<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 0-19368
--------
COMMUNITY FIRST BANKSHARES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 46-0391436
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
520 Main Avenue
Fargo, ND 58124
- ------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(701) 298-5600
----------------------------------
(Registrant's telephone number, including area code)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES X NO
--- ---
At May 10, 1999, 47,114,179 shares of Common Stock were outstanding.
1
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Financial Statements and Notes............................ 3 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 10 - 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk........................ 16
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings................................................................ 17
Item 2. Changes in Securities............................................................ 17
Item 3. Defaults Upon Senior Securities.................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders.............................. 17
Item 5. Other Information................................................................ 17
Item 6. Exhibits and Reports on Form 8-K................................................. 17
SIGNATURES ................................................................................. 18
</TABLE>
2
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks.............................................. $ 198,860 $ 250,963
Federal funds sold and securities purchased under
agreements to resell............................................. 195 100
Interest-bearing deposits............................................ 10,457 5,067
Available-for-sale securities........................................ 2,001,197 1,980,530
Held-to-maturity securities (fair value: 3/31/99 -
$70,556, 12/31/98 - $69,906)..................................... 70,556 69,906
Loans................................................................ 3,327,424 3,386,142
Less: Allowance for loan losses................................. (51,422) (50,173)
- -----------------------------------------------------------------------------------------------------------
Net loans................................................... 3,276,002 3,335,969
Bank premises and equipment, net..................................... 123,697 123,254
Accrued interest receivable.......................................... 48,213 51,429
Intangible assets.................................................... 130,625 133,231
Other assets......................................................... 57,011 52,523
- ----------------------------------------------------------------------------------------------------------
Total assets................................................ $ 5,916,813 $ 6,002,972
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing............................................. $ 802,645 $ 547,703
Interest-bearing................................................ 3,969,436 4,336,969
- ----------------------------------------------------------------------------------------------------------
Total deposits.............................................. 4,772,081 4,884,672
Federal funds purchased and securities sold under
agreements to repurchase......................................... 172,913 143,057
Other short-term borrowings.......................................... 293,990 292,669
Long-term debt....................................................... 94,443 93,472
Capital lease obligations............................................ 4,732 5,238
Accrued interest payable............................................. 28,203 26,650
Other liabilities.................................................... 24,658 31,968
- ----------------------------------------------------------------------------------------------------------
Total liabilities........................................... 5,391,020 5,477,726
Company-obligated mandatorily redeemable
preferred securities of CFB Capital I & II...................... 120,000 120,000
Shareholders' equity:
Common stock..................................................... 477 477
Capital surplus.................................................. 172,043 172,043
Retained earnings................................................ 244,186 244,835
Less cost of common stock in treasury -
March 31, 1999 - 555,178 shares
December 31, 1998 - 564,588 shares......................... (10,913) (12,109)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity........................................... 405,793 405,246
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity........................... $ 5,916,813 $ 6,002,972
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-----------------------------------
(Dollars in thousands, except per share data) (restated)
(Unaudited) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans............................................................ $ 78,323 $ 75,426
Investment securities............................................ 31,748 27,470
Interest-bearing deposits........................................ 29 161
Federal funds sold and resale agreements......................... 56 1,085
- ----------------------------------------------------------------------------------------------------------
Total interest income....................................... 110,156 104,142
Interest expense:
Deposits......................................................... 36,925 39,710
Short-term and other borrowings.................................. 5,560 2,186
Long-term debt................................................... 1,676 2,114
- ----------------------------------------------------------------------------------------------------------
Total interest expense...................................... 44,161 44,010
- ----------------------------------------------------------------------------------------------------------
Net interest income.................................................. 65,995 60,132
Provision for loan losses............................................ 4,731 1,752
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses.................. 61,264 58,380
- ----------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts.............................. 7,641 6,711
Fees from fiduciary activities................................... 1,295 1,224
Insurance commissions............................................ 1,972 1,479
Net gain on sales of available-for-sale securities............... 530 481
Other............................................................ 4,240 4,297
- ----------------------------------------------------------------------------------------------------------
Total noninterest income:................................... 15,678 14,192
- ----------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits................................... 25,117 24,607
Net occupancy.................................................... 7,486 8,323
FDIC insurance................................................... 191 176
Legal and accounting............................................. 601 587
Other professional service....................................... 1,351 460
Data processing.................................................. 804 422
Acquisitions..................................................... 0 52
Company-obligated mandatorily redeemable preferred
securities of CFB Capital I & II............................ 2,561 2,534
Amortization of intangibles...................................... 2,621 2,365
Other............................................................ 9,416 10,002
- ----------------------------------------------------------------------------------------------------------
Total noninterest expense................................... 50,148 49,528
Income from continuing operations before income
taxes ........................................................... 26,794 23,044
Provision for income taxes........................................... 9,183 6,277
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations ................................... 17,611 16,767
Discontinued operations:
Income from operations of discontinued operations
(less applicable income taxes).............................. 0 (68)
- -----------------------------------------------------------------------------------------------------------
Net income........................................................... $ 17,611 $ 16,699
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
(Dollars in thousands, except per share data) (restated)
(Unaudited) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Earnings per common and common equivalent share:
Basic income from continuing operations......................... $0.37 $0.35
Discontinued operations......................................... 0.00 0.00
- -------------------------------------------------------------------------------------------------------------
Basic net income................................................ $0.37 $0.35
- -------------------------------------------------------------------------------------------------------------
Diluted income from continuing operations ...................... $0.37 $0.35
Discontinued operations......................................... 0.00 0.00
- -------------------------------------------------------------------------------------------------------------
Diluted net income.............................................. $0.37 $0.35
- -------------------------------------------------------------------------------------------------------------
Average common shares outstanding:
Basic....................................................... 47,140,043 47,304,562
Diluted..................................................... 47,498,661 48,041,294
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Dividend declared per common share.............................. $0.14 $0.11
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------------
(Dollars in thousands, except per share data) (restated)
(Unaudited) 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income...................................................... $17,611 $16,699
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during period......... (8,010) (889)
Less: Reclassified adjustment for gains
included in net income.............................. (318) (292)
- -----------------------------------------------------------------------------------------------------------
Other comprehensive income...................................... (8,328) (1,181)
- -----------------------------------------------------------------------------------------------------------
Comprehensive income............................................ $9,283 $15,518
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------------
(In thousands) (restated)
(Unaudited) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 17,611 $ 16,699
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses................................... 4,731 1,752
Depreciation................................................ 3,661 3,572
Amortization of intangibles................................. 2,621 2,365
Net of amortization of premiums & discounts
on securities.......................................... 149 (1,070)
Decrease (increase) in interest receivable....................... 3,216 (1,966)
Increase in interest payable................................ 1,553 2,762
Other - net................................................. (7,446) (44,580)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities.................. 26,096 (20,466)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits........................ (5,390) (1,470)
Purchases of available-for-sale securities....................... (302,915) (2,320,678)
Maturities of available-for-sale securities...................... 232,969 1,750,935
Sales of securities, net of gains................................ 36,247 34,287
Purchases of held-to-maturity securities......................... (817) (6,081)
Maturities of held-to-maturity securities........................ 167 9,400
Net decrease (increase) in loans................................. 55,236 (99,032)
Net increase in bank premises and equipment...................... (4,104) (10,395)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities.................. 11,393 (643,034)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW
accounts and savings accounts.................................... (92,295) 399,719
Net (decrease) increase in time accounts............................. (20,296) 254,578
Net increase (decrease) in short-term & other borrowings............. 31,177 (3,878)
Net increase in long-term debt....................................... 971 2,646
Purchase of common stock held in treasury............................ (3,999) (3,039)
Sale of common stock held in treasury................................ 1,549 544
Common stock dividends paid.......................................... (6,604) (4,471)
- -----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities.................. (89,497) 646,099
- ----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents............................ (52,008) (17,401)
Cash and cash equivalents at beginning of period..................... 251,063 331,131
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period........................... $ 199,055 $ 313,730
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
COMMUNITY FIRST BANKSHARES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements,
which include the accounts of Community First Bankshares, Inc. (the "Company"),
its wholly-owned data processing, credit origination, insurance agency and
properties subsidiaries, and its eleven wholly-owned subsidiary banks, have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for fair presentation have been included.
EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income
applicable to common equity by the weighted average number of shares of common
stock outstanding.
Diluted earnings per common share is calculated by dividing net income
applicable to common equity by the weighted average number of shares of common
stock outstanding. The weighted average number of shares of common stock
outstanding is increased by the number of shares of common stock that would be
issued assuming the exercise of stock options and warrants during each period.
Such adjustments to the weighted average number of shares of common stock
outstanding are made only when such adjustments dilute earnings per share.
NOTE B - SUBSEQUENT EVENTS
On May 10, 1999, the Company signed a definitive agreement to acquire Valley
National Corporation ("Valley National"), the holding company for Valle de Oro
Bank, N.A., El Cajon, California through the issuance of Company common stock to
holders of Valley National common stock. The transaction, which is subject to
due diligence and regulatory and stockholder approval, is expected to be
completed during the fourth quarter of 1999 and is expected to be accounted for
using the pooling of interests method of accounting. Valley National had assets
of approximately $241 million and deposits of approximately $220 million as of
March 31, 1999.
On April 8, 1999, the Company signed an agreement to complete the purchase
and assumption of approximately $20 million in assets and liabilities of the
Greeley, Colorado branch of Zions Bancorporation. The transaction is subject to
regulatory approval and is expected to be completed during the third quarter.
The Greeley office will be merged into the Company's existing Colorado affiliate
bank.
In a related transaction, on April 8, 1999, the Company signed an agreement
to complete the sale of its Nephi, Utah office to Zions Bancorporation. The
Nephi office had approximately $15 million in assets at March 31, 1999. The
transaction is subject to regulatory approval and is expected to be completed
during the third quarter.
7
<PAGE>
NOTE C - ACCOUNTING CHANGES
REPORTING COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities which prior to adoption was reported separately in
shareholders' equity to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement 130.
NOTE D - INVESTMENTS
The following is a summary of available-for-sale and held-to-maturity
securities at March 31, 1999
<TABLE>
<CAPTION>
Available-for-Sale Securities
- ---------------------------------------------------------------------------------------------------------------
(in thousands): Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Treasury............................... $ 118,305 $ 1,372 $ 52 $ 119,625
United States Government agencies.................... 378,500 1,056 2,941 376,615
Mortgage-backed securities........................... 1,206,015 9,657 2,446 1,213,226
Collateralized mortgage obligations.................. 48,013 324 20 48,317
State and Political Securities ...................... 135,778 2,763 555 137,986
Other securities..................................... 106,481 1,075 2,128 105,428
- ---------------------------------------------------------------------------------------------------------------
$ 1,993,092 $ 16,247 $ 8,142 $ 2,001,197
======================================================
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
- ---------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other securities..................................... 70,556 - - 70,556
- ---------------------------------------------------------------------------------------------------------------
$ 70,556 $ - $ - $ 70,556
------------------------------------------------------
------------------------------------------------------
</TABLE>
Proceeds from the sale of available-for-sale securities during the three
months ended March 31, 1999 and 1998, were $36,247,000 and $34,287,000,
respectively. Gross gains of $530,000 and $482,000 were realized on sales during
1999 and 1998, respectively. Gross losses of $1,000 were realized on these sales
during 1998. Gains and losses on disposition of these securities were computed
using the specific identification method.
NOTE E - LOANS
The composition of the loan portfolio at March 31, 1999, was as follows (in
thousands):
<TABLE>
<S> <C>
Real estate................................... $ 1,214,589
Real estate construction...................... 345,176
Commercial.................................... 889,792
Agricultural.................................. 269,139
Consumer and other............................ 608,728
-------------
3,327,424
Less allowance for loan losses................ 51,422
-------------
Net loans.................................. $ 3,276,002
-------------
-------------
</TABLE>
8
<PAGE>
NOTE F - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company is party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers and to manage its interest rate risk. These financial instruments
include commitments to extend credit and letters of credit. The contract or
notional amounts of these financial instruments at March 31, 1999, were as
follows (in thousands):
<TABLE>
<S> <C>
Commitments to extend credit............................... $ 558,170
Letters of credit.......................................... 25,293
</TABLE>
NOTE G - SUBORDINATED NOTES
Long-term debt at March 31, 1999, included $60 million of 7.30%
Subordinated Notes issued in June 1997. These notes are due June 30, 2004, with
interest payable semi-annually. At March 31, 1999, the entire $60 million
qualified as Tier 2 capital.
NOTE H - INCOME TAXES
The reconciliation between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate was as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------
<S> <C>
35% of pretax income....................................... $ 9,378
State income tax, net of federal tax benefit............... 523
Tax-exempt interest........................................ (1,348)
Amortization of goodwill................................... 223
Other...................................................... 407
-----------
Provision for income taxes................................. $ 9,183
</TABLE>
NOTE I - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended March 31 (in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noncash transfers of held-to-maturity securities
to available-for-sale securities........................... $ - $113,526
Unrealized loss on available-for-sale securities................ 12,884 1,333
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION
The following is a discussion of the Company's financial condition as of
March 31, 1999 and December 31, 1998, and its results of operations for the
three month periods ended March 31, 1999 and 1998. Each of the pooling of
interests transactions described in the table below is reflected in the
Company's results of operations for all periods. The purchase transaction
described below is reflected in the Company's statement of 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.
POOLING OF INTERESTS TRANSACTIONS. In the following transactions during the
periods presented, the Company accounted for the acquisition using the pooling
of interests method.
POOLING OF INTERESTS TRANSACTIONS
<TABLE>
<CAPTION>
Total Assets
Location and/or Number of at Date of
Date of Name of Main Office Locations at Acquisition
Acquisition of Acquired Entity Date of Acquisition (in millions)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
August 1998 Salt Lake City, Utah 2 $ 99
July 1998 Las Cruces, New Mexico 3 159
May 1998 FNB, Inc., Colorado 2 120
April 1998 Longmont, Colorado 4 138
April 1998 Thornton, Colorado 4 78
</TABLE>
With respect to the acquisitions listed above, the Company's results of
operations and financial condition have been restated for all historical
periods:
On August 7, 1998, the Company issued approximately 1,526,000 shares of
common stock to acquire Guardian Bancorp ("Guardian"), a one-bank holding
company headquartered in Salt Lake City, Utah. At acquisition, Guardian had
approximately $99 million in assets at two offices in Utah.
On July 1, 1998, the Company issued approximately 1,932,000 shares of common
stock to acquire Western Bancshares of Las Cruces, Inc. ("Western"), a one-bank
holding company headquartered in Las Cruces, New Mexico. At acquisition, Western
had approximately $159 million in assets at three offices in New Mexico.
On May 7, 1998, the Company issued approximately 1,135,000 shares of common
stock to acquire FNB Inc. ("FNB"), a two-bank holding company with banks in
Greeley and Fort Collins, Colorado. At acquisition, FNB had approximately $120
million in assets.
On April 30, 1998, the Company issued approximately 1,432,000 shares of
common stock to acquire Pioneer Bank of Longmont ("Pioneer"). At acquisition,
Pioneer had approximately $138 million in assets at four offices in Colorado.
On April 3, 1998, the Company issued approximately 853,000 shares of common
stock to acquire Community Bancorp, Inc. ("CBI"), a one-bank holding company
headquartered in Thornton, Colorado. At acquisition, CBI had approximately $78
million in assets at one bank in Colorado.
10
<PAGE>
PURCHASE TRANSACTIONS. The following transaction during the periods
presented was accounted for as a purchase of certain assets and assumption
of certain liabilities.
PURCHASE TRANSACTION
<TABLE>
<CAPTION>
Total Assets
Location and/or Number of at Date of
Date of Name of Main Office Locations at Acquisition
Acquisition of Acquired Entity Date of Acquisition (in millions)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
January 1998 Banc One, Phoenix, Arizona 37 $ 730
</TABLE>
The purchase and assumption listed above involved the assets and
liabilities of 37 offices of Banc One Corporation located in Arizona, Colorado,
and Utah. The transaction 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 2,000,000 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.
OVERVIEW
For the three months ended March 31, 1999, net income was $17.6 million, an
increase of $912,000, or 5.5%, from the $16.7 million earned during the 1998
period. The Company's basic earnings per common share for the first quarter of
1999 were $0.37, compared to $0.35 in 1998. Diluted earnings per common share
for the first quarter of 1999 were $0.37.
Return on average assets was 1.20% for the first quarter of 1999, compared
with 1.24% for the 1998 period. Return on average common shareholders' equity
for the 1999 and 1998 periods was 17.74%. Principal factors contributing to
these changes included incremental net noninterest expenses associated with the
acquisition and integration of entities acquired during 1998.
SALE OF SUB-PRIME LENDING BUSINESS
In December 1996, the Company acquired two sub-prime lending affiliates,
Mountain Parks Financial Services, Inc. ("MPFS") and Equity Lending, Inc.
("ELI"), through its merger with Mountain Parks Financial Corporation. The
Company subsequently decided to sell MPFS and ELI and accounted for these
entities as discontinued operations during 1997 and the first two quarters of
1998.
During the first two quarters of 1998, the Company recognized a charge of
$1.7 million, which reflected the expected loss on disposition of the
subsidiaries, and realized a $2.2 million operating loss, consisting of $707,000
attributed to quarterly operations, including a $68,000 loss during the first
quarter and $1.4 million associated with one-time operating expenses related to
preparing the subsidiaries for sale.
As of June 30, 1998, in anticipation of the disposition of certain
operating assets, the Company changed the status of MPFS and ELI from
discontinued operations and reflected the assets expected to be retained as
loans. In July 1998, the Company sold the operating assets, excluding loans
retained of MPFS and ELI in cash transactions. The Company retained
approximately $50 million in sub-prime mortgage loans originated by ELI,
approximately $50 million in automobile installment contracts originated by MPFS
and servicing rights on an additional $100 million in ELI loans sold to other
parties. In late 1998, the Company sold a portion of the loans retained from
MPFS and ELI. The Company recorded another charge of $10 million in the fourth
quarter in connection with further expected losses upon liquidation of these
assets, including direct losses, increased reserves, termination fees on certain
servicing contracts and severance costs for loan servicing personnel. At March
31, 1999, the Company had approximately $20 million in performing sub-prime
mortgages and $33 million in automobile installment contracts. During April
1999, the Company sold $8.5 million of the remaining sub-prime mortgages and $22
million of the remaining automobile installment contracts. The Company expects
to sell the remaining assets in the second quarter of 1999, and the Company
anticipates that after the sale, it will not pursue further sub-prime lending
activities.
11
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1999, was $66.0
million, an increase of $5.9 million, or 9.8%, from the net interest income of
$60.1 million earned during the 1998 period. The increase was principally due to
the increased asset base associated with the acquisition completed during 1998.
The net interest margin of 5.07% for the period ended March 31, 1999 was down
slightly from 5.08% for the 1998 period.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1999,
was $4.7 million, an increase of $2.9 million, or 161.1%, from the $1.8 million
provision during the 1998 period. This increase reflects the Company's objective
of maintaining adequate reserve levels in recognition of significant loan growth
in the Company's subsidiaries, as well as providing for the credit risk
associated with the Company's sub-prime loan portfolios.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1999, was $15.7
million, an increase of $1.5 million, or 10.6%, from the 1998 level of $14.2
million. The increase included an increase of $930,000 in deposit service
charges and an increase of $493,000 in insurance commissions.
NONINTEREST EXPENSE
Noninterest expense for the three months ended March 31, 1999, was $50.1
million, an increase of $620,000, or 1.2%, from the level of $49.5 million
during the 1998 period. The nominal increase is due in part to the Company's
cost reduction initiatives implemented during the fourth quarter of 1998. As a
result, only small increases occurred in salaries and benefits, occupancy and
other expenses. Other professional services increased $891,000 from $460,000 in
the period ended March 31, 1998 to $1,351,000 in the current period.
Amortization of intangibles increased $256,000 from $2.4 million in the period
ended March 31, 1998, to $2.6 million in the current period, due principally to
the 1998 Banc One acquisition.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended March 31, 1999,
was $9.2 million, an increase of $2.9 million, or 46.0%, from the 1998 level of
$6.3 million, due primarily to the increase in pre-tax income resulting from the
acquisition completed in 1998.
YEAR 2000 ISSUE
The Company is evaluating the potential impact of what is commonly referred
to as the "Year 2000" issue. This issue addresses the potential inability of
certain information systems to properly recognize and process dates containing
the year 2000 and beyond. If not corrected, these systems could fail or create
erroneous results. The Company has established a dedicated Year 2000 Team to
focus on all significant operational areas throughout the Company. This team has
worked with management to commence the following steps: (i) implementing a Year
2000 Assessment and Testing Plan for all items that may be affected by the Year
2000 date change; (ii) working with loan customers to help them understand the
impact of the Year 2000 on their business; (iii) communicating with third
parties that interact with the Company to ensure they are addressing the Year
2000 issue; (iv) communicating with hardware and software suppliers to ensure
Year 2000 compliance among their products; and (v) contingency and disaster
recovery planning to ensure Year 2000 problem resolution. The Company has
identified and tested the applications it believes are mission critical, and the
initial test results indicated that these systems are Year 2000 compliant. The
Company completed testing and established compliance with respect to its
applications, subject to equipment upgrades during 1999, ongoing communications
with third parties, and compliance of any entities acquired in 1999.
12
<PAGE>
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. Another pervasive
banking risk associated with the Year 2000 issue is the risk of banking
customers withdrawing and retaining large amounts of cash during late 1999,
thus reducing the Company's deposits and needed working capital. Because of
these uncertainties, there can be no assurance that the Year 2000 issue will
not have a material financial impact in any future period.
The Company incurred operating costs of $400,000 during 1998, which
included $100,000 in labor costs associated with dedicated staff and $200,000 of
labor costs related to other staff time devoted to Year 2000 compliance and
$100,000 in costs related to the write off of non-compliant equipment. The
Company also incurred $1.0 million in capital expenditures for equipment
upgrades related to the compliance effort. During the first quarter of 1999, the
Company incurred approximately $150,000 in operating costs and an additional
$700,000 in capital expenditures. During the remainder of 1999, the Company
expects to incur an additional $250,000 in operating costs, which represents 3%
of the Company's information technology operating budget and an additional
$300,000 in capital expenditures, which represents 10% of the Company's
information technology capital expenditure budget for 1999. The costs incurred
in 1998 were funded from operating income. Costs incurred in 1999 have been
funded from operating income as well. The Company has not delayed any
information technology projects as a result of their Year 2000 compliance
effort.
The Company has identified contingency plans for all mission critical
applications and the affiliate bank environment. The verification and validation
of these plans are expected to be completed during the first six months of 1999.
The Company's Year 2000 compliance effort has been reviewed on five occasions by
regulatory authorities during 1998, with additional reviews expected in 1999.
FINANCIAL CONDITION
LOANS
Total loans were $3.3 billion at March 31, 1999 and $3.4 billion at
December 31, 1998.
The following table presents the Company's balance of each major category
of loans:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
- --------------------------------------------------------------------------------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan category:
Real estate...................... $ 1,214,589 36.50% $ 1,225,255 36.19%
Real estate construction......... 345,176 10.38% 358,317 10.58%
Commercial....................... 889,792 26.74% 904,063 26.70%
Consumer and other............... 608,728 18.29% 603,468 17.82%
Agricultural..................... 269,139 8.09% 295,039 8.71%
- -------------------------------------------------------------------------------------------------------
Total loans...................... 3,327,424 100.00% 3,386,142 100.00%
-------- --------
-------- --------
Less allowance for loan losses........ 51,422 50,173
----------- -----------
Total ............................. $ 3,276,002 $ 3,335,969
----------- -----------
----------- -----------
</TABLE>
13
<PAGE>
NONPERFORMING ASSETS
At March 31, 1999, nonperforming assets were $31.3 million, an increase of
$5 million, or 19.0%, from the $26.3 million level at December 31, 1998. The
increase was principally due to the level of nonaccrual loans in the Company's
sub-prime loan portfolios. At March 31, 1999, nonperforming loans as a percent
of total loans was .81%, up from the December 31, 1998 level of .67%. OREO was
$4.4 million at March 31, 1999, an increase of $734,000 from $3.7 million at
December 31, 1998.
Nonperforming assets of the Company are summarized in the following table:
<TABLE>
<CAPTION>
Loans MARCH 31,1999 DECEMBER 31, 1998
<S> <C> <C>
Nonaccrual loans................... $ 26,800 $ 22,517
Restructured loans................. 143 162
- ---------------------------------------------------------------------------------------------------------------
Nonperforming loans................ 26,943 22,679
Other real estate owned..................... 4,394 3,660
- ---------------------------------------------------------------------------------------------------------------
Nonperforming assets........................ $ 31,337 $ 26,339
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due but still accruing $ 1,574 $ 3,088
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Nonperforming loans as a percentage of total loans .81% .67%
Nonperforming assets as a percentage of total assets .53% .44%
Nonperforming assets as a percentage of loans and OREO .94% .78%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
At March 31, 1999, the allowance for loan losses was $51.4 million, an
increase of $1.2 million from the December 31, 1998 balance of $50.2 million.
Net charge-offs during the 1999 period were $1.7 million more than those
incurred during the three months ended March 31, 1998.
At March 31, 1999, the allowance for loan losses as a percentage of total
loans was 1.55%, an increase from the March 31, 1998, level of 1.29%. During the
three months ended March 31, 1999, net charge-offs increased to $3.5 million.
These charge-offs related to the Company's continued periodic review of the
existing loan portfolios and an increase in charge-offs related to the remaining
loan portfolios of the Company's sub-prime lending operations.
The following table sets forth the Company's allowance for loans losses:
<TABLE>
<CAPTION>
MARCH 31,
(DOLLARS IN THOUSANDS) 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period....................... $ 50,173 $ 40,045
Charge-offs:
Real estate................................. 1,229 223
Real estate construction.................... - 1
Commercial.................................. 764 783
Consumer and other.......................... 2,999 1,578
Agricultural................................ 187 141
- -----------------------------------------------------------------------------------------------------
Total charge-offs.................... 5,179 2,726
- -----------------------------------------------------------------------------------------------------
Recoveries:
Real estate................................. 721 11
Real estate construction.................... - -
Commercial.................................. 125 311
Consumer and other.......................... 790 467
Agricultural................................ 61 137
Total recoveries....................... 1,697 926
Net charge-offs...................................... 3,482 1,800
Provision charged to operations...................... 4,731 1,752
- -----------------------------------------------------------------------------------------------------
Balance at end of period............................. $ 51,422 $ 39,997
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Allowance as a percentage of total loans............. 1.55% 1.29%
Annualized net charge-offs to average loans outstanding 0.42% 0.24%
</TABLE>
14
<PAGE>
INVESTMENTS
The investment portfolio, including available-for-sale securities and
held-to-maturity securities, was $2.1 billion at March 31, 1999 and December 31,
1998. At March 31, 1999, the investment portfolio represented 35.0% of total
assets, compared with 34.2% at December 31, 1998. In addition to investment
securities, the Company had investments in interest-bearing deposits of $10
million at March 31, 1999, a $5 million increase from the $5 million at December
31, 1998.
DEPOSITS
Total deposits were $4.8 billion at March 31, 1999, a decrease of $113
million or 2.3% from $4.9 billion at December 31, 1998. Noninterest-bearing
deposits at March 31, 1999, were $803 million, an increase of $255 million, or
46.5%, from $548 million at December 31, 1998. The Company's core deposits as a
percent of total deposits were 86.7% and 87.6% as of March 31, 1999, and
December 31, 1998, respectively. Interest-bearing deposits were $4.0 billion at
March 31, 1999, a decrease of $368 million, or 8.5% from the $4.3 billion at
December 31, 1998.
BORROWINGS
Short-term borrowings of the Company were $294 million as of March 31,
1999, and $293 million as of December 31, 1998.
Long-term debt of the Company was $94 million as of March 31, 1999, an
increase of $1 million, or 1.1%, from the $93 million as of December 31, 1998.
CAPITAL MANAGEMENT
Shareholders' equity increased $1 million to $406 million at March 31,
1999, from $405 million at December 31, 1998. At March 31, 1999, the Company's
Tier 1 capital, total risk-based capital and leverage ratios were 9.74%, 12.47%,
and 6.68%, respectively, compared to minimum required levels of 4%, 8% and 3%,
respectively (subject to change and the discretion of regulatory authorities to
impose higher standards in individual cases). At March 31, 1999, the Company had
risk-weighted assets of $4.1 billion.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in market risk exposures that affect
the quantitative and qualitative disclosures presented as of December 31, 1998.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
None.
Item 2. Changes in Securities:
None.
Item 3. Defaults upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 27.1 Financial Data Schedule
Exhibit 99.1 Reconciliation of Amounts Previously Reported
(b) Reports on Form 8-K:
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY FIRST BANKSHARES, INC.
Date: May 13, 1999
/s/ Mark A. Anderson
Mark A. Anderson
Vice Chairman, Chief Financial Officer, Chief
Information Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from unaudited
financial statements contained in the company's quarterly report in Form 10-Q
for quarter ended March 31, 1999, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 198,860
<INT-BEARING-DEPOSITS> 10,457
<FED-FUNDS-SOLD> 195
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,001,197
<INVESTMENTS-CARRYING> 70,556
<INVESTMENTS-MARKET> 70,556
<LOANS> 3,327,424
<ALLOWANCE> 51,422
<TOTAL-ASSETS> 5,916,813
<DEPOSITS> 4,772,081
<SHORT-TERM> 293,990
<LIABILITIES-OTHER> 230,506
<LONG-TERM> 94,443
120,000
0
<COMMON> 477
<OTHER-SE> 405,316
<TOTAL-LIABILITIES-AND-EQUITY> 5,916,813
<INTEREST-LOAN> 78,323
<INTEREST-INVEST> 31,748
<INTEREST-OTHER> 85
<INTEREST-TOTAL> 110,156
<INTEREST-DEPOSIT> 36,925
<INTEREST-EXPENSE> 44,161
<INTEREST-INCOME-NET> 65,995
<LOAN-LOSSES> 4,731
<SECURITIES-GAINS> 530
<EXPENSE-OTHER> 50,148
<INCOME-PRETAX> 26,794
<INCOME-PRE-EXTRAORDINARY> 17,611
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,611
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 0
<LOANS-NON> 26,800
<LOANS-PAST> 1,574
<LOANS-TROUBLED> 143
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 50,173
<CHARGE-OFFS> 5,179
<RECOVERIES> 1,697
<ALLOWANCE-CLOSE> 51,422
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
Reconciliation of Amounts Previously Reported
<TABLE>
<CAPTION>
First
(Amounts in thousands, except per share data) Quarter
-------
<S> <C>
AS PREVIOUSLY REPORTED DURING 1998:
Net income 13,785
Earnings per common and common
equivalent shares
Basic: 0.34
Diluted: 0.33
EFFECT OF POOLING OF INTERESTS TRANSACTIONS:
Net income 2,914
Earnings per common and common
equivalent shares
Basic: 0.01
Diluted: 0.02
AS RESTATED FOR 1998:
Net income 16,699
Earnings per common and common
equivalent shares
Basic: 0.35
Diluted: 0.35
</TABLE>
