21% 5.31%
------------------------
------------------------
1996
Federal funds purchased and securities sold
under agreements to repurchase ........................... $ 78,369 $ 56,356 $ 83,451 4.75% 5.55%
Commercial paper ........................................... 14,062 12,643 14,965 5.72% 5.63%
FHLB advances .............................................. 152,000 96,130 182,000 5.91% 6.30%
Other ...................................................... 3,203 3,182 4,140 5.58% 5.95%
------------------------
Total .................................................. $ 247,634 $ 168,311 $ 272,895 5.49% 6.01%
------------------------
------------------------
1995
Federal funds purchased and securities sold
under agreements to repurchase ........................... $ 50,102 $ 67,421 $ 100,627 5.59% 4.69%
Commercial paper ........................................... 10,000 6,352 10,000 6.11% 5.91%
FHLB advances .............................................. 28,775 36,345 61,975 6.07% 5.88%
Other ...................................................... 2,004 1,666 2,917 5.70% 6.05%
------------------------
Total .................................................. $ 90,881 $ 111,784 $ 152,523 5.78% 5.23%
------------------------
------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LONG TERM DEBT
Long-term debt of the Company was $116 million as of December 31, 1997, and
$47 million as of December 31, 1996. The increase is due to the Company's
June 1997 completion of an unsecured $60 million subordinated debt offering,
which carries interest at 7.30% payable semi-annually. The subordinated notes
payable mature June 20, 2004. The Company does not have the option of
redeeming the notes prior to maturity. Long-term debt also includes $12
million of exchangeable subordinated notes maturing August 15, 2005.
COMPANY-OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES
Company-obligated mandatorily redeemable preferred securities of the Company
was $120 million as of December 31, 1997, which consisted of $60 million of
8.20% Cumulative Capital Securities issued December 10, 1997 through CFB
Capital II and $60 million of 8.875% Cumulative Capital Securities issued
February 5, 1997 through CFB Capital I. The proceeds of both offerings were
invested by CFB Capital II and CFB Capital I, respectively in Junior
Subordinated Debentures of the Company. The debentures mature not earlier
than February 1, 2002 and not later than December 15, 2027.
SHAREHOLDERS' EQUITY
Total shareholders' equity increased $94.7 million, or 38.7%, to $339.3
million at December 31, 1997, from $244.6 million at December 31, 1996, as a
result of the retention of a majority of earnings, the conversion of
debentures and the issuance of common stock. During 1997 the equivalent of
3,156,617 shares of common stock were issued, including 1,000,000 shares
issued pursuant to the December 1997 shelf registration; 1,439,521 related to
the conversion of debentures; 314,834 and 368,019 related to the acquisition
of Republic and Summit, respectively, and 34,243 related to sales of common
stock to Company sponsored employee benefit plans, resulting in an increase
in shareholders' equity of $81.5 million.
In 1996, the Company increased the number of authorized common shares
from 20,000,000 to 30,000,000. The number of authorized preferred shares
remained at 2,000,000. The increases are expected to provide the Company
greater ability to utilize common and preferred stock in connection with
raising additional capital, expanding its business through acquisitions and
other general purposes.
On February 28, 1997, the Company issued notice of redemption to the
holders of its Depositary Shares, which represent ownership of one-quarter
share of 7% Cumulative Convertible Preferred Stock (approxi-
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
mately $23 million in stated value). The redemption price is $26.40 (plus
accrued and unpaid dividends) for each Depositary Share with a stated value
of $25.00 per share. Holders of the Depositary Shares have the right to
convert their investment into Common Stock, prior to redemption, at a rate of
1.569 shares of Common Stock for each Depositary Share. Virtually all of such
holders elected to convert prior to redemption, which resulted in the
issuance of approximately 1,443,000 shares of Common Stock.
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 1997, 1996 and 1995, the liquidity ratio was 8.78%, 7.77%, and
8.96%, respectively. The level of loans maturing within one year greatly
added to the Company's liquidity position in 1997. Including loans maturing
within one year, the liquidity ratio was 29.54%, 34.41%, and 40.23%,
respectively, for the same periods.
The Company has a revolving line of credit with its primary lender, which
provides for borrowing up to $38 million. This line would be utilized to
finance acquisitions which may be completed in 1998. There was no outstanding
balance on this line of credit at December 31, 1997.
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 $128 million in federal funds from 10 nonaffiliated financial
institutions.
Additionally, most of the Company's subsidiary banks have joined the
Federal Home Loan Bank ("FHLB") System. As part of membership, the Company's
subsidiary banks purchased a modest amount of stock of FHLB and obtained
advance lines of credit which represent an aggregate of $410 million in
additional funding capacity.
INTEREST RATE SENSITIVITY
Interest rate sensitivity indicates the exposure of a financial institution's
earnings to future fluctuations in interest rates. Management of interest
rate sensitivity is accomplished through the composition of loans and
investments and by adjusting the maturities on earning assets and
interest-bearing liabilities. Rate sensitivity and liquidity are related
since both are affected by maturing assets and liabilities. However, interest
rate sensitivity also takes into consideration those assets and liabilities
with interest rates that are subject to change prior to maturity.
The Company's Asset and Liability Management Committee ("ALCO") attempts
to structure the Company's balance sheet to provide for an approximately
equal amount of rate sensitive assets and rate sensitive liabilities. In
addition to facilitating liquidity needs, this strategy assists management in
maintaining relative stability in net interest income despite unexpected
fluctuations in interest rates. ALCO uses three methods for measuring and
managing interest rate risk: Repricing Mismatch Analysis, Balance Sheet
Simulation Modeling and Equity Fair Value Modeling.
REPRICING MISMATCH ANALYSIS -- Management performs a Repricing Mismatch ("Gap
Analysis") analysis which represents a point in time net position of assets,
liabilities and off-balance sheet instruments subject to repricing in
specified time periods. Guidelines established by ALCO, and approved by the
Company's Board of Directors, limit the impact on net interest income to five
percent given a 100 basis point change in interest rates over one year.
However, Management believes Gap Analysis alone does not accurately measure
the magnitude of changes in net interest income since changes in interest
rate do not impact all categories of assets, liabilities and off-balance
sheet instruments equally or simultaneously. A summary of the Gap Analysis is
presented on page 26.
BALANCE SHEET SIMULATION MODELING -- Balance Sheet Simulation Modeling allows
management to analyze the impact of short-term (less than 12 months) interest
rate fluctuations using projected balance sheet information. The balance
sheet changes are based on forecasted repayments of loans and securities,
growth in loans and deposits, and historical pricing spreads. Management uses
the model to simulate the impact of immediate and longer-term shifts in the
yield curve. The results of these models are reviewed by ALCO and used to
develop the Company's strategies. Guidelines established by ALCO limit the
impact on net interest income to five percent given a 100 basis point change
in interest rates. As of December 31, 1997, the impact of such a change in
interest rates would be approximately .45 percent of net interest income.
EQUITY FAIR VALUE MODELING -- Because Balance Sheet Simulation Modeling is
dependent on accurate forecasts, its usefulness is limited to periods of one
year or less. As a result, the Company uses the Equity Fair Value Modeling to
measure long-term interest rate exposure. The method estimates the impact of
interest rate changes on the estimated discounted future cash flows of the
Company's current assets, liabilities, and off-balance sheet instruments.
Guidelines established by ALCO limit the change in fair value to 15 percent
given a 100 basis point change in interest rates. As of December 31, 1997,
the impact of such a change in interest rates would be approximately 6.53
percent of net interest income.
Based on each of these methods of measuring interest rate risk,
management believes the Company is slightly asset sensitive as of December
31, 1997.
The Company does not engage in the speculative use of derivative
financial instruments.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Community First Bankshares, Inc.
The following table sets forth the Company's interest rate sensitivity
analysis by contractual repricing or maturity at December 31, 1997:
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
- ---------------------------------------------------------------------------------------
1 YEAR OVER 1 OVER 5
(DOLLARS IN THOUSANDS) OR LESS TO 5 YEARS YEARS TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rate sensitive assets:
Loans.............................. $1,296,659 $1,069,562 $ 270,836 $2,637,057
Held-to-maturity securities........ 8,038 23,341 149,133 180,512
Available-for-sale securities...... 332,984 438,798 727,095 1,498,877
Other interest-bearing assets...... 13,977 -- -- 13,977
-------------------------------------------------
Total rate sensitive assets....... $1,651,658 $1,531,701 $1,147,064 $4,330,423
-------------------------------------------------
Rate sensitive liabilities:
Savings deposits and interest-
bearing checking................ $ -- $ -- $1,371,546 $1,371,546
Time deposits...................... 1,352,010 298,445 -- 1,650,455
Short-term borrowings.............. 273,144 429 -- 273,573
Long-term borrowings............... 20,880 25,953 74,852 121,685
-------------------------------------------------
Total rate sensitive liabilities... $1,646,034 $ 324,827 $1,446,398 $3,417,259
-------------------------------------------------
-------------------------------------------------
Rate sensitive gap.................. $ 5,624 $1,206,874 $ (299,334) $ 913,164
Cumulative rate sensitive gap....... $ 5,624 $1,212,498 $ 913,164 $ 913,164
- ----------------------------------------------------------------------------------------
</TABLE>
The following sets forth the Company's interest rate sensitivity analysis
at December 31, 1997, with respect to the individual categories of loans and
provides separate analyses with respect to fixed interest rate loans and
floating interest rate loans:
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
- ----------------------------------------------------------------------------------
1 YEAR OVER 1 OVER 5
(DOLLARS IN THOUSANDS) OR LESS TO 5 YEARS YEARS TOTAL
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan category:
Real estate.................... $ 582,564 $ 425,306 $150,952 $1,158,822
Agricultural................... 217,353 46,663 6,211 270,227
Commercial..................... 430,825 224,032 53,227 708,084
Consumer and other............. 65,918 373,562 60,444 499,924
-----------------------------------------------
Total loans.................... $1,296,660 $1,069,563 $270,834 $2,637,057
-----------------------------------------------
Fixed interest rate loans........ $ 366,772 $ 932,960 $262,140 $1,561,872
Floating interest rate loans..... 929,888 136,603 8,694 1,075,185
-----------------------------------------------
Total loans.................... $1,296,660 $1,069,563 $270,834 $2,637,057
-----------------------------------------------
-----------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
CAPITAL MANAGEMENT
Risk-based guidelines established by regulatory agencies require the Company
to maintain minimum amounts and ratios of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets.
As of December 31, 1997, the Company is considered well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company must maintain minimum total risk-based, Tier 1
risk-based, Tier 1 leverage ratios as set forth in the table.
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS:
- ----------------------------------------------------------------------------------------
TIER 1 TOTAL RISK- TOTAL RISK-
(DOLLARS IN THOUSANDS) CAPITAL BASED CAPITAL LEVERAGE BASED ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum............................. 4.00% 8.00% 3.00% N/A
Well-Capitalized.................... 6.00% 10.00% 5.00% N/A
COMMUNITY FIRST BANKSHARES, INC
December 31, 1997................... 10.65% 14.24% 7.25% $3,266,648
December 31, 1996................... 8.88% 11.10% 6.62% $2,312,632
- ----------------------------------------------------------------------------------------
</TABLE>
Due to the Company's level of Tier 1 capital and substantial level of
earning assets invested in low risk government agency and mortgage-backed
securities, the Company's risk-based capital ratios significantly exceed the
regulatory minimums. The Company conducts an ongoing assessment of its
capital needs in order to maintain an adequate level of capital to support
business growth, to ensure depositor protection and to facilitate corporate
expansion. Management continues to explore steps to increase its capital
levels to permit it to make future acquisitions. Portions of the subordinated
debt financing referred to under "Borrowings," above, are treated as Tier 2
capital.
- ------------------------------------------------------------------------------
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 THAT ARE SUBJECT TO CERTAIN RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. THE COMPANY
WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE MADE. FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO: RISKS RELATED TO
THE COMPANY'S ACQUISITION STRATEGY, INCLUDING RISKS OF ADVERSELY CHANGING
RESULTS OF OPERATIONS AND POSSIBLE FACTORS AFFECTING THE COMPANY'S ABILITY TO
CONSUMMATE FURTHER ACQUISITIONS; RISKS OF LOANS AND INVESTMENTS, INCLUDING
DEPENDANCE ON LOCAL ECONOMIC CONDITIONS; COMPETITION FOR THE COMPANY'S
CUSTOMERS FROM OTHER PROVIDERS OF FINANCIAL SERVICES; POSSIBLE ADVERSE
EFFECTS OF CHANGES IN INTEREST RATES; AND OTHER RISKS DETAILED IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, WHICH RISKS
ARE DIFFICULT TO PREDICT AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE
COMPANY.
26
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Community First Bankshares, Inc.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks ................................................................ $ 222,088 $ 175,732
Federal funds sold and securities purchased under agreements to resell ................. 12,690 3,600
Interest-bearing deposits .............................................................. 1,287 3,598
Available-for-sale securities .......................................................... 1,498,877 506,888
Held-to-maturity securities (Fair Value: 1997 -- $182,335, 1996 -- $223,200) ........... 180,512 222,348
Loans .................................................................................. 2,637,057 2,064,108
Less: Allowance for loan losses .................................................... (36,194) (26,215)
---------------------------------
Net loans .............................................................................. 2,600,863 2,037,893
Bank premises and equipment, net ....................................................... 101,820 65,705
Accrued interest receivable ............................................................ 40,105 29,233
Intangibles ............................................................................ 97,307 39,182
Other assets ........................................................................... 99,977 32,219
---------------------------------
Total assets ........................................................................... $ 4,855,526 $ 3,116,398
---------------------------------
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ................................................................ $ 597,333 $ 431,078
Interest-bearing:
Savings and NOW accounts ........................................................ 1,371,546 964,829
Time accounts over $100,000 ..................................................... 398,291 233,875
Other time accounts ............................................................. 1,252,164 907,658
---------------------------------
Total deposits ......................................................................... 3,619,334 2,537,440
Federal funds purchased and securities sold under agreements to repurchase ............. 43,002 78,369
Other short-term borrowings ............................................................ 230,571 169,265
Long-term debt ......................................................................... 116,476 46,750
Accrued interest payable ............................................................... 20,842 17,027
Due to brokers ......................................................................... 340,457 --
Other liabilities ...................................................................... 25,550 21,665
---------------------------------
Total liabilities ...................................................................... 4,396,232 2,870,516
Company-obligated mandatorily redeemable preferred securities of CFB Capital I and II .. 120,000 --
Minority interest ...................................................................... -- 1,311
Shareholders' equity:
Preferred stock .................................................................... -- 22,988
Common stock, par value $.01 per share:
Authorized Shares - 30,000,000
Issued Shares - 20,359,301 ...................................................... 204 172
Capital surplus .................................................................... 157,138 77,029
Retained earnings .................................................................. 177,748 144,239
Unrealized gain on available-for-sale securities, net of tax ....................... 5,587 1,368
Less cost of common stock in treasury - 1997 - 36,255 shares; 1996 - 50,810 shares . (1,383) (1,225)
---------------------------------
Total shareholders' equity ............................................................. 339,294 244,571
---------------------------------
Total liabilities and shareholders' equity ............................................. $ 4,855,526 $ 3,116,398
---------------------------------
---------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See ACCOMPANYING NOTES.
27
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Community First Bankshares, Inc.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ............................................................................... $ 218,588 $ 183,530 $ 150,948
Investment securities ............................................................... 59,103 44,936 40,210
Interest-bearing deposits ........................................................... 575 163 366
Federal funds sold and resale agreements ............................................ 331 797 1,344
-----------------------------------------
Total interest income ................................................................... 278,597 229,426 192,868
INTEREST EXPENSE:
Deposits ............................................................................ 102,632 81,655 71,780
Short-term and other borrowings ..................................................... 8,734 9,247 6,184
Long-term debt ...................................................................... 5,887 4,332 4,927
-----------------------------------------
Total interest expense .................................................................. 117,253 95,234 82,891
-----------------------------------------
Net interest income ..................................................................... 161,344 134,192 109,977
Provision for loan losses ............................................................... 5,352 6,757 2,711
-----------------------------------------
Net interest income after provision for loan losses ..................................... 155,992 127,435 107,266
NONINTEREST INCOME:
Service charges on deposit accounts ................................................. 17,023 12,328 10,116
Insurance commissions ............................................................... 5,375 5,213 4,283
Fees from fiduciary activities ...................................................... 3,805 3,332 2,718
Net gains on sales of securities .................................................... 463 93 52
Other ............................................................................... 9,898 6,404 5,319
-----------------------------------------
Total noninterest income ................................................................ 36,564 27,370 22,488
NONINTEREST EXPENSE:
Salaries and employee benefits ...................................................... 64,868 54,870 42,796
Net occupancy ....................................................................... 19,139 15,085 10,563
FDIC insurance ...................................................................... 357 669 2,532
Legal and accounting ................................................................ 1,710 1,989 1,311
Other professional service .......................................................... 2,378 1,892 2,700
Acquisition expense ................................................................. 398 2,928 768
Data processing ..................................................................... 1,290 1,506 1,607
Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II . 5,108 -- --
Amortization of intangibles ......................................................... 5,519 3,362 2,551
Permanent impairment of equity method investment .................................... -- 940 --
Other ............................................................................... 24,423 21,047 17,765
-----------------------------------------
Total noninterest expense ............................................................... 125,190 104,288 82,593
-----------------------------------------
Income from continuing operations before income taxes and extraordinary item ............ 67,366 50,517 47,161
Provision for income taxes .............................................................. 21,516 18,007 17,208
-----------------------------------------
Income from continuing operations before extraordinary item ............................. 45,850 32,510 29,953
Discontinued Operations:
Income from operations of discontinued operations
(Less applicable income taxes of $583) ............................................ 967 -- --
-----------------------------------------
Income before extraordinary item ........................................................ 46,817 32,510 29,953
Extraordinary item:
Loss on early extinguishment of debt, net of taxes ...................................... (265) -- --
-----------------------------------------
Net Income .............................................................................. 46,552 32,510 29,953
Preferred stock dividend ................................................................ -- 1,610 1,610
-----------------------------------------
Net income applicable to common equity .................................................. $ 46,552 $ 30,900 $ 28,343
-----------------------------------------
Earnings per common and common equivalent share:
Basic income per share from continuing operations before extraordinary item ............. $ 2.48 $ 1.87 $ 1.85
Discontinued operations ................................................................. 0.05 -- --
Extraordinary item ...................................................................... (0.01) -- --
-----------------------------------------
Basic net income ........................................................................ $ 2.52 $ 1.87 $ 1.85
-----------------------------------------
Diluted income per share from continuing operations before extraordinary item ........... $ 2.40 $ 1.79 $ 1.75
Discontinued operations ................................................................. 0.05 -- --
Extraordinary item ...................................................................... (0.01) -- --
-----------------------------------------
Diluted net income ...................................................................... $ 2.44 $ 1.79 $ 1.75
-----------------------------------------
Average common and common equivalent shares outstanding:
Basic ............................................................................... 18,474,749 16,509,289 15,361,370
Diluted ............................................................................. 19,069,078 18,142,377 17,167,650
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See ACCOMPANYING NOTES.
28
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Community First Bankshares, Inc.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
YEARS ENDED DECEMBER 31, ---------------- --------------- CAPITAL RETAINED UNREALIZED ----------------
1997,1996,1995 SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS GAIN(LOSS) SHARES AMOUNT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994.. 230,000 $23,000 14,744,919 $148 $48,915 $92,755 $(5,182) 144,344 $(1,935) $157,701
Net income.................... -- -- -- -- -- 29,953 -- -- -- 29,953
Preferred stock dividends
($7.00 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
taxes of $4,219........... -- -- -- -- -- -- 7,158 -- -- 7,158
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995.. 230,000 23,000 16,164,357 162 64,776 115,154 1,976 78,624 (1,064) 204,004
Net income.................... -- -- -- -- -- 32,510 -- -- -- 32,510
Preferred stock dividends
($7.00 per share)......... -- -- -- -- -- (1,610) -- -- -- (1,610)
Common stock dividends
($0.58 per share)......... -- -- -- -- -- (6,714) -- -- -- (6,714)
Issuance of common stock...... -- -- 842,253 8 9,810 5,226 -- -- -- 15,044
Retirement of common stock.... -- -- (19,125) -- (349) -- -- -- -- (349)
Purchases of common stock
for treasury, at cost..... -- -- -- -- -- -- -- 64,900 (1,535) (1,535)
Sales of treasury stock to
employee benefit plans.... -- -- -- -- 162 -- -- (22,582) 307 469
Exercise of options, net of
stock tendered in payment. -- -- 215,199 2 2,630 (322) -- (69,349) 1,050 3,360
Conversion of convertible
preferred Stock........... (125) (12) -- -- -- (5) -- (783) 17 --
Change in unrealized loss on
available-for-sale
securities, net of income
tax benefit of $336....... -- -- -- -- -- -- (608) -- -- (608)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996.. 229,875 22,988 17,202,684 172 77,029 144,239 1,368 50,810 (1,225) 244,571
Net income.................... -- -- -- -- -- 46,552 -- -- -- 46,552
Common stock dividends
($0.70 per share)......... -- -- -- -- -- (12,837) -- -- -- (12,837)
Purchases of common stock for
treasury, at cost......... -- -- -- -- -- -- -- 78,500 (2,777) (2,777)
Sales of common stock to
employee benefit plans ... -- -- 34,243 1 1,066 -- -- -- -- 1,067
Issuance of common stock...... -- -- 3,122,374 31 79,043 1,315 -- -- -- 80,389
Exercise of options, net of
stock tendered in payment. -- -- -- -- -- (1,521) -- (93,055) 2,619 1,098
Conversion of convertible
preferred.................(229,875) (22,988) -- -- -- -- -- -- -- (22,988)
Change in unrealized loss on
available-for-sale
securities, net of income
taxes of $2,244........... -- -- -- -- -- -- 4,219 -- -- 4,219
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997.. -- -- 20,359,301 $204 $157,138 $177,748 $5,587 36,255 $(1,383) $339,294
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Community First Bankshares, Inc.
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................................. $ 46,552 $ 32,510 $ 29,953
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses ........................................................... 5,352 6,757 2,711
Depreciation ........................................................................ 9,205 6,974 5,373
Amortization of intangibles ......................................................... 5,519 3,362 2,551
Net amortization of premiums and discounts on securities ............................ (68) 1,867 1,946
Deferred income tax benefit ......................................................... (3,133) (3,906) (4,009)
(Increase) decrease in interest receivable .......................................... (4,047) 422 (2,309)
Increase in interest payable ........................................................ 1,066 282 4,746
Other, net .......................................................................... 5,800 (4,236) (6,066)
---------------------------------------
Net cash provided by operating activities ............................................... 66,246 44,032 34,896
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash acquired ...................................................... 145,351 14,026 35,667
Net increase (decrease) in interest-bearing deposits .................................... 2,311 (158) (462)
Purchases of available-for-sale securities .............................................. (736,619) (218,601) (86,629)
Maturities of available-for-sale securities ............................................. 366,438 217,771 75,262
Sales of securities, net of gains ....................................................... 74,636 29,720 50,530
Purchases of held-to-maturity securities ................................................ (29,250) (23,344) (75,871)
Maturities of held-to-maturity securities ............................................... 27,555 30,986 54,990
Net increase in loans ................................................................... (114,732) (237,802) (139,434)
Net increase in bank premises and equipment ............................................. (19,327) (18,194) (10,438)
Net (decrease) increase in minority interest ............................................ (1,311) 355 (4,828)
---------------------------------------
Net cash used in investing activities ................................................... (284,948) (205,241) (101,213)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts and savings accounts ........... 11,634 51,952 (44,603)
Net increase (decrease) in time accounts ................................................ 7,056 (5,807) 141,005
Net increase (decrease) in short-term and other borrowings .............................. 22,366 156,753 (23,088)
Proceeds from issuance of long-term debt ................................................ 69,140 -- 56,624
Repayment of long-term debt ............................................................. -- (34,538) (10,000)
Net proceeds from issuance of Company-obligated mandatorily redeemable
preferred securities of CFB Capital I and II ........................................ 120,000 -- --
Net proceeds from issuance of common stock .............................................. 81,456 15,044 11,577
Conversion of convertible preferred stock ............................................... (22,988) -- --
Purchase of common stock held in treasury ............................................... (2,777) (1,535) (56)
Sale of common stock held in treasury ................................................... 1,098 3,829 896
Retirement of common stock .............................................................. -- (349) --
Preferred stock dividends paid .......................................................... -- (1,610) (1,610)
Common stock dividends paid ............................................................. (12,837) (6,714) (5,279)
---------------------------------------
Net cash provided by financing activities ............................................... 274,148 177,025 125,466
---------------------------------------
Net increase in cash and cash equivalents ............................................... 55,446 15,816 59,149
Cash and cash equivalents at beginning of year .......................................... 179,332 163,516 104,367
---------------------------------------
Cash and cash equivalents at end of year ................................................ $ 234,778 $ 179,332 $ 163,516
---------------------------------------
---------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
DECEMBER 31, 1997, 1996 AND 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Community First Bankshares, Inc. (the "Company") is multi-bank holding
company which, at the end of 1997, served 109 communities in Arizona,
Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota, Wisconsin,
and Wyoming. The Company's community banks provide a full range of banking
services, primarily in small and medium-sized communities and the surrounding
communities. In addition to its primary emphasis on commercial and consumer
banking services, the Company offers trust, insurance and nondeposit
investment products and services.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Community First
Bankshares, Inc., its wholly-owned data processing, credit origination and
insurance agency subsidiaries and its ten majority-owned subsidiary banks.
Minority interest which existed at December 31, 1996 and 1995 is reflected in
consolidation and is the portion of the subsidiary banks that was not owned
by the Company. Minority interest ranged from 0.00% to 1.29% and 0.00% to
2.87% at December 31, 1996 and 1995, respectively. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts in prior periods have been reclassified to conform to the
current presentation.
As discussed in Note 2, the Company acquired Mountain Parks Financial
Corporation ("Mountain Parks"), on December 18, 1996, Minowa Bancshares, Inc.
("Minowa"), on February 22, 1995, and First Community Bankshares, Inc.
("FCB"), on July 3, 1995. These acquisitions were accounted for using the
pooling of interests method. Accordingly, the consolidated financial
information has been restated to reflect the results of operations of the
four companies on a combined basis for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES
Management determines the classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a component of retained
earnings in shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity or, in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization and accretion is included as
an adjustment to interest income from investments. Realized gains and losses and
declines in value judged to be other-than-temporary are included in net
securities gains (losses). The cost of securities sold is based on the specific
identification method.
LOANS
Loans are stated at their principal balance outstanding, less the allowance
for loan losses. Interest on loans is recognized on an accrual basis. Loans
are placed on nonaccrual when they become past due over 90 days, or earlier,
if the collection of interest or principal is considered unlikely.
Thereafter, no interest income is recognized unless received in cash and
until such time as the borrower demonstrates the ability to pay interest and
principal.
LOAN FEE INCOME
The Company recognizes loan fees and certain direct origination costs as a
yield adjustment over the estimated life of the loan, utilizing a method that
results in a constant rate of return.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained through charges to expense at an
amount that will provide for estimated loan losses. These estimates are based
principally on a continual review of the loan portfolio, loan charge-off
experience, economic conditions and industry guidelines. Ultimate losses may
vary from current estimates, and as adjustments become necessary, the
allowance for loan losses is adjusted in the periods in which such losses
become known or fail to occur. Actual loan charge-offs and subsequent
recoveries are deducted from and added to the allowance, respectively.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation for financial reporting purposes is provided on the
straight-line method over the estimated lives of the assets and includes
amortization of assets recorded under capital leases. Estimated lives range
from three to twenty and twenty-five to forty years for equipment and
premises, respectively. Accelerated depreciation methods are used for income
tax reporting purposes.
INTANGIBLE ASSETS
Goodwill, the excess cost over net assets acquired, of banking subsidiaries
is amortized over a period of fifteen years. At December 31, 1997, goodwill
totaled $87,348,000, net of accumulated amortization of $10,749,000. Other
intangible assets, principally deposit base intangibles, unexpired premium
lists and noncompetition agreements, totaled $9,959,000, net of accumulated
amortization of $4,127,000, 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
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 based on net income before
considering the preferred stock dividends declared and interest expense, net
of tax, paid on convertible exchangeable redeemable subordinated
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
debentures (the "Debentures"). Interest expense on the Debentures, net of
tax, was $86,000 for the year ended December 31, 1995. There was no similar
expense for the years ended December 31, 1997 and 1996. The weighted average
number of shares of common stock outstanding is increased by the assumed
conversion of convertible preferred stock outstanding and the Debentures
outstanding from the beginning of the period or date of issuance, if later,
and the number of shares of common stock that would be issued assuming the
exercise of stock options and warrants during each period. Such adjustments
to the weighted average number of shares of common stock outstanding are made
only when such adjustments dilute earnings per share.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents is defined as cash and due from banks, federal
funds sold and securities purchased under agreements to resell.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense for the stock option grants. See Footnotes
4 and 15.
2. BUSINESS COMBINATIONS AND DIVESTITURES
On December 1, 1997, the Company issued approximately 314,800 shares of
common stock to acquire First National Summit Bankshares, Inc. ("Summit"), a
one-bank holding company headquartered in Gunnison, Colorado. At acquisition,
Summit had approximately $90 million in assets and $82 million in deposits at
banking offices located in Crested Butte, Fruitvale, Grand Junction,
Gunnison, and Mt. Crested Butte, Colorado. The Company used the pooling of
interests method to account for the transaction. This merger was not material
to the Company's financial condition or operating results. Accordingly, the
Company's consolidated financial information has not been restated to reflect
this merger. The operating results are included in the Company's consolidated
financial statement from the date of merger.
On November 24, 1997, the Company issued approximately 368,000 shares of
common stock to acquire Republic National Bancorp, Inc. ("Republic"), a
holding company with one bank in Phoenix, Arizona. At acquisition, Republic
had approximately $54 million in assets and $49 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 financial
statements from the date of the merger.
On July 14, 1997, the Company completed the acquisition of KeyBank
National Association, Cheyenne, Wyoming ("KeyBank Wyoming") with 28 banking
offices located in 24 communities throughout the state of Wyoming. The
transaction, which was accounted for as a purchase, resulted in the addition
of approximately $1.1 billion in assets and $900 million in deposits and the
recognition of goodwill of approximately $60 million. The operating results
of KeyBank Wyoming, subsequent to the date of acquisition, are included in
the Company's consolidated financial statements as of and for the period
ended December 31, 1997.
The following unaudited pro forma consolidated financial information for
the year ended December 31, 1997, reflects the results of operations as if
the acquisition of KeyBank Wyoming had occurred on January 1, 1997. In
addition to combining the historical results of operations of the two
companies, the pro forma operating results include adjustments for the
estimated effect of purchase accounting on the Company's results, principally
amortization of intangibles, adjustments to reflect the estimated impact on
income and expense related to the assets and liabilities retained by KeyCorp
and assumes the following were completed at the beginning of the period
presented: (i) the $60 million offering of 8-7/8% Cumulative Capital
Securities of CFB Capital I completed in February 1997; (ii) the redemption
on March 31, 1997 of the Company's 7.75% Subordinated Notes due 2000 in the
principal amount of $23 million; and (iii) the conversion during March 1997
of substantially all of the Company's 7% Cumulative Convertible Preferred
Stock.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<S> <C>
Net interest income .................................................. $179,014
Income from continuing operations .................................... 48,365
Income before extraordinary item ..................................... 49,332
Net income ........................................................... 49,067
Earnings per common share.............................................
Basic ............................................................ $ 2.62
Diluted .......................................................... $ 2.57
</TABLE>
The proforma information may not be indication of the results that actually
would have occurred if the combination had been in effect on the date
indicated or that may be obtained in the future.
On November 7, 1997, the Company signed a definitive merger agreement
with Pioneer Bank of Longmont ("Longmont"), Longmont, Colorado, with offices
in Berthoud, Longmont, Lyons, and Niwot, Colorado. Upon completion of the
transaction, the Company will issue approximately 700,000 shares of common
stock to the holders of Longmont common stock. Longmont had total assets of
approximately $130 million as of December 31, 1997. The completion of the
transaction is subject to regulatory approvals, approval by the shareholders
of Longmont and other conditions. The transaction, is expected to be
completed during the second quarter of 1998 and is expected to be accounted
for by using the pooling of interests method of accounting.
On April 30, 1997, the Company sold its 24.36% minority interest in Vail
Banks, inc., the parent company of WestStar Bank, Vail, Colorado for
approximately $3 million. The sale was completed in response to regulatory
requirements with regard to competitive factors resulting from the Company's
December 1996 acquisition of Mountain Parks.
On April 4, 1997, the Company, through its Colorado subsidiary, completed
the sale of its offices in Granby and Grand Lake, Colorado in response to
regulatory requirements with regard to competitive factors resulting from the
Company's merger with Mountain Parks. The transaction included approximately
$24 million in deposits and resulted in the recognition of a gain of
approximately $2.8 million.
On December 18, 1996, the Company issued 5,176,672 shares of common stock
to complete its merger with Mountain Parks, a one bank holding company with
seventeen offices in Colorado. The merger was
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
accounted for using the pooling of interests method. Operating results of the
Company and Mountain Parks for the years ended December 31, 1995 and the nine
months ended September 30, 1996, prior to restatement were:
<TABLE>
<CAPTION>
THE MOUNTAIN
(IN THOUSANDS, EXCEPT PER SHARE DATA) COMPANY PARKS COMBINED
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 (unaudited):
Net interest income .................... $75,240 $23,148 $ 98,388
Net income ............................. 21,070 5,392 26,462
Net income applicable to
common equity ........................ 19,862 5,392 25,254
Earnings per common and
common equivalent share:
Basic ............................. $ 1.74 $ 1.42 $ 1.55
Diluted ........................... $ 1.61 $ 1.40 $ 1.47
YEAR ENDED DECEMBER 31, 1995:
Net interest income .................... $88,148 $21,829 $109,977
Net income ............................. 22,819 7,134 29,953
Net income applicable to
common equity ........................ 21,209 7,134 28,343
Earnings per common and common
equivalent share:
Basic ............................. $ 1.86 $ 2.29 $ 1.85
Diluted ........................... $ 1.77 $ 2.17 $ 1.75
- --------------------------------------------------------------------------------
</TABLE>
(NO MATERIAL ADJUSTMENTS WERE REQUIRED TO RESTATE COMBINED RESULTS OF
OPERATIONS.)
During 1996, the Company completed the acquisition of several smaller
financial institutions in its existing markets. These acquisitions, except as
described below, were accounted for using the purchase method and were not
material to the financial condition or operating results of the Company.
On October 1, 1996, the Company acquired Financial Bancorp, Inc.
("Financial"), a holding company with one bank in Trinidad, Colorado. In the
transaction, which was accounted for using the pooling of interests method,
the Company issued 538,803 shares of common stock in exchange for 100% of
Financial common stock. This merger was not material to the Company's
financial condition or operating results. Accordingly, the Company's
consolidated financial information has not been restated to reflect this
merger. The operating results of Financial are included in the Company's
consolidated financial statements subsequent to the date of the merger.
On July 31, 1996, the Company acquired High Plains Bancorp, Inc. ("High
Plains"), with offices in Kiowa, Elizabeth, and Parker, Colorado. The company
paid approximately $7,100,000 for 100% of High Plains common stock. The
transaction resulted in the recognition of goodwill of approximately
$3,448,000.
On July 3, 1996, the Company acquired Charter Bancorporation ("Charter"),
Englewood, Colorado. The Company paid approximately $4,600,000 for 100% of
Charter common stock. The transaction resulted in the recognition of goodwill
of approximately $2,723,000. The equivalent of approximately 232,050 shares
of common stock were issued in the transaction.
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,
1997, 1996 and 1995.
During 1997, the Company made the determination to dispose of its
sub-prime lending affiliates, Mountain Parks Financial Services, Inc.
("MPFS") and Equity Lending, inc. ("ELI"). Both MPFS, which purchases auto
contracts and ELI, which originates residential, non-conforming mortgages
were acquired by the Company in December 1996 through the merger with
Mountain Parks Financial Corporation. The Company has accounted for these
entities as discontinued operations on the consolidated financial statements.
At December 31, 1997, the net balance sheet effect of $72 million from these
entities has been included as an Other Asset. The Company recognized income
of $967,000 net of tax, from these entities during 1997.
3. SUBSEQUENT EVENTS (UNAUDITED)
On February 3, 1998, the Company announced that its Board of Directors
approved a two-for-one split of the Company's common stock, to be in the form
of a 100 percent stock dividend. The action is subject to shareholder
approval of an increase in the Company's authorized common stock at the April
28, 1998 annual shareholders meeting. The stock dividend is expected to be
distributed May 15, 1998 to shareholders of record on May 1, 1998.
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.
On January 14, 1998, the Company signed a definitive agreement to acquire
FNB, Inc., ("FNB") Greeley, Colorado, the bank holding company that owns
First National Bank of Greeley and Poudre Valley Bank in Fort Collins,
Colorado, through the issuance of Company common stock to holders of FNB
common stock. The transaction which is expected to be completed during the
second quarter of 1998 will be accounted for using the pooling of interests
method of accounting. FNB had assets of $118 million and deposits of $105
million as of December 31, 1997.
On January 9, 1998, the Company signed a definitive agreement to acquire
Community Bancorp, Inc. ("CBI"), the parent company of Community First
National Bank, Thornton, Colorado, through the issuance of Company common
stock to holders of CBI common stock. The transaction is expected to be
completed during the second quarter of 1998 and will be accounted for using
the pooling of interests method of accounting. CBI had assets of $78 million
and deposits of $72 million as of December 31, 1997.
4. ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
indicate that the carrying amount of an asset is not recoverable. The Company's
adoption of SFAS No. 121 did not have a material impact on the Company's
financial position. During December 1996, the Company recorded a $940,000
writedown in the value of its investment in an unconsolidated subsidiary, which
is being divested to satisfy regulators' competitive issues related to the
merger with Mountain Parks. The amount of impairment is based on the estimated
net proceeds from the sale of the investment, expected to be completed in early
1997.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a new
fair value-based accounting method for stock-based compensation plans. As
permitted by SFAS No. 123, management has elected to measure compensation costs
as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Note 14 includes the required pro forma disclosures reflecting the impact on net
income and earnings per share as if the Company had recorded compensation
expense based on the fair value method described in SFAS 123.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities," addresses whether the transfer of financial
assets should be accounted for as a sale and removed from the balance sheet, or
as a financing recognized as a borrowing. SFAS No. 125 uses a "financial
components" approach to determine the accounting results of the transfers of
financial assets and focuses on control to determine whether assets have been
sold. If the entity has surrendered control over the transferred assets, the
transaction is considered a sale. Control is considered surrendered only if the
seller has no legal right to the assets, even in bankruptcy; the buyer has the
right to pledge or exchange the assets; and the seller does not maintain
effective control over the assets through an agreement to repurchase or redeem
them. SFAS No. 125 was effective on a prospective basis for all transactions
occurring after December 31, 1996. The Company regularly uses participations of
loans to manage its asset/liability mix. The accounting for such transactions is
included in SFAS No. 125. However, the adoption of SFAS No. 125 did not have a
material effect on the Company's operations or financial position.
SFAS No.128 -- Earnings Per Share -- In February 1997, the FASB issued
Statements of Financial Accounting Standard ("SFAS"), No. 128, Earnings Per
Share. Under this Statement, primary and fully diluted earnings per share is
replaced with basic and diluted earnings per share. For basic EPS, the dilutive
effect of stock options is excluded from the calculation. Diluted EPS is
calculated similarly to the previously reported fully diluted earnings per
share. SFAS 128 became effective for the Company's 1997 year-end financial
statements. All prior period earnings per share data presented have been
restated to conform to the provisions of this statement. The Company's adoption
of SFAS 128 did not have a material impact on the Company's reported earnings
per share.
SFAS No. 130 -- Reporting Comprehensive Income -- In June 1997, the FASB
issued Statement 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of financial statements. The Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed as prominently as other financial statements. The Statement requires
the classification of items of other comprehensive income separately from
retained earnings and capital surplus in the equity section of the statement of
financial position. SFAS 130 is effective January 1, 1998, with all prior
periods presented restated to conform to the provisions of this statement.
5. SECURITIES
The following is a summary of available-for-sale securities and held-to-maturity
securities at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
- --------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Treasury ................. $ 146,228 $1,048 $ 150 $ 147,126
United States Government agencies ...... 266,082 963 349 266,696
Mortgage-backed securities ............. 823,712 6,660 429 829,943
Collateralized mortgage obligations .... 107,799 403 99 108,103
State and political securities ......... 67,919 858 100 68,677
Other securities ....................... 78,409 34 111 78,332
--------------------------------------------------------------
Total .................................. $1,490,149 $9,966 $1,238 $1,498,877
--------------------------------------------------------------
--------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
- ----------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------
<S> <S> <C> <C> <C>
United States Government agencies ... $ 228 $ -- $ -- $ 228
Mortgage-backed securities .......... 67,959 453 428 67,984
State and political securities ...... 48,064 1,816 9 49,871
Other securities .................... 64,261 -- 9 64,252
-------------------------------------------
Total ............................... $180,512 $2,269 $446 $182,335
-------------------------------------------
-------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
The following is a summary of available-for-sale securities and held-to-maturity
securities at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
- -----------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Treasury ................... $119,601 $1,014 $ 422 $120,193
United States Government agencies ........ 85,827 214 730 85,311
Mortgage-backed securities ............... 234,782 2,690 639 236,833
Collateralized mortgage obligations ...... 43,320 184 245 43,259
State and political securities ........... 14,913 215 6 15,122
Other securities ......................... 6,178 92 100 6,170
---------------------------------------------
Total .................................... $504,621 $4,409 $2,142 $506,888
---------------------------------------------
---------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
- -------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government agencies ........ $ 879 $ 468 $ 20 $ 1,327
Mortgage-backed securities ............... 86,506 525 1,162 85,869
State and political securities ........... 56,694 1,149 104 57,739
Other securities ......................... 78,269 -- 4 78,265
----------------------------------------------
Total .................................... $222,348 $ 2,142 $1,290 $223,200
----------------------------------------------
----------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
Proceeds from the sale of available-for-sale securities during the years
ended December 31, 1997, 1996 and 1995, were $75,100,000, $29,812,000, and
$50,596,000, respectively. Gross gains of $550,000, $195,000, and $633,000 and
gross losses of $86,000, $103,000, and $567,000 were realized on those sales
during 1997, 1996 and 1995, respectively. The tax effect on the net gains during
1997, 1996 and 1995 was approximately $162,000, $32,000, and $22,000,
respectively. There were no sales of held-to-maturity securities during 1997,
1996 or 1995.
The amortized cost and estimated fair value of debt securities at December
31, 1997, 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.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
AVAILABLE-FOR-SALE (IN THOUSANDS) COST FAIR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less ............................... $ 121,120 $ 121,155
Due after one year through five years ................. 315,822 317,234
Due after five years through ten years ................ 51,058 51,429
Due after ten years ................................... 70,638 71,013
-----------------------
558,638 560,831
Mortgage-backed securities ............................ 823,712 829,943
Collateralized mortgage obligations ................... 107,799 108,103
-----------------------
Total ................................................. $1,490,149 $1,498,877
-----------------------
-----------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
HELD-TO-MATURITY (IN THOUSANDS) COST FAIR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less ............................... $ 3,958 $ 3,981
Due after one year through five years ................. 8,404 8,496
Due after five years through ten years ................ 18,834 19,698
Due after ten years ................................... 81,357 82,176
-----------------------
112,553 114,351
Mortgage-backed securities ............................ 67,959 67,984
-----------------------
Total ................................................. $180,512 $182,335
-----------------------
-----------------------
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, available-for-sale securities included $340,457,000 in
commitments to purchase specific investment securities at a future date.
Available-for-sale and held-to-maturity securities carried at $773,218,000
and $452,478,000 at December 31, 1997 and 1996, respectively, were pledged to
secure borrowings, public and trust deposits and for other purposes required by
law. Securities sold under agreement to repurchase were collateralized by
available-for-sale and held-to-maturity securities with an aggregate carrying
value of $61,749,000 and $38,856,000 at December 31, 1997 and 1996,
respectively.
In October 1995, the FASB approved a one-time opportunity for companies to
reevaluate the classifications of their investment portfolio and transfer
securities from their held-to-maturity account to available-for-sale without
consequences to the classification of securities not transferred. The Company
utilized this opportunity to transfer $187 million of securities, based on
amortized cost from held-to-maturity to available-for-sale. The unrealized
losses on these securities at the time of transfer was $758,000.
6. LOANS
The composition of the loan portfolio at December 31 was as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Real estate $ 1,158,822 $ 871,432
Commercial 708,084 624,456
Consumer and other 499,924 346,139
Agriculture 270,227 222,081
------------------------------
2,637,057 2,064,108
Less allowance for loan losses (36,194) (26,215)
------------------------------
Net Loans $ 2,600,863 $ 2,037,893
------------------------------
------------------------------
- -------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, real estate loans totaling $358,000,000 were pledged to
secure borrowings.
7. ALLOWANCE FOR LOAN LOSSES
ACTIVITY IN THE ALLOWANCE WAS AS FOLLOWS (IN THOUSANDS):
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year ................ $ 26,215 $ 22,712 $ 17,333
Allowance of acquired companies(1) .......... 10,065 784 5,230
Provision charged to operating expense ...... 5,352 6,757 2,711
Loans charged off ........................... (7,857) (4,971) (3,463)
Recoveries of loans charged off ............. 2,419 933 901
--------------------------------
Balance at end of year ...................... $ 36,194 $ 26,215 $ 22,712
--------------------------------
--------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) INCLUDES ONLY ACQUISITIONS OF COMPANIES ACCOUNTED FOR AS PURCHASES.
Nonaccrual loans totaled $12,507,000, $12,796,000, and $3,252,000 at
December 31, 1997, 1996 and 1995, 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, 1997. Interest income of
$364,000 on nonaccrual loans would have been recorded during 1997 if the loans
had been current in accordance with their original terms. During 1997, the
Company recorded interest income of $361,000 related to loans that were on
nonaccrual status as of December 31, 1997.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the nature of its business and the financing needs of its customers, the
Company is involved with a large number of financial instruments, the majority
for which an active market does not exist. Accordingly, the Company has used
various valuation techniques to estimate the fair value of its financial
instruments. These techniques are significantly affected by the assumptions
used, including the discount rate, the estimated timing and amount of cash flows
and the aggregation methods used to value similar instruments. In this regard,
the resulting fair value estimates cannot
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
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.
FEDERAL FUNDS PURCHASED AND SHORT-TERM BORROWED FUNDS
The carrying amount approximates fair value due to the short maturity of the
instruments and floating interest rates which are tied to market conditions.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
Fair values for these items are based on available market quotes. If market
quotes are not available, fair values are based on market quotes of
comparable securities.
INTEREST-BEARING DEPOSITS
The fair value of interest-bearing deposits is estimated using a discounted
cash flow analysis using current market rates of interest-bearing deposits
with similar maturities to discount the future cash flows.
LOANS
The loan portfolio consists of both variable and fixed rate loans. The
carrying amounts of variable rate loans, a majority of which reprice within
the next three months and for which there has been no significant change in
credit risk, are assumed to approximate fair values. The fair values for
fixed rate loans are estimated using discounted cash flow analyses. The
discount rates applied are based on the current interest rates for loans with
similar terms to borrowers of similar credit quality.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and certain money market
deposits is defined by SFAS No. 107 to be equal to the amount payable on
demand at the date of the financial statements. Fair values for fixed rate
certificates of deposits are estimated using a discounted cash flow 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.
The estimated fair values of the Company's financial instruments at
December 31 are shown in the table below (in thousands):
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks ....... $ 222,088 $ 222,088 $ 175,732 $ 175,732
Federal funds sold and
resale agreements ............ 12,690 12,690 3,600 3,600
Interest-bearing deposits ..... 1,287 1,287 3,598 3,605
Available-for-sale securities . 1,498,877 1,498,877 506,888 506,888
Held-to-maturity securities ... 180,512 182,335 222,348 223,200
Loans ......................... 2,637,057 2,632,042 2,064,108 2,054,714
Allowance for loan losses ..... (36,194) (36,194) (26,215) (26,215)
--------------------------------------------------
Net loans ..................... 2,600,863 2,595,848 2,037,893 2,028,499
Financial liabilities:
Deposits:
Noninterest-bearing .......... $ 597,333 $ 597,333 $ 431,078 $ 431,078
Interest-bearing:
Savings and NOW ............ 1,371,546 1,371,546 964,829 964,829
Time accounts over 100,000.. $ 398,291 398,523 233,875 234,248
Other time accounts ........ 1,252,164 1,252,191 907,658 907,723
--------------------------------------------------
Total deposits ................ 3,619,334 3,619,593 2,537,440 2,537,878
Federal funds purchased and
repurchase agreements ........ 43,002 43,002 78,369 78,369
Other short-term borrowings ... 230,571 230,571 169,265 169,265
Long-term debt ................ 116,476 116,924 46,750 48,003
- ------------------------------------------------------------------------------------
</TABLE>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-
SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company is party to financial
instruments with off-balance-sheet risk. These transactions enable customers
to meet their financing needs and enable the Company to manage its interest
rate risk. These financial instruments include commitments to extend credit
and letters of credit. The contract or notional amounts of these financial
instruments at December 31, 1997 and 1996, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit ........................... $ 449,961 $ 389,604
Standby letters of credit .............................. 16,627 14,683
Commercial letters of credit ........................... 1,816 990
- --------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
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 Arizona, Colorado, Iowa, Minnesota, Nebraska, North
Dakota, South Dakota, Wisconsin and Wyoming. 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):
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land .................................................... $ 15,259 $ 10,031
Buildings ............................................... 93,882 59,359
Furniture, fixtures and equipment ....................... 70,264 44,139
Leased property under capital lease obligations ......... 10,403 5,932
---------------------
189,808 119,461
Less accumulated depreciation ........................... 87,988 53,756
---------------------
$101,820 $ 65,705
---------------------
- --------------------------------------------------------------------------------
</TABLE>
11. SHORT-TERM BORROWINGS
As of December 31, 1997, the Company's subsidiary banks had $216,300,000 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 5.05% to 6.90% at December 31, 1997.
The Company's subsidiaries had additional short-term borrowings of $3,104,000
outstanding at December 31, 1997.
The Company has a short-term line of credit bearing interest at the
Federal Funds rate plus 2% that provides for borrowing up to $8,000,000
through December 31, 1997, with a commitment fee of 0.2% on the unused
amount. As of December 31, 1997, 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 $25,000,000 in commercial paper
and has obtained lines of credit to support these borrowings. As of December
31, 1997, there was a $11,167,000 commercial paper balance outstanding with a
blended rate of 5.78%. The terms of the lines of credit include certain
covenants with which the Company must comply. At December 31, 1997, 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):
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Parent Company:
Subordinated notes payable, interest at 7.30%,
payable semi-annually, maturing June 30, 2004,
unsecured......................................................................... $ 60,000 $23,000
Exchangeable subordinated notes payable, interest
at 9.00% payable quarterly, maturing August 15,
2005, unsecured................................................................... 11,500 11,500
Term note payable to bank, interest at bank's base rate (8.50% and 8.25% at
December 31, 1997 and 1996, respectively), payable quarterly, principal
payments of $100,000 due annually through October 1, 1999, unsecured.............. 400 400
Term note payable to bank, interest at Federal Funds rate plus 2% (7.31% at
December 31, 1996), payable quarterly, principal payments equal to 6.25%
of the amortized balance, semi-annually through July 1, 2003...................... -- 4,106
Subsidiaries:
Federal Home Loan Bank advances, interest rates ranging from 5.32% to 8.33%,
payable quarterly, with maturities ranging from June 16, 1999 to March 10,
2010.............................................................................. 41,600 4,829
Term Note payable to bank, interest at 5.19% payable monthly, principal
payments ranging from $35,600 to $54,600, per schedule due
monthly through March 31, 2003.................................................... 2,800 2,850
Other notes payable................................................................. 176 65
-----------------------------
$116,476 $46,750
-----------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The 7.30% subordinated notes payable are not redeemable, in whole or in
part, by the Company. These notes, of which 100% of the balance qualifies as
Tier 2 capital under the Federal Reserve Board guidelines, are
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
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,
1997, the Company was in compliance with all covenants pertaining to the
subordinated notes payable.
In July 1995, the Company issued the exchangeable subordinated notes
("Exchangeable Notes") to retire acquisition related debt, support the
Company's growth strategy and for general corporate purposes. One hundred
percent of the balance of Exchangeable Notes qualify as Tier 2 Capital under
Federal Reserve Board guidelines. On any interest payment date beginning
August 15, 1996, the Company may require the holder to exchange all, but not
part, of the Exchangeable Notes for shares of the Company's cumulative
perpetual preferred stock (the "Exchange Stock"), at the rate of one share of
Exchange Stock for each $25 in principal amount of Exchangeable Notes. The
Exchange Stock would accrue cumulative dividends, payable quarterly, at a
rate equal to the interest rate on the Exchangeable Notes. The Exchangeable
Notes are, and the Exchange Stock would be, redeemable in whole or in part at
any time after August 15, 1998 at the option of the Company at the declining
redemption amounts set forth below plus accrued interest or dividends:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE 12-MONTH PERCENTAGE OF
PERIOD BEGINNING AUGUST 15 PRINCIPAL AMOUNT
- -----------------------------------------------------------------------------
<S> <C>
1998 .............................................................. 103.0%
1999 .............................................................. 101.5%
2000 and thereafter ............................................... 100.0%
- -----------------------------------------------------------------------------
</TABLE>
Maturities of long-term debt outstanding, primarily of the parent company, at
December 31, 1997, were (in thousands):
<TABLE>
<S> <C>
1998 .....................................................$ 453
1999 ..................................................... 20,883
2000 ..................................................... 524
2001 ..................................................... 569
2002 ..................................................... 21,784
Thereafter ............................................... 72,263
----------
$ 116,476
----------
----------
</TABLE>
During March 1997, the Company redeemed its $23 million in aggregate
principal amount of 7.75% Subordinated Notes (the "7.75% Notes"). The 7.75%
Notes were redeemed at par plus accrued interest and resulted in an
extraordinary loss of $265,000, net of taxes, on the early extinguishment of
debt.
13. COMPANY-OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES
On December 10, 1997, the Company issued $60 million of 8.20% Cumulative
Capital Securities, through CFB Capital II, a business trust subsidiary
organized in December 1997. The proceeds of the offering were invested by CFB
Capital II in Junior Subordinated Debentures of the Company. The Company used
the net proceeds in part to capitalize its bank subsidiaries in Colorado and
Arizona, which acquired branches of Bank One, in their respective states. The
debentures will mature not earlier than December 15, 2002, and not later than
December 15, 2027.
On February 5, 1997, the Company issued $60 million of 8.875% Cumulative
Capital Securities, through CFB Capital I, a business trust subsidiary
organized in January 1997. The proceeds of the offering were invested by CFB
Capital I in Junior Subordinated Debentures of the Company. The Company used
a portion of the net proceeds to redeem $23 million in aggregate principal
amount of 7.75% Subordinated Notes. The remainder of the proceeds of the
offering were used for general corporate purposes, including in part, the
purchase of KeyBank Wyoming. The debentures will mature not earlier than
February 1, 2002 and not later than February 1, 2027.
At December 31, 1997, $111 million of the combined $120 million in
Capital Securities qualified as Tier 1 capital under capital guidelines of
the Federal Reserve. The remaining $9 million qualified as Tier 2 capital.
14. SHAREHOLDERS' EQUITY
COMMON STOCK
On December 31, 1997, the Company filed a shelf registration statement with
the Securities and Exchange Commission for the purpose of issuing up to
3,000,000 shares of its common stock. The shares may be offered in
acquisition transactions in exchange for shares of capital stock, partnership
interests or other assets representing an interest, direct or indirect, in
other companies or entities, or in exchange for assets used in or related to
the business of such entities.
On December 15, 1997, the Company completed the issuance of 1,000,000
million shares of common stock. The issuance of these shares occurred at a
selling price of $49.50 per share with an underwriting discount of $1.73 per
share paid by the Company. The Company used the proceeds, in combination with
the $60 million Capital Securities issue to capitalize its bank subsidiaries
in Colorado and Arizona which acquired branches of Bank One.
On October 9, 1997, the Company filed a shelf registration with the
Securities and Exchange Commission for the offering, from time to time, of up
to $150 million in any combination of common stock, preferred stock or debt
securities. Proceeds from the sale of Securities offered under this shelf
registration will be used to finance acquisitions by the Company and for
general corporate purposes.
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,
issuance of common stock under compensation plans, 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.
PREFERRED STOCK
SHAREHOLDERS' RIGHTS PLAN
The Company adopted a shareholders' rights plan in January 1995 that attached
one right to each share of common stock outstanding on January 19, 1995. Each
right entitles the holder to purchase one one-hundredth of a share of a new
series of junior participating preferred stock of the Company, which has an
initial exercise price of $63. The rights become exercisable only upon the
acquisition of 15% or more of the Company's voting stock, or an announcement
of a tender offer or exchange offer to acquire an interest of 15% or more by
a person or group, without the prior consent of the Company. If exercised, or
if the
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
Company is acquired, each right entitles the holder to purchase, at the
exercise price, common stock with a market value equal to two times the
exercise price. The rights, which may be redeemed by the Company in certain
circumstances, expire January 5, 2005.
CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios of total
and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average
assets.
As of December 31, 1997, the Company is considered well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Company must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following table.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
TIER 1 TOTAL RISK- TOTAL RISK-
REGULATORY CAPITAL REQUIREMENTS: (Dollars in thousands) CAPITAL BASED CAPITAL LEVERAGE BASED ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum 4.00% 8.00% 3.00% N/A
Well-Capitalized 6.00% 10.00% 5.00% N/A
- ------------------------------------------------------------------------------------------------------------------------
BANK SUBSIDIARIES:
Community First National Bank, Fergus Falls .............. 9.93% 11.10% 7.75% $ 624,017
Community First National Bank, Fargo ..................... 10.03% 11.28% 7.46% 388,051
Community First State Bank, Vermillion ................... 10.73% 11.90% 7.83% 211,897
Community First State Bank, Decorah ...................... 11.63% 12.89% 7.82% 108,761
Community First State Bank, Alliance ..................... 10.40% 11.65% 8.48% 257,024
Community First State Bank, Spooner ...................... 11.16% 12.32% 8.26% 71,856
Colorado Community First National Bank, Fort Morgan ...... 10.20% 11.39% 7.28% 804,028
Colorado Community First National Bank, Gunnison ......... 11.18% 12.43% 7.20% 59,051
Community First National Bank, Cheyenne .................. 13.75% 14.79% 7.52% 606,471
Community First National Bank, Phoenix ................... 9.37% 10.62% 7.95% 45,712
Community First Bankshares, Inc. ......................... 10.65% 14.24% 7.25% $3,266,648
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
TIER 1 TOTAL RISK- TOTAL RISK-
REGULATORY CAPITAL REQUIREMENTS: (Dollars in thousands) CAPITAL BASED CAPITAL LEVERAGE BASED ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum ..................................................... 4.00% 8.00% 3.00% N/A
Well-Capitalized ............................................ 6.00% 10.00% 5.00% N/A
- ----------------------------------------------------------------------------------------------------------------------------
BANK SUBSIDIARIES:
Community First National Bank, Worthington(1) ............... 9.21% 10.31% 6.87% $ 255,997
Community First National Bank, Little Falls(1) .............. 9.74% 10.96% 7.32% 178,583
Community First National Bank, Fergus Falls ................. 9.22% 10.42% 6.82% 133,913
Community First National Bank, Fargo ........................ 9.76% 10.94% 7.39% 287,776
Community First National Bank, Dickinson(2) ................. 9.21% 10.40% 6.86% 109,775
Community First State Bank, Vermillion ...................... 9.54% 10.72% 6.98% 96,061
Community First State Bank, Redfield(3) ..................... 10.77% 11.87% 7.56% 120,170
Community First State Bank, Decorah ......................... 12.07% 13.32% 7.45% 101,980
Community First State Bank, Alliance ........................ 9.53% 10.73% 7.84% 259,254
Community First State Bank, Spooner ......................... 10.48% 11.56% 7.64% 70,406
Colorado Community First National Bank, Fort Morgan ......... 11.08% 12.27% 7.76% 118,233
Colorado Community First State Bank, Steamboat Springs(4) ... 9.64% 10.81% 7.10% 86,821
Colorado Community First National Bank, Trinidad(4) ......... 20.83% 21.76% 10.45% 36,368
Colorado Community First State Bank of Denver(4) ............ 10.35% 11.33% 7.62% 438,967
Community First Bankshares, Inc. ............................ 8.88% 11.10% 6.62% $2,312,632
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) MERGED INTO COMMUNITY FIRST NATIONAL BANK, FERGUS FALLS IN JANUARY 1997.
(2) MERGED INTO COMMUNITY FIRST NATIONAL BANK, FARGO IN JANUARY 1997.
(3) MERGED INTO COMMUNITY FIRST STATE BANK, VERMILLION IN FEBRUARY 1997.
(4) MERGED INTO COLORADO COMMUNITY FIRST NATIONAL BANK, FORT MORGAN IN
APRIL 1997.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc.
15. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN -- During 1996, the Company approved the 1996 Stock Option
Plan under which an additional 2,000,000 shares of the Company's common stock
were reserved for granting of future stock options. Similar to the 1987 Stock
Option Plan, the Company may grant key employees incentive or nonqualified
options to purchase common stock of the Company at fair market value on the
date of the grant, as determined by the Company. The options vest ratably
over a three-year period and are exercisable over a five-year term starting
one year after the date of grant. Stock options outstanding under the plans
are as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS PRICE PER OPTIONS PRICE PER
OUTSTANDING SHARE OUTSTANDING SHARE
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of Year ................... 563,655 $16.02 499,777 $13.66
Options Granted ................... 227,000 29.25 165,388 21.42
Options Exercised ................. (103,676) 13.74 (75,905) 11.68
Options Forfeited ................. (14,533) 18.21 (25,605) 18.31
---------------------------------------------
End of Year ......................... 672,446 $20.71 563,655 $16.02
---------------------------------------------
---------------------------------------------
Exercisable at end of year .......... 337,771 $16.45 281,463 $14.10
Weighted average fair
value of options granted .......... $6.40 $3.94
- ------------------------------------------------------------------------------------
</TABLE>
The range of exercise prices and the weighted average remaining
contractual life of the options outstanding at December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED WEIGHTED
OUTSTANDING AT AVERAGE AVERAGE
RANGE OF EXERCISE DECEMBER 31 EXERCISE PRICE REMAINING
PRICES PER SHARE 1997 PER SHARE CONTRACTUAL LIFE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
$28.50 to $48.34 ..................... 217,500 $ 29.41 4.1 years
$21.25 to $23.38 ..................... 148,557 21.41 3.1 years
$12.50 to $14.75 ..................... 306,389 14.20 1.3 years
- -----------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, a total of 2,473,084 shares of authorized common
stock was reserved for exercise of options granted under the 1996 and 1987
Stock Option Plans.
As described in Note 4, the Company has elected to measure compensation
costs as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, does not recognize compensation expense. SFAS
No. 123 requires the Company to disclose pro forma information reflecting net
income and earnings per share had the Company elected to record compensation
expense based on the fair market value method described in SFAS 123. The fair
value of the options was estimated at the grant date using a Black-Sholes
option pricing model. Option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from traded options, and because
changes in the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
The following weighted-average assumptions were used in the valuation
model: risk-free interest rates of 6.15 percent and 5.15 percent in 1997 and
1996, respectively; dividend yield of 1.30 percent and 2.50 percent in 1997
and 1996, respectively; stock price volatility factors of .175 and .20 in
1997 and 1996, respectively; and expected life of options of four years in
both 1997 and 1996.
The pro forma disclosures include options granted in 1997 and 1996 and
are not likely to be representative of the pro forma disclosures for future
years. The estimated fair value of the options is amortized to expense over
the options' vesting period.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Pro forma net income ............................ $46,018 $30,662
Pro forma net income (diluted) .................. $46,018 $32,272
Pro forma earnings per share:
Basic ....................................... $ 2.49 $ 1.86
Diluted ..................................... $ 2.41 $ 1.78
- -----------------------------------------------------------------------------
</TABLE>
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 $1,407,000, $859,000 and $444,000 in 1997,
1996 and 1995, respectively.
PROFIT-SHARING PLAN -- The Company offers a contributory profit-sharing and
thrift plan that qualifies under section 401(k) of the Internal Revenue Code.
The plan covers all employees who are 21 years of age with more than one year of
service. The plan provides for an employer-matching contribution of 50% based on
each participant's eligible contribution for each plan year, subject to a
limitation of the lesser of 6% of the participant's annual compensation or the
maximum amount prescribed by the Internal Revenue Code. The Company's
contribution was $1,094,000, $727,000, and $712,000 in 1997, 1996 and 1995,
respectively.
16. RESTRICTIONS ON CASH AND DUE FROM BANKS
Bank subsidiaries are required to maintain average reserve balances with
the Federal Reserve Bank. Balances of $40,539,000 and $12,518,000 at
December 31, 1997 and 1996, respectively, exceeded required amounts.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
17. INCOME TAXES
The components of the provision for income taxes were (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current ........................... $ 22,043 $ 18,455 $ 18,008
Deferred .......................... (2,540) (3,444) (3,546)
-------- -------- --------
19,503 15,011 14,462
State:
Current ........................... 2,606 3,458 3,209
Deferred .......................... (593) (462) (463)
-------- -------- --------
2,013 2,996 2,746
-------- -------- --------
Provision for income taxes ............ $ 21,516 $ 18,007 $ 17,208
-------- -------- --------
-------- -------- --------
- --------------------------------------------------------------------------------
</TABLE>
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>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate (35%) .................. $ 23,578 $ 17,681 $ 16,506
State income tax, net of federal tax benefit . 1,308 1,805 1,812
Minority interest ............................ -- -- 61
Tax-exempt interest .......................... (2,297) (1,736) (2,376)
Amortization of goodwill ..................... 923 822 531
Other ........................................ (1,996) (565) 674
-------- -------- --------
Provision for income taxes ................... $ 21,516 $ 18,007 $ 17,208
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------
</TABLE>
Deferred income tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
reporting purposes. Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1997 and 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves ............................... $ 7,929 $ 8,737
Contingency reserve .............................. 246 748
Deferred compensation ............................ 835 863
Deferred loan fees ............................... 316 316
Other ............................................ 735 566
------- ------
10,061 11,230
Deferred tax liabilities:
Unrealized gains ................................. 3,141 897
Depreciation ..................................... 245 87
Purchase accounting .............................. 349 151
Other ............................................ 13 297
------- -------
3,748 1,432
------- -------
Net deferred tax assets .............................. $ 6,313 $ 9,798
------- -------
------- -------
- --------------------------------------------------------------------------------
</TABLE>
The realization of the Company's deferred tax assets is dependent upon
the Company's ability to generate taxable income in future periods and the
reversal of deferred tax liabilities during the same period. The Company has
evaluated the available evidence supporting the realization of its deferred
tax assets and determined it is more likely than not that the assets will be
realized.
18. COMMITMENTS AND CONTINGENT LIABILITIES
Total rent expense was $5,336,000, $1,318,000, and $1,789,000 in 1997, 1996
and 1995, 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, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS) OPERATING CAPITAL
- --------------------------------------------------------------------
<S> <C> <C>
1998 ......................................... $1,471 $2,043
1999 ......................................... 1,563 1,851
2000 ......................................... 1,652 1,529
2001 ......................................... 1,327 730
2002 ......................................... 3,390 137
------ ------
$9,403 $6,290
Executory costs (taxes) ...................... (234)
------
Net minimum lease payments ................... 6,056
Less:
Amount representing interest ............. (847)
-------
Present value of net minimum lease payments $5,209
-------
-------
- --------------------------------------------------------------------
</TABLE>
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,
1997, the reserve balance was $838,000. All remaining issues subject to the
reserve are expected to be resolved during 1998. It is management's expectation
that resolution of the remaining issues will not exceed the current reserve
balance.
In the normal course of business, there are various outstanding legal
proceedings, claims, commitments and contingent liabilities. In the opinion of
management, the Company and its subsidiaries will not be materially affected by
the outcome of such matters.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
19. COMMUNITY FIRST BANKSHARES, INC.
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
DECEMBER 31 (IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from subsidiary banks ..................... $ 4,944 $ 6,548
Interest-bearing deposits .............................. 505 --
Available-for-sale securities .......................... 63,795 --
Investment in subsidiaries ............................. 452,731 275,100
Furniture and equipment ................................ 6,210 1,657
Receivable from subsidiaries ........................... 10,509 2,336
Other assets ........................................... 15,582 17,389
----------------------
Total assets ........................................... $554,276 $303,030
----------------------
----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings .................................. $ 11,167 $ 14,164
Long-term debt ......................................... 195,611 39,006
Other liabilities ...................................... 8,204 5,289
Shareholders' equity ................................... 339,294 244,571
----------------------
Total liabilities and shareholders' equity ............. $554,276 $303,030
----------------------
----------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries ................ $ 35,727 $29,536 $ 34,453
Service fees from subsidiaries ............. 3,505 2,948 3,147
Interest income ............................ 1,558 106 607
Other ...................................... 641 467 (304)
------------------------------
Total income ................................... 41,431 33,057 37,903
Expense:
Interest expense ........................... 10,479 4,403 3,961
Other expense .............................. 17,135 17,323 11,862
------------------------------
Total expense .................................. 27,614 21,726 15,823
------------------------------
Income before income tax benefit, equity
in undistributed income of subsidiaries
and extraordinary item ..................... 13,817 11,331 22,080
Income tax benefit ............................. 9,348 6,799 4,423
------------------------------
Income before undistributed income of
subsidiaries and extraordinary item ........ 23,165 18,130 26,503
Equity in undistributed income of
subsidiaries ............................... 23,652 14,380 3,450
------------------------------
Income before cumulative effect of
extraordinary item ......................... 46,817 32,510 29,953
Extraordinary item, net of tax ................. (265) -- --
------------------------------
Net Income ..................................... $ 46,552 $32,510 $ 29,953
------------------------------
------------------------------
Net income applicable to common equity ......... $ 46,552 $30,900 $ 28,343
------------------------------
------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................... $ 46,552 $ 32,510 $ 29,953
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in income of subsidiaries ......... (59,322) (43,916) (37,903)
Depreciation ............................. 694 488 474
Increase (decrease) in interest payable .. 1,448 (32) 64
Other, net ............................... 3,274 (7,650) 1,213
--------------------------------------
Net cash used in operating activities ......... (7,354) (18,600) (6,199)
CASH FLOWS FROM INVESTING ACTIVITIES
Dividends received from subsidiaries .......... 35,727 29,536 34,453
Net increase in interest-bearing deposits ..... (505) -- --
Purchases of stock in subsidiaries ............ (149,845) (14,743) (71,581)
Net loans to subsidiaries ..................... (8,145) (1,585) 10,197
Purchases of available-for-sale securities .... (63,795) -- (4,393)
Sales of available-for-sale securities,
net of gains ................................. -- -- 9,543
Net increase in furniture and equipment ....... (5,247) (997) (578)
--------------------------------------
Net cash (used in) provided by investing
activities ................................... (191,810) 12,211 (22,359)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in short-term borrowings ......... (2,997) 4,062 7,145
Proceeds from issuance of long-term debt ...... 236,466 18,162 44,006
Repayment of long-term debt ................... (79,861) (24,058) (27,302)
Net proceeds from issuance of
common stock ................................. 81,456 15,044 11,577
Net proceeds from conversion of
convertible perferred stock .................. (22,988) -- --
Purchase of common stock held in treasury ..... (2,777) (1,535) (56)
Sale of common stock held in treasury ......... 1,098 3,829 896
Retirement of common stock .................... -- (349) --
Preferred stock dividends paid ................ -- (1,610) (1,610)
Common stock dividends paid ................... (12,837) (6,714) (5,279)
--------------------------------------
Net cash provided by financing activities ..... 197,560 6,831 29,376
Net increase in cash and cash equivalents ..... (1,604) 442 818
Cash and cash equivalents at
beginning of year ............................ 6,548 6,106 5,288
--------------------------------------
Cash and cash equivalents at end of year ...... $ 4,944 $ 6,548 $ 6,106
--------------------------------------
--------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Community First Bankshares, Inc.
Certain restrictions exist regarding the extent to which bank subsidiaries
may transfer funds to the Company in the form of dividends, loans or advances.
Federal law prevents the Company from borrowing from bank subsidiaries unless
the loans are secured by specified U.S. obligations. Secured loans to the
Company or any individual affiliate are generally limited in amount to 10% of
the banks' equity. Further, loans to the Company and all affiliates in total are
limited to 20% of the banks' equity. As of December 31, 1997 and 1996,
$44,653,000 and $27,066,000, respectively, of individual subsidiary banks'
capital was available for credit extension to the parent company. At December
31, 1997 and 1996, 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 $45,662,000 and $26,691,000 as of December 31, 1997
and 1996, respectively.
20. 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 $14,814,000 and
$12,700,000 at December 31, 1997 and 1996, respectively. During 1997, 1996 and
1995, $4,729,000, $5,779,000, and $6,115,000 of new loans were made and
repayments totaled $2,615,000, $8,479,000, and $23,878,000, respectively.
21. SUPPLEMENTAL DISCLOSURES TO
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <S> <C> <C>
Noncash transfers of held-to-maturity
securities to available-for-sale securities........ $ 92,738 $22,659 $187,320
Unrealized (loss) gain on
available-for-sale securities...................... 6,461 (993) 11,545
Income taxes paid.................................... 22,784 23,485 20,745
Interest paid........................................ 113,438 94,185 76,154
Commitments to purchase investment
securities......................................... 340,457 -- --
- ------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITOR'S LETTER
The Board of Directors and Shareholders
Community First Bankshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of Community First Bankshares, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the consolidated financial
statements of Mountain Parks Financial Corporation, which statements reflect
total assets constituting 16% of the related consolidated financial statement
totals and net income constituting 24% of the related consolidated financial
statement totals for the year ended December 31, 1995. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Mountain Parks Financial
Corporation, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and, for 1995, the report of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Community First
Bankshares, Inc., and subsidiaries at December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Minneapolis, Minnesota
January 22, 1998
43
<PAGE>
CONSOLIDATED STATEMENT OF CONDITION -- FIVE YEAR SUMMARY
Community First Bankshares, Inc.
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks ........................ $ 222,088 $ 175,732 $ 137,551 $ 96,232 $ 85,468
Federal funds sold and securities purchased
under agreement to resell .................. 12,690 3,600 25,965 8,135 35,685
Interest-bearing deposits ...................... 1,287 3,598 3,213 6,377 10,272
Available-for-sale securities .................. 1,498,877 506,888 486,522 231,364 326,041
Held-to-maturity securities:
U.S. Treasury .............................. -- -- -- 72,519 44,162
U.S. Government agencies ................... 228 879 3,318 44,957 34,654
Mortgage-backed securities ................. 67,959 86,506 106,429 185,753 177,381
Collateralized mortgage obligations ........ -- -- -- 22,811 25,151
State and political securities ............. 48,064 56,694 55,267 43,672 34,990
Other ...................................... 64,261 78,269 65,806 12,163 11,343
-----------------------------------------------------------------------
Total securities ........................ 1,679,389 729,236 717,342 613,239 653,722
Loans .......................................... 2,637,057 2,064,108 1,767,193 1,330,146 1,037,666
Less: allowance for loan losses ............ (36,194) (26,215) (22,712) (17,333) (14,332)
-----------------------------------------------------------------------
Net loans .................................. 2,600,863 2,037,893 1,744,481 1,312,813 1,023,334
Other assets ................................... 339,209 166,339 141,424 93,823 75,313
-----------------------------------------------------------------------
Total assets ............................... $ 4,855,526 $ 3,116,398 $ 2,769,976 $ 2,130,619 $ 1,883,794
-----------------------------------------------------------------------
-----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing ........................ $ 597,333 $ 431,078 $ 398,314 $ 315,667 $ 273,382
Interest-bearing ........................... 3,022,001 2,106,362 1,961,402 1,478,898 1,354,607
-----------------------------------------------------------------------
Total deposits .......................... 3,619,334 2,537,440 2,359,716 1,794,565 1,627,989
Short-term borrowings .......................... 273,573 247,634 90,881 113,469 62,194
Long-term debt ................................. 116,476 46,750 81,288 38,092 48,354
Other liabilities .............................. 386,849 40,003 34,087 26,792 20,186
-----------------------------------------------------------------------
Total liabilities .......................... 4,396,232 2,871,827 2,565,972 1,972,918 1,758,723
Company-obligated mandatorily redeemable
preferred securities of CFB Capital I and II 120,000 -- -- -- --
Shareholders' equity ........................... 339,294 244,571 204,004 157,701 125,071
-----------------------------------------------------------------------
Total liabilities and shareholders' equity . $ 4,855,526 $ 3,116,398 $ 2,769,976 $ 2,130,619 $ 1,883,794
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
CONSOLIDATED STATEMENT OF INCOME -- FIVE YEAR SUMMARY
Community First Bankshares, Inc.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans ...................................... $ 218,588 $ 183,530 $ 150,948 $ 104,012 $ 81,931
Investment securities ...................... 59,103 44,936 40,210 38,032 37,479
Other ...................................... 906 960 1,710 1,193 1,736
-----------------------------------------------------------------------
Total interest income ................... 278,597 229,426 192,868 143,237 121,146
INTEREST EXPENSE:
Deposits ................................... 102,632 81,655 71,780 46,560 42,873
Short-term and other borrowings ............ 8,734 9,247 6,184 4,029 1,994
Long-term debt ............................. 5,887 4,332 4,927 2,879 2,404
-----------------------------------------------------------------------
Total interest expense .................. 117,253 95,234 82,891 53,468 47,271
-----------------------------------------------------------------------
Net interest income ............................ 161,344 134,192 109,977 89,769 73,875
Provision for loan losses ...................... 5,352 6,757 2,711 1,839 2,149
-----------------------------------------------------------------------
Net interest income after provision for loan losses 155,992 127,435 107,266 87,930 71,726
NONINTEREST INCOME:
Service charges on deposit accounts ........ 17,023 12,328 10,116 8,467 7,571
Insurance commissions ...................... 5,375 5,213 4,283 3,777 3,442
Fees from fiduciary activities ............. 3,805 3,332 2,718 2,157 2,103
Net gains on sales of securities ........... 463 93 52 99 1,910
Other ...................................... 9,898 6,404 5,319 4,492 3,132
-----------------------------------------------------------------------
Total noninterest income ................ 36,564 27,370 22,488 18,992 18,158
NONINTEREST EXPENSE:
Salaries and employee benefits ............. 64,868 54,870 42,796 35,083 29,931
Net occupancy .............................. 19,139 15,085 10,563 9,353 8,413
FDIC insurance ............................. 357 669 2,532 3,720 3,193
Professional service fees .................. 4,088 3,881 4,011 3,457 3,776
Amortization of intangibles ................ 5,519 3,362 2,551 1,876 1,340
Data processing and loan servicing fees .... 1,290 1,506 1,607 856 722
Company-obligated mandatorily redeemable
preferred securities of CFB Capital
I & II .................................. 5,108 -- -- -- --
Other ...................................... 24,821 24,915 18,533 15,896 13,479
-----------------------------------------------------------------------
Total noninterest expense ............... 125,190 104,288 82,593 70,241 60,854
-----------------------------------------------------------------------
Income from continuing operations before income
taxes, cumulative effect of accounting
change, and extraordinary item .......... 67,366 50,517 47,161 36,681 29,030
Provision for income taxes ..................... 21,516 18,007 17,208 13,952 10,775
-----------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting change,
and extraordinary item ................... 45,850 32,510 29,953 22,729 18,255
Cumulative effect of accounting change ......... -- -- -- -- 359
Discontinued operations ........................ 967 -- -- -- --
Extraordinary item ............................. (265) -- -- -- --
-----------------------------------------------------------------------
Net income ..................................... 46,552 32,510 29,953 22,729 18,614
Preferred dividend ............................. -- 1,610 1,610 1,091 --
-----------------------------------------------------------------------
Net income applicable to common equity ......... $ 46,552 $ 30,900 $ 28,343 $ 21,638 $ 18,614
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Earnings per common and common equivalent share:
Basic ...................................... $ 2.52 $ 1.87 $ 1.85 $ 1.50 $ 1.35
Diluted .................................... $ 2.44 $ 1.79 $ 1.75 $ 1.43 $ 1.30
Average common shares outstanding:
Basic ...................................... 18,474,749 16,509,289 15,361,370 14,378,903 13,838,334
Diluted .................................... 19,069,078 18,142,377 17,167,650 16,127,250 14,389,256
-----------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
QUARTERLY REPORTS OF OPERATIONS
Community First Bankshares, Inc.
(UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996 (in thousands, except per share and
per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Interest income .................................................... $ 58,309 $ 60,172 $ 77,409 $ 82,707
Interest expense ................................................... 23,914 24,514 33,498 35,327
--------------------------------------------------------
Net interest income ................................................ 34,395 35,658 43,911 47,380
Provision for loan losses .......................................... 1,230 2,486 1,710 (74)
--------------------------------------------------------
Net interest income after provision for loan losses ................ 33,165 33,172 42,201 47,454
Net gains on sales of securities ................................... (3) 64 62 340
Noninterest income ................................................. 7,041 10,259 9,646 9,155
Noninterest expense ................................................ 24,949 27,831 34,448 37,962
--------------------------------------------------------
Income before income taxes and extraordinary item .................. 15,254 15,664 17,461 18,987
Provision for income taxes ......................................... 5,138 5,140 5,391 5,847
--------------------------------------------------------
Income from continuing operations before extraordinary item ........ 10,116 10,524 12,070 13,140
--------------------------------------------------------
Discontinued Operations:
Income from operations of discontinued operations
(Less applicable income taxes of $424) ......................... 681 611 229 (554)
--------------------------------------------------------
Income before extraordinary item ................................... 10,797 11,135 12,299 12,586
Extraordinary item:
Loss on extinguishment of debt, net of taxes ................... (265) -- -- --
--------------------------------------------------------
Net Income ......................................................... 10,532 11,135 12,299 12,586
--------------------------------------------------------
Net income applicable to common equity ............................. 10,532 11,135 12,299 12,586
--------------------------------------------------------
Earnings per common and common equivalent share:
Basic income from continuing operations before extraordinary items . $ 0.58 $ 0.57 $ 0.65 $ 0.69
Discontinued operations ............................................ 0.04 0.03 0.01 (0.03)
Extraordinary item ................................................. (0.02) 0.00 0.00 0.00
--------------------------------------------------------
Basic net income ................................................... $ 0.60 $ 0.60 $ 0.66 $ 0.66
--------------------------------------------------------
Diluted income from continuing operations before extraordinary items 0.53 0.55 0.64 0.68
Discontinued operations ............................................ 0.04 0.03 0.01 (0.03)
Extra ordinary item ................................................ (0.01) 0.00 0.00 0.00
--------------------------------------------------------
Diluted net income ................................................. $ 0.56 $ 0.58 $ 0.65 $ 0.65
Average common and common equivalent shares:
Basic .......................................................... 17,493,078 18,670,606 18,642,672 19,073,429
Diluted ........................................................ 18,863,908 18,945,576 18,992,606 19,470,488
--------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Interest income ................................... $ 53,664 $ 55,537 $ 58,711 $ 61,514
Interest expense .................................. 22,651 22,871 24,002 25,710
---------------------------------------------------------
Net interest income ............................... 31,013 32,666 34,709 35,804
Provision for loan losses ......................... 915 1,416 2,241 2,185
---------------------------------------------------------
Net interest income after provision for loan losses 30,098 31,250 32,468 33,619
Net gains on sales of securities .................. 3 (1) (8) 100
Noninterest income ................................ 5,938 6,701 6,499 8,138
Noninterest expense ............................... 22,868 23,813 25,810 31,797
---------------------------------------------------------
Income before income taxes ........................ 13,171 14,137 13,149 10,060
Provision for income taxes ........................ 4,590 4,849 4,556 4,012
---------------------------------------------------------
Net income ........................................ 8,581 9,288 8,593 6,048
Preferred stock dividends ......................... 402 403 403 402
---------------------------------------------------------
Net income applicable to common equity ............ $ 8,179 $ 8,885 $ 8,190 $ 5,646
---------------------------------------------------------
Earnings per common and common equivalent shares:
Basic ......................................... $ .50 $ .55 $ .50 $ .33
Diluted ....................................... $ .48 $ .52 $ .47 $ .32
Average common shares:
Basic ......................................... 16,197,840 16,212,028 16,428,464 16,981,123
Diluted ....................................... 17,876,890 17,913,355 18,138,629 18,638,838
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
CORPORATE INFORMATION
MARKET PRICE RANGE OF COMMON SHARES
THE COMPANY'S COMMON STOCK TRADES ON THE NASDAQ STOCK MARKET UNDER THE SYMBOL
CFBX. THE FOLLOWING TABLE SETS FORTH THE HIGH AND LOW SALES PRICES FOR THE
COMPANY'S COMMON STOCK DURING THE PERIODS INDICATED:
<TABLE>
<CAPTION>
1997 1996
High Low High Low
- ------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter... 32 1/4 27 3/8 22 3/4 20
Second Quarter.. 38 3/8 29 24 1/4 22 1/4
Third Quarter... 49 1/8 36 3/4 23 7/8 22 1/2
Fourth Quarter.. 55 1/8 45 1/2 28 3/4 23 1/8
- ------------------------------------------------
</TABLE>
SHAREHOLDERS
AS OF FEBRUARY 11, 1998, THE COMPANY HAD 1,314 SHAREHOLDERS OF RECORD AND AN
ESTIMATED 7,000 ADDITIONAL BENEFICIAL HOLDERS WHOSE STOCK WAS HELD IN STREET
NAME BY BROKERAGE HOUSES.
DIVIDEND POLICY
THE BOARD OF DIRECTORS HAS ADOPTED A POLICY OF DECLARING REGULAR QUARTERLY
DIVIDENDS. A DIVIDEND OF 14 CENTS PER SHARE WAS PAID FOR EACH OF THE FIRST
THREE QUARTERS IN 1996 AND INCREASED TO 16 CENTS PER SHARE FOR THE FOURTH
QUARTER OF 1996. A DIVIDEND OF 16 CENTS PER SHARE WAS PAID FOR THE FIRST TWO
QUARTERS IN 1997 AND INCREASED TO 19 CENTS PER SHARE FOR EACH OF THE THIRD AND
FOURTH QUARTERS OF 1997.
56
<PAGE>
EXHIBIT 21.1
COMMUNITY FIRST BANKSHARES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
OWNERSHIP
SUBSIDIARY BANK: LOCATION: PERCENTAGE
<S> <C> <C>
Community First National Bank Fergus Falls, MN 100.000%
Community First National Bank Fargo, ND 100.000%
Community First State Bank Vermillion, SD 100.000%
Community First National Bank Decorah, IA 100.000%
Community First National Bank Alliance, NE 100.000%
Community First National Bank Spooner, WI 100.000%
Colorado Community First National Bank Ft. Morgan, CO 100.000%
Community First National Bank Cheyenne, WY 100.000%
Community First National Bank Phoenix, AZ 100.000%
Colorado Community First National Bank Gunnison, CO 100.000%
NONBANK SUBSIDIARIES:
Community First Financial, Inc. Fargo, ND 100.000%
Community First Service Corporation Fargo, ND 100.000%
Community Insurance, Inc. Fargo, ND 100.000%
Community First Properties, Inc. Fargo, ND 100.000%
CFB Capital I Fargo, ND 100.000%
CFB Capital II Fargo, ND 100.000%
SUBSIDIARIES OF SUBSIDIARIES (100% OWNED):
Community First Insurance Agencies, Inc. Fargo, ND (Subsidiary of Community First
State Bank [Vermillion, SD])
CFIN, Inc. Las Vegas, NV (Subsidiary of Community First
National Bank [Spooner])
Equity Lending, Inc. Edina, MN (Subsidiary of Colorado
Community First National Bank
[Fort Morgan, CO])
<PAGE>
<CAPTION>
SUBSIDIARIES OF SUBSIDIARIES: (CONTINUED) LOCATION: PERCENTAGE
<S> <C> <C>
Mountain Parks Financial Services, Inc. Denver, CO (Subsidiary of Colorado
Community First National Bank
[Fort Morgan, CO])
Community First Minnesota Holdings, Inc. Georgetown, British (Subsidiary of
Cayman Islands Community First National Bank
[Fergus Falls, MN])
CFIRE, Inc. Fargo, ND (Subsidiary of Community
First Minnesota Holdings,
Inc.)
Community First Colorado Holdings, Inc. Georgetown, British (Subsidiary of Colorado
Cayman Islands Community First National Bank
[Ft. Morgan, CO])
Colorado CFIRE, Inc. Fargo, ND (Subsidiary of Community
First Colorado Holdings,
Inc.)
</TABLE>
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Community First Bankshares, Inc. of our report dated January 22,
1998, included in the 1997 Annual Report to Shareholders of Community First
Bankshares, Inc.
We also consent to the incorporation by reference in the following
Registration Statements and related Prospectuses of Community First
Bankshares, Inc. of our report dated January 22, 1998, with respect to the
consolidated financial statements of Community First Bankshares, Inc.
incorporated by reference in this Annual Report (Form 10-K) for the year
ended December 31, 1997.
<TABLE>
<CAPTION>
Registration
Form Statement No. Purpose
- ------------------------------------------------------------------------------
<S> <C> <C>
S-8 33-44921 1987 Stock Option Plan
S-8 33-48160 401(k) Retirement Plan
S-3 333-37527 Omnibus Shelf Registration
S-4 333-40071 Acquisition Shelf Registration
</TABLE>
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT IN FORM 10-K FOR
THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 222,088
<INT-BEARING-DEPOSITS> 1,287
<FED-FUNDS-SOLD> 12,690
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,498,877
<INVESTMENTS-CARRYING> 180,512
<INVESTMENTS-MARKET> 182,335
<LOANS> 2,637,057
<ALLOWANCE> 36,194
<TOTAL-ASSETS> 4,855,526
<DEPOSITS> 3,619,334
<SHORT-TERM> 230,571
<LIABILITIES-OTHER> 429,851
<LONG-TERM> 116,476
120,000
0
<COMMON> 204
<OTHER-SE> 339,090
<TOTAL-LIABILITIES-AND-EQUITY> 4,855,526
<INTEREST-LOAN> 218,588
<INTEREST-INVEST> 59,103
<INTEREST-OTHER> 906
<INTEREST-TOTAL> 278,597
<INTEREST-DEPOSIT> 102,632
<INTEREST-EXPENSE> 117,253
<INTEREST-INCOME-NET> 161,344
<LOAN-LOSSES> 5,352
<SECURITIES-GAINS> 463
<EXPENSE-OTHER> 125,190
<INCOME-PRETAX> 67,366
<INCOME-PRE-EXTRAORDINARY> 45,850
<EXTRAORDINARY> 702
<CHANGES> 0
<NET-INCOME> 46,552
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 2.44
<YIELD-ACTUAL> 0
<LOANS-NON> 12,507
<LOANS-PAST> 3,616
<LOANS-TROUBLED> 140
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 26,215
<CHARGE-OFFS> 7,857
<RECOVERIES> 2,419
<ALLOWANCE-CLOSE> 36,194
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
