-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P0+w24pqhQrR2/UfwsKzkoQZ7s+ZYbNg8QsHTBWlsI9rN3yFKoKHqyip2lD9z0jZ 3z5eRyNCh6XwmogZf+p1rg== 0000912057-97-010470.txt : 19970328 0000912057-97-010470.hdr.sgml : 19970328 ACCESSION NUMBER: 0000912057-97-010470 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY FIRST BANKSHARES INC CENTRAL INDEX KEY: 0000857593 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 460391436 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19368 FILM NUMBER: 97565235 BUSINESS ADDRESS: STREET 1: 520 MAIN AVENUE CITY: FARGO STATE: ND ZIP: 58124-0001 BUSINESS PHONE: 7012985600 MAIL ADDRESS: STREET 1: 520 MAIN AVENUE CITY: FARGO STATE: ND ZIP: 58124-0001 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from to -------------- -------------- COMMISSION FILE NO. 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 incorporation or organization) Identification No.) 520 MAIN AVENUE FARGO, ND 58124-0001 ------------------------------------------------------- (Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (701) 298-5600 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE 7% CUMULATIVE CONVERTIBLE PREFERRED STOCK DEPOSITARY SHARES REPRESENTING 7% CUMULATIVE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK PURCHASE RIGHTS 8-7/8% CUMULATIVE CAPITAL SECURITIES, $25 LIQUIDATION AMOUNT*
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 -------- -------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. As of March 14, 1997, assuming as market value the price of $31.125 per share, the average between the high and low sale prices on the Nasdaq National Market, the aggregate market value of shares held by nonaffiliates was approximately $456 million. As of March 14, 1997, the Company had outstanding 17,183,660 shares of Common Stock, $.01 par value, net of treasury shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1996 Annual Report to Shareholders and the Proxy Statement for the Company's Annual Meeting of Shareholders to be held May 6, 1997, are incorporated by reference into Parts II and III, respectively, of this Form 10-K, to the extent described in such Parts. * The 8-7/8% Cumulative Capital Securities (the "Capital Securities") were issued by CFB Capital I ("CFB Capital"), a wholly owned Delaware business trust subsidiary of the Company. The Company has also fully and unconditionally guaranteed all of CFB Capital's obligations under the Capital Securities. TABLE OF CONTENTS PAGE NO. PART I Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . 4 Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . 14 Item 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . 15 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . 15 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . 15 Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . 15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . 15 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . 15 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . 16 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . . . . . . . . 16 Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . 16 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . 16 Item 13. CERTAIN ELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . 16 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K. . . . . . . . . . . . . . 16 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 22 3 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Community First Bankshares, Inc. (the "Company"), is a multi-bank holding company that as of December 31, 1996 operated banks and bank branches (the "Banks") in 79 communities in Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin. Total assets of the Company were $3.1 billion as of December 31, 1996. On February 18, 1997, the Company signed a purchase agreement with KeyCorp to acquire its Wyoming subsidiary bank, KeyBank National Association, Cheyenne, Wyoming ("KeyBank"), for a purchase price of $135 million. As of December 31, 1996, KeyBank had total assets of $1.2 billion and banking offices in 24 communities in Wyoming. Regulatory approval of the purchase and consummation of the transaction will result in the recognition of goodwill by the Company of approximately $60 million. The Banks are community banks that provide a full range of commercial and consumer banking services primarily to individuals and businesses in small and medium-sized communities and the surrounding market areas. The Company encourages local autonomy by local Bank presidents, while providing to the Banks the benefits of holding company affiliation. The Company maintains a subsidiary bank phantom stock program, pursuant to which presidents of the subsidiary Banks participate in the equity appreciation of their respective local Banks. The Company believes this program is important to provide these individuals with a direct incentive to improve the performance of their Banks. In 1986, officers of the Company formed three separate bank holding companies to acquire 21 banks and bank branches from First Bank System, Inc. ("FBS") in Minnesota, North Dakota and South Dakota. In 1987, the three holding companies purchased these original banks from FBS and its affiliates. After the adoption of the necessary interstate banking laws in these three states, the three holding companies were merged into a single bank holding company in transactions in 1989 and 1991. Since its formation, the Company has acquired 23 community banks, purchased 4 bank or thrift branches and acquired 28 insurance agencies currently operated in communities served by the Company's Banks. COMMUNITY BANKING STRATEGY The Company's strategy is to operate and continue to acquire banks with approximately $20 million to $150 million in assets in each of the Company's selected communities, which communities generally have populations between 3,000 and 50,000 and are generally located in the key target acquisition states of Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming, and additionally in the adjacent states of Idaho, Illinois, Missouri, New Mexico, Oklahoma and Utah (this sixteen state area is collectively referred to as the "Acquisition Area"). Such communities are believed to provide the Company with a stable, relatively low-cost deposit base. The Company provides the Banks with the advantages of affiliation with a multi-bank holding company, such as data processing services, credit policy formulation and review, purchases of assets, investment management and specialized staff support. The Company grants substantial autonomy to managers of the Banks with respect to day-to-day operations, customer service decisions and marketing. The Banks are encouraged to participate in community activities, support local charities and community development, and otherwise enhance their images in their communities. 4 THE BANKS The Banks provide a full range of commercial and consumer banking services primarily to individuals and businesses in small and medium-sized communities and the surrounding market areas. The Banks draw most of their deposits from and make most of their loans within their respective market areas. The Banks owned by the Company as of December 31, 1996, were located in Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin. COMMUNITIES SERVED The Banks, as of December 31, 1996, were located in communities with populations ranging from approximately 200 to 20,000, except for Fargo, which has a population of approximately 77,000, and Englewood, Colorado, a suburb of Denver. Each of the Banks serves a market area with greater population because, in many cases, there are few or no other financial institutions within a reasonable distance from the community in which the Bank is located. The economies of the Banks' communities, especially those in Nebraska, North Dakota and South Dakota, depend primarily on farming, farm service and agricultural supply businesses. Agriculture in these communities is affected by many factors beyond the control of the Banks, including weather, governmental policies, fluctuating commodity prices, demand and production and natural disasters. As with other small, nonmetropolitan communities in the Upper Midwest, many of the communities in which the Banks presently operate have experienced and are expected to experience no growth or a decline in population. The Company has operated profitably in these communities. However, if reductions in population or adverse economic trends in specific communities result in decreased profitability in the Banks or offices located in those communities, the Company may consider selling such Banks or offices or reducing the level of services provided in such communities. ACQUISITION STRATEGY The Company intends to continue its growth by making acquisitions of community banks and other financial institutions in selected communities in the Acquisition Area. The Company believes it is well-positioned to acquire and profitably operate community banks because of its experience in operating community banks, its ability to provide centralized management to those banks and its access to capital. The Company believes many owners of community banks are seeking to sell their banks for a variety of reasons, including lack of shareholder liquidity, management succession problems, the difficulty of compliance with current multiple-layered bank regulations and increasing competition from non-bank organizations. The Company believes there are over 2,000 community banks that are possible acquisition candidates in the Acquisition Area. The Company competes with individuals and institutions, including major regional bank holding companies, for suitable acquisition candidates within the Acquisition Area. Acquisition competitors of the Company in the Acquisition Area range from regional bank holding companies to individual bank owners who own or control banks in the Acquisition Area. The process of industry consolidation is likely to accelerate as a result of the adoption of the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"). Effective September 29, 1995, the new law eased remaining state barriers to interstate acquisitions. IBBEA provides for multi-state branch systems beginning June 1, 1997, subject to special "opt-in" and "opt-out" provisions. Most states have now adopted implementing legislation. The effect of the new legislation is likely to both facilitate the Company's acquisitions and to increase the number of potential acquirers of banks in the Acquisition Area. The Company has established a due diligence review process to evaluate acquisition targets and has established acquisition parameters for target acquisitions relating to market factors, financial performance and 5 certain nonfinancial factors. Market factors considered by the Company include the size and long-term viability of the community and market area served by the target bank, the dominance of the acquisition target (which should be the largest or second largest financial institution in the market) and the proximity of other existing Banks owned by the Company. In exploring markets in regions not currently served by the Company, management looks for similarities between the new market areas and the Company's existing market areas in terms of culture and economic bases. Financial analyses performed by the Company in evaluating acquisition prospects include review of historical performance, comparison to peers and the Company's Banks in terms of key operating performance ratios (including earnings, staffing and loan quality) and target ratios. The Company determines the price it is willing to pay for an institution based on, among other factors, the anticipated ten-year average return on invested equity capital. Nonfinancial considerations in evaluating an acquisition prospect include the quality of the management team's skill and the demand on management resources to integrate the target institution. Finally, each target acquisition must undergo an extensive review of loan asset quality, operating procedures and deposit structure before the Company commits to a purchase. The Company's level of future acquisitions will depend, in part, on its ability to attract and retain management level employees capable of performing efficient review of credit quality standards of proposed acquisition candidates. Acquisition opportunities presented to the Company that have not met the requirements described above have not been pursued. Because of limited growth opportunities in many of the existing markets served by the Company, management believes future growth in the business earnings of the Company will largely depend on consummation of acquisitions consistent with the Company's acquisition strategy. Successful completion of acquisitions by the Company depends upon such factors as the availability of suitable acquisition candidates, necessary regulatory approvals and necessary approvals of holders of the Company's and other providers of credit, compliance with applicable capital requirements and, in the case of expansion into new states, the availability of additional management resources required to operate banks in widely dispersed geographical areas. PENDING ACQUISITIONS The Company routinely solicits and reviews acquisition opportunities and, at any given time, may have bids outstanding or may be involved in negotiations with the owners of financial institutions or other parties relative to a particular financial institution, its branches or its deposit accounts. On February 18, 1997, the Company signed a purchase agreement with KeyCorp to acquire KeyBank National Association, Cheyenne, Wyoming ("KeyBank") for a purchase price of $135 million. As of December 31, 1996, KeyBank had total assets of $1.2 billion and banking offices in 24 communities in Wyoming. The transaction, which will be accounted for as a purchase, will result in the recognition of goodwill of approximately $60 million. The purchase price is expected to be funded through a combination of the proceeds from the Company's January 1997 issue of $60 million 8-7/8% Cumulative Capital Securities, portions of bank lines of credit, net income received prior to closing and the proceeds of any possible further sales of subordinated debt or equity securities prior to the closing of the transaction. The transaction is subject to regulatory approval and is anticipated to close during the third quarter of 1997. RECENT ACQUISITIONS In 1996, the Company completed the acquisitions described below, each of which was accounted for as a pooling of interests. 6 FINANCIAL BANCORP, INC. On October 1, 1996, the Company acquired Financial Bancorp, Inc., Trinidad, Colorado ("Financial Bancorp"), the holding company of Trinidad National Bank, Trinidad Colorado (the "Trinidad Bank"). At September 30, 1996, Financial Bancorp had total assets of approximately $69.5 million and total stockholders' equity of approximately $9.6 million. Upon completion of the merger, the Company issued 538,803 shares of common stock to the former holders of Financial Bancorp common stock. The market value of the Company's common stock issued in the merger was approximately $12.7 million, based on the closing price of the Company's common stock on the Nasdaq National Market on September 30, 1996. The Trinidad Bank is a community bank located in southeastern Colorado that serves a wide range of commercial, agricultural and consumer banking needs within its market. MOUNTAIN PARKS FINANCIAL CORP. On December 18, 1996, the Company acquired Mountain Parks Financial Corp. ("Mountain Parks"), a bank holding company that operated a state chartered bank with full service commercial banking facilities in 17 Colorado communities. At September 30, 1996, Mountain Parks had total assets of approximately $581.8 million and total stockholders' equity of approximately $57.1 million. Upon completion of the merger, the Company issued approximately 5.2 million shares of common stock to the former holders of Mountain Parks common stock. The market value of the Company's common stock issued in the merger was approximately $142.2 million, based on the closing price of Company common stock on the Nasdaq National Market on December 18, 1996. As part of the acquisition of Mountain Parks, the Company also acquired (i) an 85% interest in Equity Lending, Inc., a specialty consumer mortgage company involved in originating non-conforming residential mortgages in Arizona, Colorado, Minnesota and Wisconsin, and (ii) Mountain Parks Financial Services, Inc., a consumer finance company located in Denver, Colorado that focuses on the purchase, origination and servicing of consumer installment contracts, primarily sub-prime auto finance contracts. On January 3, 1997, the Company acquired the remaining 15% interest in Equity Lending, Inc. ADMINISTRATION OF BANKS The Company provides policy and management direction and specialized staff support in general areas while relying on Bank managers for day-to-day operations, customer service decisions and community relations. The Company is responsible for policy-related functions, such as supervisory credit review, audits, personnel policies and internal examination activities. Resource allocations for administrative support by the Company are balanced to provide adequate support services for the Banks' operations, while carefully controlling service costs charged to the Banks. The major areas of administration are as follows: CREDIT. The Company's lending activities are guided by the general loan policy established by the Board of Directors. The Senior Credit Committee of the Company has established loan approval limits for each region of the Company and each subsidiary Bank. Amounts in excess of the individual Bank lending authority are presented to the Regional Credit Officers. Loans above $1,500,000 per nonclassified borrower and $250,000 per classified borrower are presented to the Senior Credit Committee for approval. The Company's credit policy establishes guidelines for approval of all credits, including local loans and purchased loans and loan participations. The credits of the Banks are subject to internal review by Bank officers every 12 months. The loan portfolios of the Banks are subject to examination by the Company's credit examination staff every 12 to 24 months, the frequency of which is based on a variety of factors, including the credit quality of the institution. The credit examination staff is also responsible for credit review with respect to the assets of banks to be acquired by the Company. 7 FINANCE. The Board of Directors of the Company has established policies in the areas of asset/liability management, investments, capital expenditures, accounting procedures and capital and dividend management. Policies are implemented and monitored for compliance by the Chief Financial Officer and the Asset/Liability Committee of the Company. OPERATIONS. Community First Service Corporation ("CFSC"), a subsidiary of the Company, provides data processing and operations support services to the Banks by contract. CFSC's system is designed to provide for all Bank and customer data processing needs at the lowest possible cost and can be expanded to accommodate future growth and additional service applications. The Company believes CFSC has sufficient capacity to provide services to the banks the Company has agreed to acquire. In addition to its own office facilities in Fargo, North Dakota, CFSC also uses Mountain Park's data processing facility in Golden, Colorado. Additional expenditures for equipment, consistent with the increased data processing volumes, would likely be necessary if additional significant acquisitions occur during 1997. OTHER SERVICES. The Company provides other services for the benefit of the Banks, such as outside professional services, central human resources services, benefits administration, marketing guidance and centralized purchasing of supplies. INSURANCE AGENCIES The Company currently owns and operates insurance agencies located in 30 communities served by the Banks through its subsidiaries, Community Insurance, Inc. ("CII"), and Community First Insurance Agencies, Inc. ("CFIA"). These agencies are primarily engaged in the sale of property and casualty insurance and make some sales of other types of insurance, such as life, accident and crop hail insurance. The Company had commission revenue of $4.2 million in 1996. OTHER ACTIVITIES The Company has steadily consolidated Banks located in each state into single legal charters with multiple locations. As of December 31, 1996, the Company had 14 separately chartered subsidiary Banks. That number was subsequently reduced, on February 14, 1997, to 10 Banks, and on April 1, 1997, the Company expects to have 7 subsidiary Banks. The subsidiary Banks of the Company in six locations maintain trust departments, but their services are more broadly available and the Company may expand its trust activities in the future. Trust services are made available to customers in several locations through local trust officers or by appointment with members of the trust department. Most of the Banks also sell annuities. Federal bank regulation permits bank holding companies to engage in other limited activities, such as the distribution of certain types of securities, and future changes in such regulation may further expand the types of activities in which the Company may engage. Although the Company intends to maintain its focus on the banking business in its targeted market areas, the Company will consider other permitted business activities as opportunities arise. COMPETITION Commercial banking is highly competitive. In the conduct of certain aspects of their business, the Banks compete with other commercial banks, savings and loan institutions, issuers of fixed income investments, finance corporations, credit unions and money market funds, among other types of institutions. The Banks compete with these institutions in such areas as obtaining new deposits, offering new types of services and setting loan rates and interest rates on various types of deposits, as well as other aspects of the banking business. Management believes community residents and businesses prefer to deal with local banks and the Banks have generally been 8 able to compete successfully in their respective communities because of the Company's emphasis on local ownership and the autonomy of Bank management in community relations. At the same time, the Company provides the Banks with the advantages of centralized sophisticated administration and the opportunity to make larger loans and diversify their lending activity through Bank group participations. Further, because most of the Banks have a significant market share in the communities they serve, the Company believes the Banks can, to a degree, influence deposit and loan pricing in their markets and are subject to less competition based on deposit and loan pricing than would be the case in larger metropolitan markets with more competitors. However, the Banks have experienced increased price competition from credit unions in certain market areas in recent periods. Future changes in government regulation of banking, particularly any future state legislation permitting interstate branching or legislation in certain states to permit statewide branching, may increase competition by both out-of-state and in-state banking organizations and by other financial institutions. See "Supervision and Regulation," below. The Banks compete with other financial institutions, including government lending agencies, for high quality loans in the Banks' market areas and for purchases of loan assets and investment assets. While management believes the Banks will continue to compete successfully in their communities, there is no assurance that future competition will not adversely affect the Banks' earnings. EMPLOYEES The Company had 1,680 employees at December 31, 1996, including 1,280 full-time employees and 400 part-time employees. Of these individuals, 78 were employed at the holding company level, 1,368 (including 1,038 full-time employees) were employed at the Bank level, 158 were employed by CFSC and 76 were employed by CII and CFIA. SUPERVISION AND REGULATION GENERAL. In addition to a variety of generally applicable state and federal laws governing businesses and employers, the Company and the Banks are extensively regulated by federal and state laws applicable only to financial institutions. Virtually all aspects of the Company's operations are subject to specific requirements or restrictions and general regulatory oversight from laws regulating consumer finance transactions, such as Truth In Lending Act, Home Mortgage Disclosure Act and Equal Credit Opportunity Act, to laws regulating collections and confidentiality, such as Fair Debt Collections Practices Act, Fair Credit Reporting Act and Right to Financial Privacy Act. With few exceptions, state and federal banking laws have as their principal objective either the maintenance of the safety and soundness of the Federal Deposit Insurance System or the protection of consumers or classes of consumers, rather than the specific protection of security holders of the Company. With the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the FDIC Improvement Act of 1991 ("FDICIA") and the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"), Congress enacted comprehensive legislation affecting the commercial banking and thrift industries. FIRREA, among other things, abolished the Federal Savings and Loan Insurance Corporation and established two new insurance funds under the jurisdiction of the FDIC: the Bank Insurance Fund ("BIF"), which insures most commercial banks, including the Banks, and the Savings Association Insurance Fund, which insures most thrift institutions. In addition to effecting far-reaching restructuring of the financial industry, FIRREA provided a phased-in increase in the rate of annual insurance assessments paid by insured depository institutions. FDICIA increased funding for the BIF and expanded regulation of depository institutions and their affiliates, including parent holding companies. FDICIA further provided authority for special assessments against insured deposits and for the development of a system of assessing deposit insurance premiums based upon the institutions's risk. 9 IBBEA generally liberalized multi-state expansion. Effective September 29, 1995, IBBEA significantly eased restrictions on interstate acquisition of banks by bank holding companies. Beginning June 1, 1997, banks located in different states may merge and operate the resulting institution as a single charter with interstate branches. However, the legislation includes special "opt-out" and "opt-in" provisions that individuals may adopt prior to the effective date of interstate branching. IBBEA does NOT affect the branching laws within a state, and imposes concentration limits limiting the resulting organization's market share to 30% of state deposits and 10% of total United States deposits. Congress continues to consider wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Company may be affected thereby. BANK HOLDING COMPANY REGULATION. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a result, the Company's activities are subject to certain limitations under the BHC Act, and transactions between the Company and the Banks and other affiliates are subject to certain restrictions. As a registered bank holding company, the Company is required to file semiannual reports with the Federal Reserve Board ("FRB") and such other information as the FRB may require, and is subject to examination by the FRB. The FRB has the authority to issue cease and desist orders against the Company and its nonbank subsidiaries if the FRB determines that actions by the Company are unsafe, unsound or violate the law. Under certain circumstances, redemptions, dividends or distributions by the Company with respect to its equity securities may be considered unsafe or unsound practices. As a bank holding company, the acquisition of "control" of the Company by an individual or a "company" is subject to the prior approval of the FRB. The term "company" is broadly defined to include any corporation, partnership, association or trust or similar organization, while the definition or control for these purposes may be met by (i) the ownership, control or power to vote 10% or more of the outstanding shares of any class of voting stock of the Company, directly or indirectly, (ii) control over the election priority of Directors of the Company, or (iii) the power to exercise, directly or indirectly, controlling influence over the management or policies of the Company. Under the BHC Act, a bank holding company must obtain prior FRB approval before it acquires direct or indirect ownership or control of any voting shares of any bank or other bank holding company if, after such acquisition, it will own or control directly or indirectly more than 5% of the voting stock of the target, unless it already owns a majority of the voting stock of the target. A bank holding company also must obtain prior FRB approval before it acquires all or substantially all of the assets of a bank or merges or consolidates with another bank holding company. A bank holding company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of a company that is not a bank or a bank holding company, and must engage in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. The FRB, by order or regulation, may authorize a bank holding company to engage in or acquire stock in a company engaged in activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities the FRB has determined by regulation to be incidental to the business of banking are: making and servicing loans or certain types of leases, engaging in discount brokerage activities, performing certain data processing services and providing insurance brokerage services under certain conditions and subject to certain limitations. 10 In reviewing any application or proposal by a bank holding company, the FRB is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the community to be served, as well as the probable effect of the transaction upon competition. Recent decisions by the FRB under the BHC Act have underscored the importance placed by the FRB upon the record of the applicant and its subsidiary banks in meeting the credit needs of its community in accordance with the Community Reinvestment Act of 1977. BANK REGULATION. The Banks are subject to detailed federal and state laws and regulations. National bank subsidiaries of the Company are primarily supervised by the Office of the Comptroller of the Currency (the "OCC"), a bureau of the United States Department of Treasury. The OCC regularly examines national banks in such areas as reserves, loans, investments, trust services, management practices, Community Reinvestment Act compliance and other aspects of bank operations. These examinations are designed for the protection of the deposit insurance system and the enforcement of federal and state laws and regulations, and not for the shareholders of the Company. In addition to undergoing these regular examinations, national banks must furnish reports containing detailed and accurate financial statements and schedules to the OCC quarterly. Bank subsidiaries of the Company that are chartered under state law are regulated and supervised by the respective state's banking agency. In addition, state-chartered banks, as members of the FDIC, are regulated and supervised by the FDIC. Each of these agencies conducts regular examinations of each Bank, generally on an alternate basis, reviewing the adequacy of the reserves, quality of the loans and investments, propriety of management practices, compliance with laws and regulations, including the Community Reinvestment Act, trust, and other aspects of Bank operations. These examinations are designed for the protection of the deposit insurance system and the enforcement of federal and state laws and regulations, and are not conducted for the benefit of the shareholders of the Company. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, investments a bank may make, reserves a bank must maintain, loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches. The OCC, in the case of national banks, and the FDIC, in the case of state-chartered, nonmember banks, are the respective primary regulatory authorities under the Financial Institution Supervisory Act, and are thereby provided authority under that Act to impose penalties, initiate civil and administrative actions and take other steps intended to prevent a bank from engaging in an unsafe or an unsound practice in the conduct of its business. In extreme cases, the FDIC has authority to revoke deposit insurance, and may assess civil money penalties and impose cease and desist orders against the bank and affiliated individuals, including the bank's attorneys and accountants. Under FDICIA, federal banking authorities are also authorized to establish safety and soundness standards for banks, thrifts and their parent holding companies covering a wide range of operational and managerial matters, including asset quality, earnings, stock valuation and employee compensation. Under current law, national and state bank subsidiaries of the Company are subject to state law restrictions in branching, including restrictions on the number, location and characteristics of branches. The laws vary from liberal branching states, like North Dakota and Wisconsin, which allow banks to branch freely, subject only to application and approval, to states like Iowa and Nebraska, which severely restrict branching, although they allow banks to combine and retain preexisting locations. In June 1993, the FDIC adopted a risk-based premium schedule that increases the assessment rates for depository institutions. Under the new schedule, which took effect for the assessment period beginning January 1, 1994, each financial institution is assigned to one of three capital groups: well capitalized, adequately capitalized or undercapitalized, as defined in the regulations implementing the prompt corrective action provisions 11 of the FDICIA; and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a particular institution depends upon the risk assessment classification so assigned to the institution by the FDIC. Because the BIF has reached its required reserve level of 1.25% of insured deposits, banks in the lowest risk classification pay no deposit insurance premiums currently. Each of the Banks currently qualifies for the lowest level of deposit insurance. EXECUTIVE OFFICERS The executive officers of the Company are as follows: NAME AGE POSITION Donald R. Mengedoth 52 President, Chief Executive Officer and Chairman of the Board Mark A. Anderson 39 Executive Vice President, Chief Financial Officer, Secretary and Treasurer Ronald K. Strand 50 Executive Vice President - Banking Group David E. Groshong 48 Executive Vice President - Financial Services Thomas E. Hansen 44 Senior Vice President and Central Region Manager Bruce A. Heysse 45 Senior Vice President - Acquisitions Thomas A. Hilt 54 Senior Vice President - Operations and Administration Gary A. Knutson 49 Senior Vice President and Western Region Manager David A. Lee 53 Senior Vice President and Eastern Region Manager Patricia J. Staples 41 Senior Vice President - Marketing Harriette S. McCaul 46 Senior Vice President - Human Resources Donald R. Mengedoth has been President, Chief Executive Officer, Chairman of the Board and a director of the Company since its organization in 1986. He was Senior Vice President of First Bank System, Inc. ("FBS") from 1982 to 1987 and has worked in the banking business since 1966, including management positions in retail banking operations, human resources and commercial lending. From 1984 to 1987, Mr. Mengedoth was Regional Managing Director of FBS. From 1979 to 1982, Mr. Mengedoth was Vice President - Operations for FBS. Prior to that time, he was Senior Vice President of First Bank Milwaukee. Mark A. Anderson has been Executive Vice President, Chief Financial Officer, Secretary and Treasurer of the Company since its organization in 1986. He was Vice President and Regional Controller for FBS from 12 1984 to 1987. From 1979 to 1984, he held various positions with FBS-affiliated banks in the finance and credit analysis areas. Mr. Anderson is a Chartered Financial Analyst and a Certified Management Accountant. Ronald K. Strand has been Executive Vice President - Banking Group since February 1993. He was previously Senior Vice President and Regional Manager for South Dakota and North Dakota for the Company from January 1991 to February 1993. Previously, Mr. Strand had been Vice President and Regional Manager for the Company and President, Chief Executive Officer and a director of the Company's affiliate bank in Wahpeton, North Dakota since 1988. Prior to his affiliation with the Company, he served as President and Chief Executive Officer of Norwest Bank of North Dakota, N.A., Wahpeton, from 1985 until 1988. He was employed by Norwest for a total of 15 years, having previously worked in Norwest banks in Jamestown, North Dakota, and Moorhead, Minnesota. David E. Groshong has been Executive Vice President - Financial Services since May 1996. He was previously Chairman and Chief Executive Officer of the Company's affiliate bank in Alliance, Nebraska from May 1995 to May 1996. Previously, Mr. Groshong had been President and Chief Executive of the Company's affiliate bank in Fergus Falls, Minnesota since 1992 and as Senior Vice President and Senior Loan Officer of the Fargo Bank since 1985. He was employed by Norwest Bank of Minnesota, N.A. for a total of eight years and prior to that worked in the consumer finance industry. Thomas E. Hansen has been Senior Vice President and Central Region Manager since April 1993. He also served as President, Chief Executive Officer and director of the Company's affiliate bank in Fargo, North Dakota from April 1993 to December 1996. Previously, he was employed by Norwest Bank Fargo for 19 years, most recently as President. Bruce A. Heysse has been Senior Vice President - Acquisitions since July 1996. He was Senior Vice President and Integration Manager of the Company from November 1995 to June 1996. He was Vice President and Senior Credit Officer of the Company from 1987 to November 1995. He began his banking career at the Company's affiliate bank in Wahpeton, North Dakota, and had a total of 11 years of banking experience prior to joining the Company. Thomas A. Hilt has been Senior Vice President - Operations and Administration of the Company since 1987 and President of Community First Service Corporation, the Company's data processing subsidiary, since 1988. He was Vice President and Manager - Operations Support for the Regional Division of FBS from 1984 to 1987. Prior to 1984, he held various positions with FBS since 1967, including responsibility for systems development, programming, audit and examination functions. Gary A. Knutson has been Senior Vice President and Western Region Manager of the Company since September 1993. He was President, Chief Executive Officer and director of the Company's affiliate bank in Wahpeton, North Dakota from January 1991 to September 1993. He began his banking career at the Company's affiliate bank in Lidgerwood, North Dakota, and had a total of 14 years of banking experience prior to joining the Company. David A. Lee has been Senior Vice President and Eastern Region Manager of the Company since January 1991. He had been a Region Manager of the Company since 1987. He was President and Chief Executive Officer and a director of the Company's affiliate bank in Little Falls from 1988 to January 1993. Mr. Lee held various positions with FBS from 1966 to 1982. 13 Patricia J. Staples has been Senior Vice President - Marketing since July 1994. Previously, Ms. Staples was employed as the public relations manager with MeritCare Health System for 10 years. Harriette S. McCaul, Ph.D., has been Senior Vice President of Human Resources since February 1997. Previously, she was the Dean of the College of Business Administration at North Dakota State University in Fargo, North Dakota. She joined NDSU in 1983 and held various teaching and administrative positions in the Business Department and human resources area. Prior to that time, she was an instructor at Moorhead State University, Moorhead, Minnesota, and the director of faculty and staff benefits at the University of Kansas. ELECTION. The Company's officers are elected by the Board of Directors. The officers serve until their successors are elected or until their earlier resignation, removal or death. ITEM 2. PROPERTIES In January 1996, the Company formed a new subsidiary, Community First Properties, Inc. ("CFPI"), for the purpose of acquiring and owning the space currently occupied by the Company. CFPI owns all of the portions of the office building not owned by the Company's Fargo Bank subsidiary at 520 Main Avenue, Fargo, North Dakota. The Company maintains its offices at 520 Main Avenue, Fargo, North Dakota, consisting of 12,564 square feet at an annual rental of $297,948, payable to its subsidiary, CFPI. The Company believes these facilities will be adequate for the foreseeable future. Each of the Banks owns its main office and those of its branches, and these facilities range in size from approximately 1,200 to 36,000 square feet. CFSC leases 11,089 square feet of office space in Fargo at an annual rental of $120,108 through August 31, 1997. CFSC will continue to lease this space on a month-to-month basis until the completion of a building being constructed by the Company, into which CFSC anticipates moving in the fourth quarter of 1997. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company and its subsidiaries are subject to various legal actions and proceedings in the normal course of business, some of which may involve substantial claims for compensatory damages. In some cases, these actions and proceedings relate in whole or in part to activities of banks prior to their acquisition and may be covered by agreements of former owners of these banks to indemnify the Company. Although litigation is subject to many uncertainties and the ultimate exposure with respect to current matters cannot be ascertained, management does not believe that the final outcome will have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information as to the principal market on which the Company's common stock is traded, market price information for the common stock of the Company, the approximate number of holders of record as of December 31, 1996, and the Company's dividend policy is incorporated herein by reference from the inside back cover of the 1996 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1996, consisting of data captioned "Financial Highlights" on page 1 of the 1996 Annual Report to Shareholders, "Consolidated Statement of Condition--Five-Year Summary" on page 44 of the Annual Report and "Consolidated Statement of Income-Five Year Summary" on page 45 of the Annual Report are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 15 through 26 of the 1996 Annual Report to Shareholders is incorporated hereby by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Statements of Financial Condition of the Company as of December 31, 1996 and 1995, and the related Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each of the three years ended December 31, 1996, the Notes to the Consolidated Financial Statements and the Report of Ernst & Young LLP, independent auditors, contained in the Company's 1996 Annual Report to Shareholders on pages 27 through 43 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth in the Company's 1997 Proxy Statement under the caption "Election of Directors" is incorporated herein by reference. Information regarding the executive officers of the Company is included under separate caption in Part I of this Form 10-K. 15 ITEM 11. EXECUTIVE COMPENSATION The information set forth in the 1997 Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference, except that information under the captions "Compensation Committee Report on Executive Compensation" and "Comparative Stock Performance" is not so incorporated. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth in the 1997 Proxy Statement under the caption "Security Ownership of Principal Shareholders and Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth in the 1997 Proxy Statement under the caption "Certain Transactions" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS FORM 10-K: 1. FINANCIAL STATEMENTS. See Item 8, above. 2. FINANCIAL STATEMENT SCHEDULES. All financial statement schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 3. PRO FORMA FINANCIAL INFORMATION. None. (b) REPORTS ON FORM 8-K. None. On October 18, 1996, the Company filed a Form 8-K report describing under Item 5 the acquisition of Financial Bancorp, Inc. and certain recent litigation. (c) EXHIBITS. 16 EXHIBIT NUMBER DESCRIPTION 2.1 Agreement and Plan of Merger dated as of August 12, 1994, between the Registrant and Minowa Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 [File No. 33-84746], as declared effective by the Commission on January 23, 1995). 2.2 Restated Agreement and Plan of Merger dated as of December 6, 1994, among the Registrant, Colorado Acquisition Corporation and First Community Bankshares, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K report of the Registrant dated January 20, 1995). 2.3 Agreement and Plan of Merger dated as of November 28, 1994, between the Registrant and Abbott Bank Group, Inc. (incorporated by reference to Exhibit 10.2 to the Form 8-K report of the Registrant dated January 20, 1995). 2.4 Master Agreement dated July 22, 1994, between the Registrant and Bank of Colorado Holding Company, including as Exhibit A the form of Purchase and Assumption Agreement executed by Colorado Community First State Bank of Steamboat Springs and Vail Bank (incorporated by reference to Exhibit 2.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 [the "1994 Form 10-K"]). 2.5 Stock Purchase Agreement dated as of June 7, 1995 by and among BNCCORP, Inc., Gregory Cleveland and Tracy Scott, and the Registrant relating to Farmers & Merchants Bank of Beach (incorporated by reference to Exhibit 2.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 [the "1995 Form 10-K"]). 2.6 Agreement and Plan of Merger dated as of March 8, 1996 among the Registrant, Trinidad Acquisition Corporation and Financial Bancorp, Inc. (the holding company for Trinidad National Bank) (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 [File No. 333- 6239], as declared effective by the Commission on August 9, 1996. 2.7 Agreement and Plan of Reorganization dated as of June 25, 1996 between the Registrant and Mountain Parks Financial Corp. (incorporated by reference to the Appendix to the Registrant's Joint Proxy Statement with Mountain Parks Financial Corp. included in the Registration Statement on Form S-4 [File No. 333-14439], as declared effective by the Commission on November 7, 1996). 2.8 Stock Purchase Agreement dated as of February 18, 1997 by and among the Registrant, KeyCorp and Key Bank of the Rocky Mountains, Inc. (the holding company for KeyBank National Association (Wyoming)). 3.1 Restated Certificate of Incorporation of the Registrant, as amended by a Certificate of Amendment filed with the Delaware Secretary of State on December 18, 1996. 17 EXHIBIT NUMBER DESCRIPTION 3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 [File No. 33-41246], as declared effective by the Commission on August 13, 1991 [the "1991 S-1"]). 4.1 Certificate of Designations, Preferences and Rights of 7% Cumulative Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 [File No. 33-77398], as declared effective by the Securities and Exchange Commission on May 4, 1994 [the "1994 Form S-3"]). 4.2 Deposit Agreement dated as of May 4,1994, by and among the Registrant, Norwest Bank Minnesota, National Association, as Depositary, and the Holders, from time to time, of the Depositary Receipts (incorporated by reference to Exhibit 4.2 to the 1994 Form S-3). 4.3 Form of Rights Agreement dated as of January 5, 1995, between the Registrant, and Norwest Bank Minnesota, National Association, which includes as Exhibit B thereto the form of Rights Certificate (incorporated by reference to Exhibit 1 to the Form 8-A report dated January 6, 1995). 10.1 1996 Annual Incentive Plan for Holding Company Management.* 10.2 Restated 1987 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-8 [File No. 33-46744], as declared effective by the Commission on May 6, 1992).* 10.3 Form of Tax Sharing Agreement between the Registrant and each of its subsidiary Banks (incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 [the "1995 Form 10-K"]). 10.4 Form of Service Agreement for Data Processing between Community First Service Corporation and each of the subsidiary Banks of the Registrant (incorporated by reference to Exhibit 10.4 to the 1995 Form 10-K). 10.5 Form of Bank Services Agreement between the Registrant and each of its subsidiary Banks (incorporated by reference to Exhibit 10.5 to the 1995 Form 10-K). 10.6 Form of Agency Agreement between the Registrant and each of its subsidiary Banks, and Assignment of Agency Agreement and Second Assignment of Agency Agreement, which assign the Registrant's interest in the Agency Agreement to Community First Financial, Inc. (relating to the Registrant's subsidiary Banks) (incorporated by reference to Exhibit 10.6 to the 1995 Form 10-K). 18 EXHIBIT NUMBER DESCRIPTION 10.7 Real Property Lease dated May 1991 among Richard A. Hentges, HLS Associates and the Registrant relating to the Registrant's previous corporate offices (incorporated by reference to Exhibit 10.24 to the 1991 S-1). 10.8 Office Lease Agreement dated October 18, 1988, between Dacotah Prairie Associates and Community First Service Corporation, and addendum to Office Lease Agreement dated April 30, 1991 (incorporated by reference to Exhibit 10.25 to the 1991 S-1). 10.9 Lease Agreement dated November 8, 1988, between Winthrop Resources Corp. and Community First Service Corporation (incorporated by reference to Exhibit 10.26 to the 1991 S-1). 10.10 Lease dated April 27, 1993, between Community First Properties, Inc. (formerly Fargo Tower Partners) and the Registrant (incorporated by reference to Exhibit 10.11 to the 1994 10-K). 10.11 Letter Agreement dated May 11, 1995 by and between the Registrant and Norwest Bank Minnesota, N.A. (incorporated by reference to Exhibit 10.11 to the 1995 Form 10-K) 10.12 Promissory Note dated December 21, 1995, issued to Norwest Bank Minnesota, National Association, in the principal amount of $26,000,000 (incorporated by reference to Exhibit 10.12 to the 1995 Form 10-K). 10.13 Letter Agreement dated May 11, 1995, by and between the Registrant and Harris Trust and Savings Bank regarding $10,000,000 Line of Credit (incorporated by reference to Exhibit 10.13 to the 1995 Form 10-K). 10.14 Form of Indemnification Agreement entered into by and between the Registrant and the Registrant's officers and directors (incorporated by reference to Exhibit 10.33 to the 1993 Form 10-K). 10.15 1996 Stock Option Plan, as approved by the Board of Directors on February 6, 1996(incorporated by reference to Exhibit 10.15 to the 1995 Form 10-K). 13.1 Annual Report to Shareholders. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. - ----------------- *Executive compensation plans and arrangements. 19 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY FIRST BANKSHARES, INC. ("Registrant") Dated: March 19, 1997 By/S/ DONALD R. MENGEDOTH ----------------------------------- Donald R. Mengedoth President, Chief Executive Officer and Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant, in the capacities and on the dates indicated. SIGNATURE AND TITLE DATE /S/ DONALD R. MENGEDOTH March 19, 1997 - --------------------------------------- Donald R. Mengedoth President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) /S/ MARK A. ANDERSON March 19, 1997 - --------------------------------------- Mark A. Anderson Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) /S/ PATRICIA A. ADAM March 19, 1997 - --------------------------------------- Patricia A. Adam, Director /S/ JAMES T. ANDERSON March 19, 1997 - --------------------------------------- James T. Anderson, Director /S/ PATRICK E. BENEDICT March 19, 1997 - --------------------------------------- Patrick E. Benedict, Director 20 SIGNATURE AND TITLE DATE - --------------------------------------- /S/ PATRICK DELANEY March 19, 1997 - --------------------------------------- Patrick Delaney, Director /S/ JOHN H. FLITTIE March 19, 1997 - --------------------------------------- John H. Flittie, Director /S/ CARGILL MACMILLAN, JR. March 19, 1997 - --------------------------------------- Cargill MacMillan, Jr., Director /S/ DEAN E. SMITH March 19, 1997 - --------------------------------------- Dean E. Smith, Director /S/ THOMAS C. WOLD March 19, 1997 - --------------------------------------- Thomas C. Wold, Director /S/ HARVEY L. WOLLMAN March 19, 1997 - --------------------------------------- Harvey L. Wollman, Director /S/ DENNIS M. MATHISEN March 19, 1997 - --------------------------------------- Dennis M. Mathisen, Director EX-2.8 2 STOCK PCSH AGMT. EXHIBIT 2.8 - -------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT by and among COMMUNITY FIRST BANKSHARES, INC., KEY BANK OF THE ROCKY MOUNTAINS, INC., and KEYCORP Dated as of February 18, 1997 - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE 1 DEFINITIONS.....................................................1 ARTICLE 2 PURCHASE AND SALE...............................................4 2.1 Purchase by the Buyer.............................................4 2.2 Purchase Price; Adjustments to Purchase Price.....................5 2.3 Earnest Money Deposit.............................................6 2.4 Closing Date......................................................6 2.5 Intercompany Accounts.............................................7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SELLER......................................................7 3.1 Organization, Standing and Authority of the Seller and the Holding Company...........................7 3.2 Organization, Standing and Authority of the Bank.....................................................8 3.3 Authorized and Effective Agreement................................8 3.4 Capital Structure of the Bank.....................................9 3.5 Financial Statements; Call Reports...............................10 3.6 Certain Events Since September 30, 1996..........................11 3.7 Absence of Undisclosed Liabilities...............................12 3.8 Loans............................................................12 3.9 Legal Proceedings................................................13 3.10 Compliance with Laws.............................................13 3.11 Brokers and Finders..............................................13 3.12 Properties.......................................................14 3.13 Agreements with Regulatory Authorities...........................15 3.14 Certain Contracts................................................15 3.15 Contract Defaults................................................15 3.16 Insurance........................................................15 3.17 Employee Benefit Plans...........................................16 3.18 Taxes and Tax Returns............................................17 3.19 Labor Matters....................................................18 3.20 Environmental Matters............................................18 3.21 Regulatory Approval..............................................19 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE BUYER......................................................19 4.1 Organization, Standing and Authority of the Buyer and Buyer's Holding Company.......................19 4.2 Authorized and Effective Agreement...............................20 4.3 Legal Proceedings................................................21 4.4 Brokers and Finders..............................................21 4.5 Financing........................................................21 4.6 Regulatory Approval..............................................21 4.7 Agreements with Banking Authorities..............................21 4.8 Non-Distributive Intent..........................................21 ARTICLE 5 COVENANTS......................................................22 5.1 Applications.....................................................22 5.2 Efforts..........................................................22 5.3 Conduct of Business of the Bank Pending Closing........................................................23 5.4 Current Information..............................................26 5.5 Access to Properties and Records.................................27 5.6 Employment and Employee Benefits After the Closing....................................................27 5.7 No Solicitation..................................................28 5.8 Public Announcements.............................................28 5.9 Divestiture......................................................28 5.10 Covenant Not to Compete..........................................29 5.11 Use of Name "Key"................................................30 5.12 Transfer of Retained Assets and Liabilities Prior to the Closing...............................30 5.13 Environmental Remediation........................................30 5.14 Vacation Policy..................................................34 ARTICLE 6 CONDITIONS TO CLOSING..........................................34 6.1 Conditions to Closing - The Seller and The Buyer......................................................34 6.2 Conditions to Closing - The Buyer................................35 6.3 Conditions to Closing - The Seller...............................36 ARTICLE 7 TERMINATION, INDEMNIFICATION, WAIVER AND AMENDMENT......................................................37 7.1 Termination......................................................37 7.2 Effect of Termination............................................37 7.3 Survival of Representations, Warranties and Covenants; Indemnification.................................37 7.4 Waiver...........................................................41 7.5 Amendment or Supplement..........................................41 ARTICLE 8 MISCELLANEOUS..................................................41 8.1 Expenses.........................................................41 8.2 Entire Agreement, etc............................................41 8.3 No Assignment....................................................41 8.4 Notices..........................................................42 8.5 Captions.........................................................43 8.6 Counterparts.....................................................43 8.7 Governing Law....................................................43 8.8 Effect of Investigations.........................................43 8.9 Severability.....................................................43 8.10 Specific Enforceability..........................................43 LIST OF SCHEDULES AND EXHIBITS Schedule 1 Retained Assets and Liabilities Schedule 3.2 Subsidiaries and 5% Investments Schedule 3.6 Certain Events Since September 30, 1996 Schedule 3.8 Third-Party Loan Servicing Agreements and Classified Loans, Leases, Other Extensions of Credit and Commitments to Extend Credit Required to be Disclosed Pursuant to Section 3.8 of the Agreement Schedule 3.9 Litigation Schedule 3.12 Real Property Schedule 3.14 Certain Contracts Schedule 3.17 Employee Benefit Plans Schedule 3.18 Tax Allocation or Tax Sharing Procedures Schedule 3.20 Environmental Matters Schedule 5.3 Certain Events Since the Date of the Agreement Schedule 5.6 Employment and Employee Benefit Matters Following the Closing Exhibit A Tax Agreement STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (this "Agreement") dated as of February 18, 1997, among KEYCORP, an Ohio corporation (the "Seller"), KEY BANK OF THE ROCKY MOUNTAINS, INC., a Colorado corporation (the "Holding Company"), and COMMUNITY FIRST BANKSHARES, INC., a Delaware corporation (the "Buyer"). W I T N E S S E T H: WHEREAS, the Seller owns beneficially all of the issued and outstanding shares of capital stock of the Holding Company which in turn owns all of the issued and outstanding shares of capital stock (the "Stock") of KeyBank National Association (Wyoming), a national banking association chartered under the laws of the United States of America (the "Bank"); and WHEREAS, the Buyer desires to purchase the Stock, directly or indirectly, from the Seller and the Seller desires to sell the Stock to the Buyer upon the terms and subject to the conditions hereinafter set forth (the "Acquisition"); and WHEREAS, the Seller and the Buyer desire to provide for certain undertakings, conditions, representations, warranties and covenants in connection with the transactions contemplated hereby; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto do hereby agree as follows: ARTICLE 1 DEFINITIONS "ACQUISITION TRANSACTION" shall have the meaning specified in Section 5.7 hereof. "BANK COMMON STOCK" shall have the meaning specified in Section 3.4(a) hereof. "BANK CUSTOMER LIST" shall have the meaning specified in Section 5.10(b) hereof. "BANK HOLDING COMPANY ACT" shall mean the Bank Holding Company Act of 1956, as amended. "CALL REPORTS" shall mean those periodic consolidated reports of condition and income on Form FFIEC 032 filed by the Bank with the FDIC as of December 31, 1995 and September 30, 1996 for the periods then ended, and as of and for the periods ending after September 30, 1996 and prior to the Closing Date. "CHARTER" shall mean the articles or certificate of incorporation, statute, constitution, joint venture or partnership agreement or articles or other charter of any Person other than an individual, each as from time to time amended or modified. "CLOSING" shall mean the consummation of the Acquisition. "CLOSING DATE" shall mean the date specified pursuant to Section 2.4(a) hereof as the date on which the parties hereto shall consummate the Acquisition. "CODE" shall mean the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. "CONFIDENTIALITY AGREEMENT" shall mean that certain letter agreement dated November 27, 1996 between the parties hereto. "DAMAGES" shall mean, in respect of any obligation to indemnify any person pursuant to the terms of this Agreement, any and all losses, claims, damages, liabilities, obligations, judgments, settlements, awards, demands, offsets, defenses, counterclaims, actions or proceedings, reasonable out of pocket costs, expenses and attorneys' fees (including any such reasonable costs, expenses and attorneys' fees actually incurred in enforcing such right of indemnification against any indemnitor or with respect to any appeal) and penalties and interest, if any, but shall not include any tax benefit arising out of payments of such amounts or any payment from a third party (including insurers) or any such amounts for which the Bank has recorded a specifically allocated reserve that is reflected in the unaudited balance sheet of the Bank included in the September 30 Call Report (as defined in Section 3.5(a) hereof). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder. "ERISA AFFILIATE" shall mean any trade or business (whether or not incorporated) under common control with the Bank within the meaning of Section 414(b), (c), (m) or (o) of the Code. "ESTIMATED BALANCE SHEET" shall mean the unaudited consolidated balance sheet of the Bank as of the last day of the month preceding the month in which -2- the Closing Date occurs prepared to reflect adjustments necessary, on an actual or proforma basis, in connection with the transfer of the Retained Assets and Liabilities. "FDIA" shall mean the Federal Deposit Insurance Act, as amended. "FDIC" shall mean the Federal Deposit Insurance Corporation. "FEDERAL RESERVE BOARD" shall mean the Board of Governors of the Federal Reserve System and/or the appropriate regional Federal Reserve Bank to the extent applicable. "FINAL BALANCE SHEET" shall mean the unaudited consolidated balance sheet of the Bank as of the Closing Date prepared to reflect adjustments necessary, on an actual or proforma basis, in connection with the transfer of the Retained Assets and Liabilities. "INTERCOMPANY ACCOUNTS" shall have the meaning specified in Section 2.5 hereof. "LOAN(S)" shall have the meaning specified in Section 3.8 hereof. "MATERIAL ADVERSE EFFECT" shall mean, when used with respect to any Person, a material adverse effect on the business, operations, results of operations or financial condition of such Person taken as a whole; PROVIDED, HOWEVER, that changes in the business, operations, results of operations or financial condition of a Person resulting directly or indirectly from changes in law, regulations or generally accepted accounting principles (or interpretations of any thereof), changes in the general level of market interest rates, or changes in the economic, financial or market conditions affecting the financial services industry generally or in the regions in which the Bank operates shall not constitute a Material Adverse Effect. "ORIGINAL BALANCE SHEET" shall mean the unaudited consolidated balance sheet of the Bank as of September 30, 1996 prepared in a manner consistent with the books and records of the Bank. "PBGC" shall mean the Pension Benefit Guaranty Corporation of any successor thereto under law. "PERSON" shall mean any individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other legal entity, or any governmental agency or political subdivision thereof. -3- "PLAN" shall have the meaning assigned to such term in Section 3.17(a) hereof. "PURCHASE PRICE" shall mean the consideration to be paid by the Buyer for the Stock which shall be in the amount and subject to the adjustments set forth in Section 2.2 and which shall be payable in the form set forth in Section 2.4(b)(i) hereof. "RETAINED ASSETS AND LIABILITIES" shall mean those assets and liabilities of the Bank which will be transferred to another affiliate of Seller prior to, or as promptly as possible following, the Closing. The Retained Assets and Liabilities include the Retained Loans and the other assets and liabilities of the Bank set forth on Schedule 1 hereto. "RETAINED LOANS" shall mean the loans set forth under the heading "Retained Loans" on Schedule 1 hereto. "RIGHTS" shall mean warrants, options, rights, convertible securities and other arrangements or commitments which obligate a Person to issue or dispose of any of its capital stock. "STOCK" shall have the meaning specified in the first Whereas clause hereof. "SUBSIDIARIES" shall mean, when used with reference to a Person, any corporation, partnership or other organization, whether incorporated or unincorporated, which is consolidated with such Person for financial reporting purposes. Notwithstanding anything to the contrary herein, no representation or warranty of Seller provided for hereunder with regard to any Subsidiary of the Bank shall constitute a representation or warranty with regard to any Subsidiary of the Bank the capital stock of which is included on Schedule 1 hereto. "TAX AGREEMENT" shall have the meaning specified in Section 6.2(d) hereof. Other terms used herein are defined in the preamble and the recitals to, and in certain provisions of, this Agreement. ARTICLE 2 PURCHASE AND SALE 2.1 PURCHASE BY THE BUYER. Upon the terms and subject to the conditions set forth in this Agreement, the Buyer agrees to purchase all of the Stock, directly or -4- indirectly, from the Seller, and the Seller agrees to sell all of the Stock to the Buyer. 2.2 PURCHASE PRICE; ADJUSTMENTS TO PURCHASE PRICE. (a) The Purchase Price shall be an amount payable in cash equal to $135,000,000, adjusted as set forth below. (b) The Purchase Price shall be increased or decreased to the extent the shareholders' equity of the Bank on the Closing Date (the "Shareholders' Equity") is more than or less than $75,000,000. (c) DETERMINATION OF SHAREHOLDERS' EQUITY. (i) The determination of the Estimated Shareholders' Equity (as defined below) and the determination of the Shareholders' Equity shall comply in all respects with the rules, regulations and instructions for the preparation of the Call Reports of the Bank, and, in the absence of direction therein to the contrary, to generally accepted accounting principles applied on a basis consistent with prior periods. Notwithstanding the Bank's practice in prior periods, however, the determination of the Estimated Shareholders' Equity and Shareholders' Equity amounts shall take into account all appropriate expense accruals (including, but not limited to, real estate taxes not yet due), provisions for income tax and loan and lease losses. Notwithstanding anything to the contrary above, however, the determination of the Estimated Shareholders' Equity and Shareholders' Equity amounts shall not take into account any adjustments otherwise required by FASB 115. (ii) Promptly following the end of the month preceding the month in which the Closing Date occurs, and not less than five (5) business days prior to the Closing Date, the Seller shall prepare and deliver to the Buyer the Estimated Balance Sheet. The Estimated Balance Sheet shall reflect the Bank's shareholders' equity, calculated as of the close of business on the last day of the month preceding the month in which the Closing Date occurs (the "Estimated Shareholders' Equity"). The Estimated Shareholders' Equity shall be used by Buyer and Seller for purposes of making the adjustment to the Purchase Price due at Closing pursuant to Section 2.2(b) hereof. (iii) As soon as reasonably practicable following the Closing Date, the Seller shall prepare and deliver to the Buyer the Final Balance Sheet which shall reflect the Shareholders' Equity (excluding any adjustment for any special pre-Closing dividend declared by the Bank and paid to the Holding Company in connection with the payment of the Purchase Price adjustments required by Section 2.2(b) hereof). Promptly following completion and delivery of the Final Balance Sheet, (x) Buyer shall pay to Seller the amount, if any, by which the Shareholders' -5- Equity exceeds the Estimated Shareholders' Equity, or (y) Seller shall pay to Buyer the amount, if any, by which the Estimated Shareholders' Equity exceeds the Shareholders' Equity; in either event, such payment to be made by wire transfer of immediately available federal funds to such bank account in the United States of America as the Seller or Buyer, as applicable, shall designate. (iv) Buyer and Seller shall cooperate and promptly commence good faith negotiations to resolve any disputes regarding the Final Balance Sheet. In the event any dispute regarding the Final Balance Sheet shall continue unresolved twenty (20) days after the Closing Date, then either Buyer or Seller may require resolution of the dispute by binding arbitration determined by Price Waterhouse LLP. The fees and expenses of Price Waterhouse LLP shall be shared equally by Buyer and Seller. 2.3 EARNEST MONEY DEPOSIT. Buyer shall wire transfer in immediately available federal funds to Seller, contemporaneously with the signing hereof, an earnest money deposit of a portion of the Purchase Price in the amount of $13,000,000, which earnest money deposit shall be non-refundable to Buyer, except in the event of a material breach by Seller prior to the Closing of any of its covenants or agreements contained herein or any material inaccuracy in any of its representations or warranties contained herein and, in either case, if such breach or inaccuracy has not been cured or otherwise corrected within 45 days after the date on which written notice of such breach or inaccuracy is given to Seller. 2.4 CLOSING DATE. (a) Subject to the terms and conditions of this Agreement, the purchase and sale of the Stock hereunder shall occur at the offices of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota, or at such other place as shall be mutually agreeable to the parties, on a date which shall be not less than five days nor more than forty-five days after the date upon which the last of the conditions to Closing set forth in Article 6 hereof has been satisfied or properly waived and as shall be mutually agreed to by the parties. (b) On the Closing Date, the following actions shall be taken: (i) the Buyer shall pay to the Seller an amount equal to the Purchase Price, including any adjustments provided in Section 2.2 and excluding the earnest money deposit, plus interest on such deposit from the date hereof to the Closing Date at the rate of 5.07% per annum, provided in Section 2.3, to -6- the Seller by wire transfer of immediately available federal funds to such bank account in the United States of America as the Seller shall designate in writing at least two (2) business days prior to the Closing Date; (ii) the Seller shall deliver or cause to be delivered one or more certificates for the Stock to Buyer, duly endorsed in blank or with stock powers duly endorsed in blank, together with such other documents as the Buyer may reasonably request to evidence the transfer to Buyer of good and valid title in and to the Stock, free and clear of any lien, security interest, pledge, charge, encumbrance, option to purchase or call (except such as may be created by the Buyer); and (iii) each party shall, or Seller shall cause the Bank to, take such other actions, and shall execute and deliver such other instruments or documents, as shall be required under Article 6 hereof. 2.5 INTERCOMPANY ACCOUNTS. All intercompany accounts between the Bank and any of its Subsidiaries, on the one hand, and the Seller or any of its Subsidiaries, on the other hand (the "Intercompany Accounts"), as of the Closing shall be settled in the manner provided in this Section 2.5. At least five business days prior to the Closing, the Seller shall prepare and deliver to the Buyer a statement setting out in reasonable detail the calculation of all Intercompany Account balances based upon the latest available financial information as of such date. All such Intercompany Accounts balances shall be paid in full in cash prior to the Closing. As promptly as practicable, but not later than 30 days after the Closing Date, the Seller will cause to be prepared and delivered to the Buyer a statement setting out in reasonable detail the calculation of such Intercompany Account balances as of the Closing Date (giving effect to any settlement hereunder and any other payments). The Buyer and the Seller shall cooperate in the preparation of any such calculation and in resolving any disputes related thereto. -7- ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller represents and warrants to the Buyer as follows: 3.1 ORGANIZATION, STANDING AND AUTHORITY OF THE SELLER AND THE HOLDING COMPANY. (a) The Seller is a duly organized corporation, validly existing and in good standing under the laws of the State of Ohio and is registered as a bank holding company with the Federal Reserve Board under the Bank Holding Company Act, and has all requisite corporate power, right and authority to own and lease its properties and assets and to carry on its business as now being conducted. (b) The Holding Company is a duly organized corporation, validly existing and in good standing under the laws of the State of Colorado and is registered as a bank holding company with the Federal Reserve Board under the Bank Holding Company Act, and has all requisite corporate power, right and authority to own the Stock. 3.2 ORGANIZATION, STANDING AND AUTHORITY OF THE BANK. (a) The Bank is a national banking association duly organized and validly existing under the laws of the United States of America and has all requisite corporate power, right and authority and all necessary federal and state authorizations to own and lease its properties and assets and to carry on its business as now being conducted. The deposits of the Bank are insured by the FDIC in accordance with the FDIA, and the Bank has paid all assessments and filed all reports required by the FDIA. (b) Schedule 3.2 lists the Subsidiaries of the Bank and each other corporation, limited liability company, partnership or other association or organization in which the Bank has the power to vote 5% or more of any class of capital stock or of any other equity interest therein. Each of the Bank's Subsidiaries is a duly organized corporation, validly existing and in good standing under the laws of the state of its incorporation and has full corporate power, right and authority to own and lease its properties and assets and to carry on its business as now being conducted. The Bank is the lawful record and beneficial owner of all of the shares of the outstanding capital stock of each of its Subsidiaries free and clear of any lien, security interest, pledge, charge, encumbrance, option to purchase or call. (c) Copies of the Charter and by-laws of the Bank, as amended to the date hereof and as currently in -8- effect, have been made available to the Buyer and are true and complete. 3.3 AUTHORIZED AND EFFECTIVE AGREEMENT. (a) Each of the Seller and the Holding Company has all requisite corporate power and authority to enter into and perform all of its obligations under this Agreement. The execution and delivery of this Agreement and consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action in respect hereof on the part of each of the Seller and the Holding Company. This Agreement constitutes a legal, valid and binding obligation of each of the Seller and the Holding Company, enforceable against each such party in accordance with its terms, except that enforcement thereof may be limited by the receivership, conservatorship and supervisory powers of bank regulatory agencies generally, as well as bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting enforcement of creditors' rights generally and except that enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and the availability of equitable remedies. (b) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, nor the compliance by either Seller or the Holding Company with any of the provisions hereof shall (i) conflict with or result in a breach of any provision of the Charter or by-laws of the Seller, the Holding Company or the Bank, (ii) constitute or result in a breach of any term, condition or provision of, or constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge or encumbrance upon any property or asset of the Bank or the Stock pursuant to, any note, bond, mortgage, indenture, license, agreement or other instrument or obligation, the result of which, individually or in the aggregate, would have a Material Adverse Effect on the Bank or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Seller, the Holding Company or the Bank, or any of the Bank's Subsidiaries excluding from this clause (iii) violations which, either individually or in the aggregate, would not have a Material Adverse Effect on the Bank or otherwise prevent the Seller or the Holding Company from performing its obligations under this Agreement. (c) Except as set forth in Section 5.1 hereto and except for consents, approvals, filings, notices or registrations the failure of which to make or obtain would not, individually or in the aggregate, have a Material Adverse Effect on the Bank or prevent the -9- consummation of the Acquisition, no consents or approvals of, notices to, or filings or registrations with, any public body or authority are necessary, and no consents or approvals of or notices to any third parties are necessary, in connection with the execution, delivery and performance of this Agreement by the Seller or the Holding Company or the consummation by the Seller or the Holding Company of the Acquisition. 3.4 CAPITAL STRUCTURE OF THE BANK. (a) The authorized capital stock of the Bank consists solely of 5,000 shares of common stock, $100 par value ("Bank Common Stock"). As of the date hereof, there were 5,000 shares of Bank Common Stock issued and outstanding. There are no options or other contracts of any kind that require the issuance of any Bank Common Stock. All issued and outstanding shares of Bank Common Stock have been duly authorized and are validly issued, fully paid and nonassessable. None of the issued and outstanding shares of Bank Common Stock were issued in violation of any preemptive rights. (b) The Holding Company is the lawful record and beneficial owner of all of the issued and outstanding shares of Bank Common Stock (the "Stock") free and clear of all liens, security interests, pledges, charges, encumbrances, options to purchase, or calls of any kind. The Holding Company will, upon delivery of the Stock to the Buyer effective as of the Closing Date pursuant to the terms hereof, transfer to the Buyer good and valid title to the Stock free and clear of all liens, security interests, pledges, charges, encumbrances, options to purchase or calls except for those created by the Buyer. 3.5 FINANCIAL STATEMENTS; CALL REPORTS. (a) Seller has previously delivered to Buyer each of the Call Reports filed by the Bank with the FDIC as of December 31, 1995 (the "December 31 Call Report") and September 30, 1996 (the "September 30 Call Report"). The balance sheets included in the December 31 Call Report and the September 30 Call Report fairly present the financial condition of the Bank as of the dates indicated, and the statements of income included in the December 31 Call Report and the September 30 Call Report fairly present the results of operations of the Bank for the periods then ended, in conformity with regulatory accounting principles generally applicable to depository institutions such as the Bank, and, in the case of interim statements, subject to normal year-end adjustments. (b) When delivered, the Original Balance Sheet, the Estimated Balance Sheet and the Final Balance Sheet shall have been prepared in a manner consistent with the books and records of the Bank except as otherwise specifically provided herein. -10- (c) The Call Reports comply in all material respects with the rules, regulations, and instructions applicable to the preparation thereof. The Bank has filed all Call Reports required to have been filed by it with the FDIC. The balance sheets included in the Call Reports fairly present the financial condition of the Bank as of the dates indicated, and the statements of income included in the Call Reports fairly present the results of operations of the Bank for the periods then ended, in conformity with regulatory accounting principles generally applicable to depository institutions such as the Bank, and, in the case of interim statements, subject to normal year-end adjustments. 3.6 CERTAIN EVENTS SINCE SEPTEMBER 30, 1996. Since September 30, 1996, except as disclosed in Schedule 3.6 hereto or as otherwise expressly contemplated by this Agreement or any Schedule hereto, the Bank has conducted its business in the ordinary course of business, and there has not been: (a) any change or event which, individually or in the aggregate, has had a Material Adverse Effect on the Bank; (b) any employment contract, severance contract, contract with an obligation to a director or employee triggered upon a change in control, bonus, pension, retirement, incentive or similar arrangement or plan instituted, agreed to or amended by the Bank or any of its Subsidiaries; (c) any increase in the compensation payable or to become payable to any of the officers, directors or employees of the Bank or any of its Subsidiaries or any bonus payment or arrangement made to or with any of them, except grants of normal individual bonuses and increases in compensation to employees in the ordinary course of business in amounts and upon terms consistent with the prior practice of the Bank; (d) any agreement, contract or commitment entered into or agreed to be entered into by the Bank or any of its Subsidiaries except for those in the ordinary -11- course of business (none of which, individually or in the aggregate, has had a Material Adverse Effect on the Bank); (e) any change in any of the accounting methods or practices of the Bank or any of its Subsidiaries other than changes required by applicable law or regulation, generally accepted accounting principles or regulatory accounting principles generally applicable to depository institutions such as the Bank; (f) except as contemplated on Schedule 5.3 hereto, any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of Bank Common Stock; (g) any purchase, redemption, retirement or other acquisition, hypothecation, pledge or other encumbrance of any shares of Bank Common Stock; (h) any acquisition of all or any material portion of the assets of any other Person or any sale of all or any material portion of the Bank's consolidated assets, other than in the ordinary course of business; or (i) any new commitment or undertaking entered into by the Bank or any of its Subsidiaries to extend credit to any Person in an amount which exceeds the limitations set forth in Section 5.3(b)(x). 3.7 ABSENCE OF UNDISCLOSED LIABILITIES. The Bank and its Subsidiaries do not have any liabilities (as such term is used under generally accepted accounting principles), contingent or otherwise, that individually or in the aggregate would be material to the Bank except as disclosed in the Call Reports. 3.8 LOANS. Except for the Retained Loans, all currently outstanding loans of, or current extensions of credit by, the Bank or any of its Subsidiaries -12- (individually, a "Loan", and collectively, the "Loans") were solicited, originated and currently exist in compliance in all material respects with all applicable requirements of federal and state law and regulations promulgated thereunder. Except as disclosed on Schedule 3.8 hereto, none of the Loans are presently serviced by third parties who are not affiliated with Seller and there is no obligation, except as set forth on such Schedule 3.8, which would result in any Loan becoming subject to any such third-party servicing. Without limitation to the foregoing, the Bank's consolidated reserve for losses on loans included in the Bank Consolidating Summary Balance Sheet for the period ending December 31, 1996 provided by Seller to Buyer during its due diligence review was approximately $7,745,000, representing 1.56% of its total consolidated loans held in portfolio (exclusive of the Retained Assets). The amount of such reserve for losses on loans was adequate to absorb reasonably expectable losses in the loan portfolios of the Bank as of such date. To the best knowledge of the Seller and the Holding Company on the date hereof, there are no facts which would cause it to increase the level of such allowance for losses on loans. The documentation relating to the loan portfolio of the Bank and relating to all security interests, mortgages and other liens with respect to all collateral for such portfolio, taken as a whole, is adequate for the enforcement of the material terms of the loans in such portfolio and of the related security interests, mortgages and other liens, except where any inadequacy would not result in a Material Adverse Effect on the Bank. To the best knowledge and belief on the date hereof of the executive officers of the Holding Company and the Bank, the terms of such loans and of the related security interests, mortgages and other liens comply in all material respects with all applicable laws, rules and regulations (including laws, rules and regulations relating to the extension of credit). Except as set forth in Schedule 3.8 hereto, to the best knowledge and belief on the date hereof of the executive officers of the Holding Company and the Bank, there are no loans, leases, other extensions of credit or commitments to extend credit of the Bank that should have been classified by the Bank as nonaccrual, as restructured, as 90 days past due, as still accruing and doubtful of collection or any comparable classification that have not been so classified and Seller has provided to Buyer true, correct and complete in all material respects such written information concerning the loan portfolio of the Bank as Buyer has requested. 3.9 LEGAL PROCEEDINGS. (a) Except as set forth on Schedule 3.9 hereto, there are no pending, or to the knowledge of Seller, threatened, legal, administrative, arbitration or other proceedings, claims, actions or governmental investigations of any nature against the Bank or any of its Subsidiaries, or any director or officer of -13- the Bank or of any of its Subsidiaries, which, if adversely determined, would, individually or in the aggregate, result in Damages to the Bank in an amount exceeding $500,000. (b) There are no pending, or to the knowledge of Seller, threatened, legal, administrative, arbitration or other proceedings, claims, actions or governmental investigations of any nature against the Seller which, if adversely determined, would prevent the Seller from performing its obligations under this Agreement. 3.10 COMPLIANCE WITH LAWS. The Bank and its Subsidiaries hold all licenses, franchises, permits and authorizations required for the lawful conduct of their businesses under, and are in compliance with, all laws, statutes, orders, rules and regulations, and published policies or guidelines of any federal, state or local government authority applicable to the conduct of its business, except where the failure to so hold or comply would not, individually or in the aggregate, have a Material Adverse Effect on the Bank. 3.11 BROKERS AND FINDERS. Neither the Seller nor the Bank nor any of their respective officers, directors, employees or agents has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the transactions contemplated hereby, except for legal, accounting and other professional fees payable by Seller in connection with the Acquisition. 3.12 PROPERTIES. Schedule 3.12 hereto sets forth a true and complete list of all real property owned, leased (as lessor or lessee) or operated by the Bank or its Subsidiaries (including all of the Bank's branches and all of the Bank's properties acquired by foreclosure proceedings in the ordinary course of business) as of the date hereof. The Bank directly or indirectly through its Subsidiaries has good and marketable title, free and clear of all liens, encumbrances (other than leases in which the Bank is the Lessor as listed in Schedule 3.12) or charges, to all of the properties and assets, real and personal, reflected on the balance sheet included in the September 30 Call Report or acquired after such date, except (a) liens for current taxes not yet due and payable or being contested in good faith by appropriate proceedings, (b) pledges to secure deposits and other liens incurred in the ordinary course of the Bank's and its Subsidiaries' businesses, (c) such imperfections of title, easements and encumbrances, if any, as are not material in character, kind or extent, and (d) dispositions and encumbrances for adequate consideration in the ordinary course of business or as expressly permitted by the terms of this Agreement after September 30, 1996. The Bank has not received any -14- written notice of violation of any applicable zoning or environmental regulation, ordinance or other law, order, regulation, or requirement relating to its properties. Neither the Bank nor any of its Subsidiaries is in default, and there has not occurred any event that with the lapse of time or giving of notice or both would constitute a default, under any leases pursuant to which the Bank or any of its Subsidiaries leases any real property, except for such defaults which, individually or in the aggregate, would not result in the forfeiture of the use or occupancy of the property covered by any such lease or would not result in a Material Adverse Effect on the Bank. All such leases constitute legal, valid and binding obligations of the Bank or a Subsidiary of the Bank and, to the knowledge of Seller, the other party thereto enforceable by the Bank in accordance with their respective terms, except that enforcement thereof may be limited by the receivership, conservatorship and supervisory powers of bank regulatory agencies generally as well as bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting enforcement of creditors' rights generally and except that enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and the availability of equitable remedies. Neither the Bank nor any of its Subsidiaries has received any written notice of, or made a claim with respect to, any breach or default under any leases pursuant to which the Bank or any such Subsidiary leases any real property. 3.13 AGREEMENTS WITH REGULATORY AUTHORITIES. Neither the Bank nor any of its Subsidiaries is a party to any commitment, letter (other than letters addressed to regulated banking institutions generally or examination reports), written agreement, memorandum of understanding or order to cease and desist with any federal or state governmental entity charged with the supervision or regulation of the Bank or engaged in the insurance of bank deposits, which restricts the conduct of its business or in any manner relates to its capital adequacy, credit policies, management or overall safety and soundness, and neither the Bank nor the Seller has received written notification from any such federal or state governmental entity that the Bank or any such Subsidiary may be requested to enter into, or otherwise be subject to, any such commitment, letter, written agreement, memorandum of understanding or cease and desist order. 3.14 CERTAIN CONTRACTS. Other than in connection with Loans, loan commitments, letters of credit and other similar agreements entered into in the ordinary course of the Bank, on the date hereof, neither the Bank nor any of its Subsidiaries is a party to any agreement, other than agreements disclosed in Schedule 3.14 hereto or otherwise expressly permitted under the terms of this -15- Agreement, pursuant to which the Bank may be required to expend in excess of $125,000 in any twelve (12)-month period. Except as set forth on Schedule 3.14 hereto, on the date hereof, neither the Bank nor any of its Subsidiaries is a party to any agreement relating to the employment, election, retention in office or severance of any present or former director or officer of the Bank or any such Subsidiary. 3.15 CONTRACT DEFAULTS. Neither the Bank nor any of its Subsidiaries is in any default, and there has not occurred any event that with the lapse of time or giving of notice or both would constitute such a default, under any of the agreements, commitments or other instruments referred to on Schedule 3.14 hereto. 3.16 INSURANCE. The Seller has made available to the Buyer a description of the claims history under the insurance policies maintained by the Seller or the Bank with respect to the Bank's properties and the conduct of the Bank's business and a description of the insurance maintained by Seller or another affiliate of Seller for the Bank under policies which, as of the Closing Date, will no longer be in effect with respect to the Bank or its properties or business. 3.17 EMPLOYEE BENEFIT PLANS. (a) Except as listed on Schedule 3.17 hereto, neither the Bank nor any ERISA Affiliate maintains or contributes to any bonus, deferred compensation, incentive compensation, severance, pension, profit-sharing, retirement, stock purchase, stock option, employee welfare benefit or any other fringe benefit plan, agreement, arrangement or practice for which the Bank has any liability. Schedule 3.17 hereto sets forth a true and complete list of each plan which is an "employee benefit plan" (within the meaning of Section 3(3) of ERISA) maintained or contributed to by the Bank (each, a "Plan"). Each Plan is and has been operated in compliance with the provisions of ERISA, the Code, all regulations, rulings and announcements promulgated or issued thereunder, and all other applicable governmental laws and regulations, except where the failure to do so would not, individually or in the aggregate, result in any Material Adverse Effect on the Bank. Each other benefit plan, agreement, arrangement or practice which is not an "employee benefit plan" (the "Other Benefit Arrangements") is and has been operated in compliance with its terms and all applicable governmental laws, regulations, rulings and announcements, except where the failure to do so would not, individually or in the aggregate, result in any Material Adverse Effect on the Bank. (b) The present value of all accrued benefits under each Plan which is subject to Title IV of ERISA did not, as of the latest valuation date, exceed the -16- then current value of the assets of such Plan allocable to such accrued benefits, based upon the actuarial assumptions currently utilized for such Plan. Full payment has been made of all amounts which the Bank is required under the terms of all Plans to have paid as contributions or premiums to or in respect of such Plans as of the last day of the most recent fiscal year of each such Plan ended prior to the date hereof. All expenses relating to contributions or premiums due and owing with respect to the Plans have been properly accrued and reflected in the Call Reports as of the date of such Call Reports or will be properly accrued and reflected in the Closing Date Balance Sheet. None of the Plans have incurred any "accumulated funding deficiency" (within the meaning of Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each such Plan ended prior to the date hereof. Except as set forth on the Closing Date Balance Sheet, the Bank has no liability for any "employee benefit plan" of the Seller or any ERISA Affiliate. (c) Neither the Bank, any ERISA Affiliate nor any "party in interest" (within the meaning of Section 4975 of the Code) has engaged in a transaction or transactions in connection with which the Bank could be subject, individually or in the aggregate, to either civil penalties assessed pursuant to Section 502(i) of ERISA or tax liabilities imposed by Section 4975 of the Code that would have a Material Adverse Effect on the Bank. No material liability under Title IV of ERISA has been incurred either directly or indirectly by the Bank or any ERISA Affiliate, other than liability for premiums to the PBGC, that has not been satisfied in full. There have been no "reportable events" (within the meaning of Section 4043(b) of ERISA) with respect to any Plan with respect to which the thirty (30)-day notice period has not been waived or with respect to which the PBGC has not determined to waive penalties pursuant to PBGC Technical Update 95-3. No event has occurred and there exists no condition or set of circumstances which presents a risk of the termination or partial termination of any Plan which could result in any liability to the PBGC. There is no pending or, to the knowledge of the Seller, threatened claim against or otherwise involving any Plan, or any fiduciary thereof, by or on behalf of any participant or beneficiary under any Plan (other than routine claims for benefits), nor is there any pending or, to the knowledge of Seller, threatened claim by or on behalf of any of the Plans, which has or could have a Material Adverse Effect on the Bank. (d) Except as set forth on Schedule 3.17, there are no unfunded obligations under any Plan providing benefits after termination of employment to any employee of -17- the Bank (other than continuation of health coverage as required by Part 6 of Title I of ERISA). 3.18 TAXES AND TAX RETURNS. The Bank and each of its Subsidiaries has timely filed all federal, state, and local tax returns required to be filed by it before the date of this Agreement or have obtained extensions for filing such tax returns and has duly paid or made provisions for the payment of all taxes and other governmental charges (including penalties and interest) which are shown on such tax returns. All of such returns are complete and accurate in all material respects. The amounts set up as reserves as shown on the September 30 Call Report for accrued but unpaid federal, state and local taxes (including any interest or penalties thereon), whether or not disputed, through the period ended September 30, 1996 or for any year or period ending prior thereto, and for which the Bank may be liable in its own right or as transferee of the assets of, or successor to, any Person are adequate under generally accepted accounting principles except where the failure to so reserve would not have a Material Adverse Effect on the Bank. Except as set forth on Schedule 3.18 hereto, there are no claims asserted for federal, state or local taxes or assessments upon the Bank, nor has the Bank given or been requested to give any currently effective waivers extending the statutory period of limitation applicable to any federal or state income tax return for any period, except in each case, which would not have a Material Adverse Effect on the Bank. Except as set forth on Schedule 3.18 hereto, the Bank is not a party to or bound by any tax allocation or tax sharing procedure. Any such tax allocation or tax sharing procedure will be terminated as of the Closing Date. Neither Seller nor Holding Company is aware of any reason why an election under Section 338(h)(10) of the Internal Revenue Code (and similar provisions of state law) would not be available for this transaction. 3.19 LABOR MATTERS. As of the date of this Agreement, neither the Bank nor any of its Subsidiaries is a party to any collective bargaining or labor agreement or union contract, there are no labor or representation negotiations or union organizing efforts pending which involve the Bank, any of its Subsidiaries, or any of their employees and there are no charges of unfair labor practices pending or, to the knowledge of the Seller, threatened by or before any governmental authority which involve the Bank, any of its Subsidiaries, or any of their present or former employees. The Bank is in compliance in all material respects with the terms of each of its written policies and with all applicable governmental laws, regulations, rulings and announcements respecting employment. All liabilities for wages due and owing as of the Closing Date will have been paid or properly accrued for on the Closing Date Balance Sheet in -18- accordance with generally accepted accounting principles. Except as provided in Schedules 3.17 and 3.14, there are no written employment contracts or other agreements to pay wages during employment, upon termination of employment or as a result of the transactions contemplated by this Agreement. 3.20 ENVIRONMENTAL MATTERS. To the knowledge of Seller, the Bank and each of its Subsidiaries is in compliance with all environmental laws, rules and regulations of the United States of America and of states and localities in which it conducts its business ("ENVIRONMENTAL LAWS"), except for any such noncompliance which, individually or in the aggregate, has not had, and is not expected to have, to the knowledge of Seller, a Material Adverse Effect on the Bank. To the knowledge of Seller, neither the Bank nor any of its Subsidiaries has any liability which, taken singularly or as a whole, if adversely determined, would have a Material Adverse Effect on the Bank (a) for alleged noncompliance with any Environmental Law or (b) relating to the discharge or release into the environment of any hazardous material or waste at or on a site owned, leased or operated by the Bank or any of its Subsidiaries as a branch or otherwise in the conduct of its business ("PROPERTIES OWNED"). Except as set forth in Schedule 3.20, to the knowledge of Seller, no Toxic Substances (as defined below) have been deposited or disposed of in, on or under any Property Owned during the period in which Holding Company or the Bank has owned, occupied, managed, controlled or operated such properties, except to the extent the same, in the aggregate with any other conditions described in this Section 3.20, would not have a Material Adverse Effect upon the Bank. Except as set forth in Schedule 3.20, to the knowledge of Seller, (A) no portion of the Properties Owned has ever been used as a dump, gasoline service station, or dry cleaning establishment, by any person, including past owners, occupants and operators of such properties and (B) no Toxic Substances have ever been deposited or disposed of or allowed to be deposited or disposed of in, on or under such properties, except to the extent the same, in the aggregate with any other conditions described in this Section 3.20, would not have a Material Adverse Effect upon the Bank. Except as disclosed in Schedule 3.20, to the knowledge of Seller, there are no underground or above ground storage tanks (whether or not currently in use) located on or under any Property Owned, and no underground tank previously located on the Property Owned has been removed therefrom. For purposes of this Agreement, (1) "Toxic Substances" shall mean petroleum or petroleum-based substances or waste, hazardous waste, PCBs, pesticides, herbicides, radioactive materials, asbestos or asbestos -19- containing materials, urea formaldehyde foam insulation, or substances defined as "hazardous substances" or "toxic substances" in any Environmental Laws; (2) materials will be considered to be deposited or disposed of in, on or under any real property if such materials have been stored, treated, recycled or used in violation of applicable law or accidentally or intentionally spilled, released, dumped, emitted or otherwise placed, deposited or disposed of, in, on or under such property; and (3) costs of violations or conditions shall take into account, without limitation, liabilities, damages, penalties, injunctive relief or removal, remediation or other costs under any applicable Environmental Law. 3.21 REGULATORY APPROVAL. The Seller is not aware of any reason why the condition set forth in Section 6.1(a) would not be satisfied on or before June 1, 1997. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants to the Seller as follows: 4.1 ORGANIZATION, STANDING AND AUTHORITY OF THE BUYER AND BUYER'S HOLDING COMPANY. The Buyer is a duly organized corporation, validly existing and in corporate good standing under the laws of the State of Delaware and is registered as a bank holding company with the Federal Reserve Board under the Bank Holding Company Act and has full corporate power, right and authority to own and lease its properties and assets and to carry on its business as now conducted. 4.2 AUTHORIZED AND EFFECTIVE AGREEMENT. (a) The Buyer has all requisite corporate power and authority to enter into and perform all of its obligations under this Agreement. The execution and delivery of this Agreement and consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action in respect thereof on the part of the Buyer. This Agreement constitutes a legal, valid and binding obligation of the Buyer enforceable against the Buyer in accordance with its terms, except that enforcement thereof may be limited by the receivership, conservatorship and supervisory powers of bank regulatory agencies generally, as well as bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting enforcement of creditors' rights generally and except that enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in -20- a proceeding in equity or at law) and the availability of equitable remedies. (b) Neither the execution and delivery of this Agreement, consummation of the transactions contemplated hereby nor compliance by the Buyer with any of the provisions hereof shall (i) conflict with or result in a breach of any provision of the Charter or by-laws of the Buyer, (ii) constitute or result in a breach of any term, condition or provision of, or constitute a default under, or give rise to any right of termination, cancellation or acceleration with respect to, or result in the creation of any lien, charge or encumbrance upon any property or asset of the Buyer or any of its Subsidiaries pursuant to, any note, bond, mortgage, indenture, license, agreement or other instrument or obligation, the result of which, individually or in the aggregate, would prevent the Buyer from performing its obligations under this Agreement or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Buyer, excluding from this clause (iii) violations which, either individually or in the aggregate, would not prevent the Buyer from performing its obligations under this Agreement. (c) Except as provided in Section 5.1 hereto and except for consents, approvals, notices, filings or registrations the failure of which to make or obtain would not, individually or in the aggregate, prevent the Buyer from performing its obligations under this Agreement, no consents or approvals of, notices to or filings or registrations with, any public body or authority are necessary, and no consents or approvals of or notices to any third parties are necessary, in connection with the execution, delivery and performance of this Agreement by the Buyer or the consummation by the Buyer of the Acquisition. 4.3 LEGAL PROCEEDINGS. There are no pending or, to the knowledge of Buyer, threatened legal, administrative, arbitration or other proceedings, claims, actions or governmental investigations of any nature against the Buyer which, if adversely determined, would, individually or in the aggregate, prevent the Buyer from performing its obligations under this Agreement. 4.4 BROKERS AND FINDERS. Neither the Buyer nor any of its officers, directors, employees or agents has employed any broker, finder or financial advisor or incurred any liability for any fees or commissions in connection with the transactions contemplated hereby, except for legal, accounting and other professional fees payable by Buyer in connection with the Acquisition. -21- 4.5 FINANCING. The Buyer has, and will have on the Closing Date, available to it capital and cash sufficient to fulfill its obligations hereunder. 4.6 REGULATORY APPROVAL. The Buyer is not aware of any reason why the condition set forth in Section 6.1(a) would not be satisfied on or before June 1, 1997. 4.7 AGREEMENTS WITH BANKING AUTHORITIES. The Buyer is not a party to any commitment, letter, written agreement, memorandum of understanding or order to cease and desist with any federal or state governmental entity charged with the supervision or regulation of banks or bank holding companies or engaged in the insurance of bank deposits, which would prohibit the Buyer from entering into this Agreement or consummating the Acquisition or otherwise require the consent of such governmental entity prior to the consummation of the Acquisition, and the Buyer has not received written notification from any such federal or state governmental entity that it may be requested to enter into, or otherwise be subject to, any such commitment, letter, written agreement, memorandum of understanding or cease and desist order. 4.8 NON-DISTRIBUTIVE INTENT. Buyer is acquiring the Stock for its own account and not for the account of others for investment purposes and not with a view to the resale or distribution thereof. Buyer will not sell or dispose of any of the shares of the Stock without, prior thereto, registration under the Securities Act of 1933, as amended, or establishing an exception therefrom. Notwithstanding the foregoing, Buyer shall not be prohibited from transferring the Stock, at any time after the Closing Date, to another affiliate of Buyer. ARTICLE 5 COVENANTS 5.1 APPLICATIONS. As promptly as practicable, and in any event not later than twenty (20) days after the date hereof, the Buyer shall submit all requisite applications for prior approval of the transactions contemplated by this Agreement to the Federal Reserve Board and any other appropriate bank regulatory agency, and in addition thereto, each of the parties hereto shall, and they shall cause their respective Subsidiaries to, as promptly as practicable, submit any other applications, notices or other filings to any other state or federal government agency, department or body, which is required for consummation of the Acquisition (including for consummation of any of the actions contemplated by Schedule 5.3 hereto). The Buyer and the Seller each -22- represents and warrants to the other that all information concerning it and any of its Subsidiaries, directors, officers and shareholders included (or submitted for inclusion) in any application, notice or filing contemplated under this Section 5.1 shall be true, correct and complete in all respects. 5.2 EFFORTS. The Buyer and the Seller shall each use all reasonable efforts in good faith to (a) furnish as promptly as practicable such information as may be required in connection with the preparation of the applications, notices or other filings referred to in Section 5.1 above, (b) take or cause to be taken all action necessary or desirable on its part so as to permit consummation of the Acquisition at the earliest reasonable date, including, without limitation, using all reasonable efforts to obtain all permits, authorizations, consents, waivers and approvals from third parties or governmental authorities required for the consummation of the transactions contemplated hereby, and (c) obtain all necessary approvals for a reduction in the shareholders' equity of the Bank through normal or special dividends, a reduction in surplus or any other permitted reduction in shareholders' equity. The Buyer shall use all reasonable efforts to lift or rescind any injunction, restraining order or other order adversely affecting the abilities of the parties to consummate the transactions contemplated hereby. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall take all such necessary or desirable action. Notwithstanding the foregoing, Buyer agrees to use its best efforts to obtain all necessary regulatory approvals in connection with the Acquisition, including, without limitation, the approval of the Board of Governors of the Federal Reserve System under the Bank Holding Company Act, and to take all necessary steps to raise common equity capital to the extent necessary or required to obtain such regulatory approvals. 5.3 CONDUCT OF BUSINESS OF THE BANK PENDING CLOSING. (a) During the period from the date of this Agreement to the Closing Date, except with the consent of Buyer (which consent shall be deemed to have been given upon the passage of five (5) business days following written notice from the Seller to the Buyer of the proposed action or inaction by the Bank unless the Buyer shall object in writing to the Seller within such five (5)-day period), the Seller will cause the Bank to: (i) maintain its corporate existence and good standing, except where any failure to maintain such good standing does not or would not -23- have a Material Adverse Effect on the Bank; (ii) conduct its business and engage in transactions only in the ordinary course and consistent with prior practice, except that the Bank may transfer the Retained Assets and Liabilities in accordance with the terms of this Agreement and carry out the transactions described in Schedule 5.3 hereto; (iii) use all reasonable efforts to maintain and keep its properties in as good repair and condition in all respects as they presently exist, except for ordinary wear and tear and damage due to casualty; (iv) use all reasonable efforts to maintain in full force and effect insurance generally comparable in amount and in scope of coverage to that now maintained by it (with the exception of any insurance policies which are listed on Schedule 1 hereto), and to timely notify the Buyer prior to any termination of any such insurance (other than on the Closing Date as contemplated by Section 3.16); (v) comply with and perform in all respects its obligations and duties (A) under contracts, leases and documents relating to or affecting its assets, properties and business and (B) imposed upon it by all federal, state and local laws and all rules, regulations and orders imposed by federal, state or local governmental authorities, judicial orders, judgments, decrees and similar determinations; (vi) maintain or establish immediately prior to the Closing a reserve for loan and lease losses in an amount not less than $7,500,000 after continuing to administer Loans in conformity with Bank policy and past practices; and -24- (vii) use all reasonable efforts to continue to conduct the business of the Bank with its business organization substantially intact (except with regard to the transfer of Retained Assets and Liabilities in accordance with the terms of this Agreement) and to preserve the goodwill of those having business relationships with the Bank; PROVIDED, HOWEVER, that Seller shall not be obligated to pay retention bonuses to employees unless the Buyer shall have requested or approved the payment of such bonuses and reimbursed the Seller for such payments. (b) The Seller agrees that from the date of this Agreement to the Closing Date, except as otherwise permitted or required by this Agreement (including as set forth on Schedule 5.3 hereto and in connection with the transfer of the Retained Assets and Liabilities in accordance with the terms of this Agreement), or consented to by the Buyer which consent shall be deemed to have been given upon the passage of five (5) business days (or, in case the Bank proposes to undertake or enter into any commitment to do any of the things prohibited without the consent of the Buyer in the parenthetical set forth in paragraph (x) below, three (3) business days) following written notice from the Seller to the Buyer of the proposed action by the Bank unless the Buyer shall object in writing to the Seller within such five-day or three-day period, the Seller will prevent the Bank from: (i) changing any provision of its Charter or by-laws; (ii) changing the number of shares of its authorized or issued Stock; (iii) issuing any shares of capital stock of the Bank or any of the Bank's Subsidiaries or any securities convertible into shares of such capital stock or granting any Rights relating to the authorized or issued capital stock of the Bank or any securities convertible into shares of such capital stock; (iv) splitting, combining or reclassifying any shares of its Stock; -25- (v) purchasing, redeeming, retiring or otherwise acquiring, or hypothecating, pledging or otherwise encumbering, any shares of its Stock; (vi) granting any severance, reduction in force, separation or termination pay (other than pursuant to agreements or policies of the Bank in effect on the date of this Agreement), or entering into any agreement which would grant severance, reduction in force, separation or termination pay, employment agreement or plan or deferred compensation, noncompetition, bonus, stock option, profit-sharing, retirement or incentive plan or any other similar plan with, any of its officers or directors, or, except as required by applicable law or regulation, renewing, amending or modifying any such agreement, arrangement or plan now in existence (including but not limited to any Plan) or increasing the compensation payable to or granting bonuses to any of its directors, officers or other employees other than merit increases in accordance with past practices and general increases to employees as a class in accordance with past practice or as required by law; (vii) making any capital expenditures in excess of $100,000 per project or $500,000 in the aggregate; (viii) issuing any notes or other evidence of funded indebtedness with a maturity of more than ninety (90) days from the date of issuance; (ix) making application for the opening or closing of any branch offices; (x) except as otherwise expressly permitted under this Agreement, undertaking or entering into any contract or other commitment to (i) make any new loan to any -26- borrower, or repurchase, or enter into any agreement to repurchase, all or any portion of any loan or commitment from any other financial institution except such loans and commitments for loans which are individually less than or equal to $500,000 in principal if fully secured and unclassified, or $250,000 in principal if an agribusiness relationship loan, or $100,000 in principal if not fully secured, or $50,000 in principal if criticized or classified as nonaccrual, in accordance with Bank policies and procedures, or (ii) renew any existing loan (other than outstanding lines of credit) in excess of the then current outstanding principal balance except in compliance with the limitations set forth in part (i), above; (xi) merging with or into, consolidating with, affiliating with, or purchasing or acquiring, any other Person, or, except to realize upon collateral and except for purchases or sales of loans in the ordinary course of its business or as otherwise expressly permitted under this Agreement, acquiring all or any portion of the assets of any other Person, or selling all or any portion of its assets; (xii) making any change in its accounting methods or practices, other than changes in accordance with generally accepted accounting principles, regulatory accounting principles generally applicable to depository institutions such as the Bank, or as required by law or regulation; (xiii) seeking or accepting deposits other than in the ordinary course of business or engaging in any brokered deposit transactions; or (xiv) agreeing to do or announcing an intention to agree to do any of the foregoing. -27- 5.4 CURRENT INFORMATION. (a) During the period from the date of this Agreement to the Closing Date, the Seller will cause one or more of its or the Bank's designated representatives to confer on a regular basis with representatives of the Buyer and to report to the Buyer the general status of the ongoing operations of the Bank and will, or will cause the Bank to, provide to Buyer copies of any Call Reports and internally generated management reports produced, within five (5) business days of the production of such reports. (b) The Buyer and the Seller will each promptly notify the other after senior management of the Buyer or the Seller, as the case may be, receives notice of any condition or event which would constitute a violation of the terms and conditions of this Agreement. (c) In the event that either the Buyer or the Seller determines that a condition to its obligations to complete the Acquisition cannot be fulfilled and that it will not waive that condition, it will promptly notify the other party. 5.5 ACCESS TO PROPERTIES AND RECORDS. The Seller shall, and shall cause the Bank to, permit the officers, attorneys, accountants and other representatives of the Buyer reasonable access (during normal business hours and following reasonable notice to Seller) during the period prior to the Closing Date to the properties of the Bank, and shall disclose and make available to the Buyer all books, papers and records relating to the Seller's ownership or control of the Stock, or the Bank's properties, operations, employees, obligations and liabilities, including, but not limited to, all of the Bank's books of account (including the general ledger), tax records, minute books of directors' and stockholders' meetings, Charter, by-laws, contracts and agreements, filings with any regulatory authority, litigation files, plans affecting employees of the Bank, and any other business activities of the Bank. Further, the Seller shall, and shall cause the Bank to, at the Buyer's request and expense, use all reasonable efforts to cooperate with the Buyer with respect to the preparation for the combination and integration of the businesses, systems and operations of the Buyer and the Bank, and shall confer on a regular and frequent basis with one or more representatives of the Buyer to report on operational and related matters. Notwithstanding the foregoing, the Seller shall, and shall cause the Bank to, provide such information as is reasonably requested by the Buyer about the data processing systems used in the operation of the Bank's business in order to enable the Buyer to prepare for the conversion of the Bank's systems to the Buyer's systems and shall provide the Buyer with such access as is reasonably requested by the Buyer to the Bank's system in order to enable the Buyer -28- to run and balance trial conversions (PROVIDED that the Seller and the Buyer shall have agreed upon reasonable measures for protecting the security of the Bank's systems). The Seller shall not be required to provide access to or to disclose information which does not relate to the Bank or where Seller reasonably believes that such access or disclosure could or would violate or prejudice the rights or business interests or confidences of any customer or other Person, jeopardize the attorney-client privilege of the Seller or the Bank, or contravene any law, rule, regulation, order, judgment, decree or binding agreement. All information disclosed by the Seller to the Buyer pursuant to this Section 5.5 shall be subject to the Confidentiality Agreement. 5.6 EMPLOYMENT AND EMPLOYEE BENEFITS AFTER THE CLOSING. Certain terms and conditions regarding the parties' respective obligations with respect to employment and employee benefit matters under this Agreement, and the corresponding rights of employees of the Bank hereunder, are set forth in Schedule 5.6 hereto, the terms of which are incorporated herein by this reference and made a part hereof. 5.7 NO SOLICITATION. Unless and until this Agreement shall have been terminated by either party pursuant to Section 7.1 hereof, neither the Seller nor the Bank shall, except to the extent required by the fiduciary obligations of its respective board of directors, directly or indirectly, encourage, solicit, initiate or participate in any discussions or negotiations with, or provide any information to, any Person (other than the Buyer or any of its affiliates or representatives) concerning any merger involving the Bank, sale of all or substantially all of the Bank's assets, sale of shares of Stock issued by the Bank or similar transaction involving the Bank (an "Acquisition Transaction"). The Seller will promptly communicate to the Buyer the terms of any proposal, discussion, negotiation or inquiry relating to an Acquisition Transaction and the identity of the Person making such proposal or inquiry which it may receive in respect of any such transaction. 5.8 PUBLIC ANNOUNCEMENTS. Except as otherwise required by law or the rules of the New York Stock Exchange, the Seller and the Buyer will cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement or any of the transactions contemplated hereby. 5.9 DIVESTITURE. If the Buyer shall determine that it is necessary or advisable, in order to resolve or minimize objections that may be asserted with respect to the Acquisition by the Federal Reserve Board, the United States Department of Justice, any state or -29- federal banking authority or any other governmental entity, that the Buyer not acquire (directly or indirectly) from the Seller certain assets or deposit liabilities of the Bank or the Bank's Subsidiaries, the Buyer shall so notify the Seller and shall identify those assets and deposit liabilities, if any, which the Buyer proposes that it should not acquire. The Buyer and the Seller shall thereafter cooperate in an assessment of which assets and deposit liabilities should be disposed of, and the Seller agrees to use all reasonable efforts and to cause the Bank to use all reasonable efforts to assist the Buyer in arranging such divestitures. No such objection by any governmental entity, nor any failure by the Seller to perform its obligations under this Section 5.9, shall affect the obligation of the Buyer to consummate the Acquisition. Buyer shall be responsible for paying Seller, and Seller shall be entitled to receive from Buyer, any costs or expenses incurred directly by Seller in complying with its obligations under Section 5.5 as to any buyer of any assets or deposit liabilities involved in any such divestiture. 5.10 COVENANT NOT TO COMPETE. (a) For a period of three (3) years after the Closing Date, the Seller shall not open, and shall not permit any of its Subsidiaries to open, any office within the State of Wyoming for the provision of Retail Public Branch Services (as defined below); provided, that this Section 5.10(a) shall not require any disposition or closing of any branch operated, prior to any such transaction, (i) by any institution that acquires the Seller, (ii) by any institution resulting from any merger of the Seller with or into any institution or (iii) by any institution that Seller acquires; provided, however, that in connection with any transaction of the type described in subsections (ii) or (iii) above, the provision of Retail Public Branch Services in the State of Wyoming cannot be the predominant factor motivating Seller to consummate the transaction. (b) The Seller agrees that it will leave with the Bank, and not remove or otherwise obtain, in any manner or in any form or medium, any list compiled for purposes of identifying the customers of the Bank (each, a "Bank Customer List"), and that it shall not, and shall not permit its Subsidiaries to, use for any purpose (including any solicitation of business for itself or for any of its Subsidiaries) at any time after the Closing Date any Bank Customer List. Further, the Seller agrees that it shall not, nor shall it permit any of its Subsidiaries to, use after the Closing Date for any purpose whatsoever, including, without limitation, any solicitation or marketing efforts, any proprietary information concerning any customers named on any Bank Customer List; PROVIDED, HOWEVER, that the foregoing shall not preclude the Seller or any of its affiliates from engaging in general -30- promotions to the public at large or to customers of Seller or any of its affiliates to generate new business, provided that such solicitations are not specifically generated from any Bank Customer List and PROVIDED, FURTHER, that nothing in this Section 5.10(b) shall obligate Seller to remove the name of a customer of the Bank, or any additional information relating to such customer, from any other listing or database not compiled for purposes of identifying the customers of the Bank. (c) "Retail Public Branch Services" shall mean retail banking services provided to the public from any branch or other physical facility, including automated teller machines, including, without limitation, the taking of deposits of any type, and the origination of direct residential (including home equity) mortgage loans, commercial mortgage loans, and direct home improvement, auto and other such consumer loans. (d) Except as specifically set forth in this Section 5.10 (a) and (b), Seller shall not be prohibited from competing with Buyer. 5.11 USE OF NAME "KEY". Effective upon the Closing, Buyer shall change the name of the Bank so that the word "Key" shall no longer appear in its name. From and after the Closing Date, the Buyer shall not, and shall cause its affiliates not to, use the name "Key" or any derivative thereof and shall, at the request of the Seller, execute and deliver to the Seller or Seller's designee any instrument that is necessary or desirable to transfer to the Seller or Seller's designee all of its right, title and interest in and to that name. Within twenty (20) days following the Closing, Buyer shall have ceased using any documentation or other materials which include or reference the name "Key" or any derivative thereof and shall have destroyed all such documentation and materials; provided, however, that Buyer shall continue to accept and honor any checks or other documentation held by customers of the Bank as of the Closing Date which include or reference the name "Key" or any derivative thereof. 5.12 TRANSFER OF RETAINED ASSETS AND LIABILITIES PRIOR TO THE CLOSING. Prior to the Closing, Seller will use its reasonable efforts to cause the transfer at book value, whether by sale, dividend or other disposition, of the Retained Assets and Liabilities from the Bank to another affiliate of Seller. In the event that the transfer of the Retained Assets and Liabilities to another affiliate of Seller is not completed prior to the Closing, Buyer shall cooperate with Seller to complete the transfer at book value of the Retained Assets and Liabilities as soon as practicable following the Closing, including, without limitation, the execution and delivery, at any time following the Closing, of any and all proper -31- assignments, conveyances, and assurances by the officers and/or directors of the Bank and the taking of all acts necessary or desirable to vest, perfect, or confirm title to any Retained Assets and Liabilities in Seller (or its designee) and to otherwise carry out the provisions of this Section 5.12. 5.13 ENVIRONMENTAL REMEDIATION. (a) PHASE I ENVIRONMENTAL AUDIT. For all Properties Owned as to which a Phase I Environmental Audit (as defined in Section 5.13(e)) meeting the requirements of this Section 5.13(a) was not previously provided to Buyer, Buyer may commission, at its sole expense, a Phase I Environmental Audit by one or more qualified independent environmental engineers or consultants reasonably acceptable to Seller. The Environmental Audit Reports (as defined in Section 5.13(e)) relating to the Phase I Environmental Audit shall be made available to Seller as soon as is practicable and, in any event, no later than 10 days following the date of completion of the Phase I Environmental Audit. (b) PHASE II ENVIRONMENTAL AUDIT AND ENVIRONMENTAL AUDIT RESPONSE. Within ten (10) business days after either Buyer's receipt of the Environmental Audit Report relating to any Environmental Audit or within ten (10) business days after Buyer's receipt of any Environmental Occurrence Notification (as defined in Section 5.13(c)), Buyer shall, with respect to each parcel of the Properties Owned, provide Seller with an Environmental Audit Response (as defined in Section 5.13(e)). If the Environmental Audit Response requests an initial or additional Phase II Environmental Audit (as defined in Section 5.13(e)), Buyer may commission a Phase II Environmental Audit by the environmental engineer or consultant who performed the Phase I Environmental Audit or by such other qualified environmental engineer or consultant reasonably acceptable to Seller. The cost of each such Phase II Environmental Audit shall be paid by Buyer. Such Phase II Environmental Audit shall be completed as soon as is practicable and, in any event, no later than 30 days following the date of the delivery of the Environmental Audit Response to Seller. Buyer shall, promptly after receipt of the Environmental Audit Report relating to the Phase II Environmental Audit, deliver a copy of such report to Seller. (c) ENVIRONMENTAL OCCURRENCE NOTIFICATION. In the event that Seller either receives notice from any governmental entity, or Seller has knowledge at any time after the date of this Agreement and prior to the Closing Date that there are any Environmental Action Items (as defined in Section 5.13(e)) emanating from, occurring on, or in any way related to, the Properties Owned, which -32- Environmental Action Items are not fully disclosed in the Phase I Environmental Audit Report or, if applicable, the Phase II Environmental Audit Report, Seller shall provide Buyer with notice setting forth the details thereof (the "ENVIRONMENTAL OCCURRENCE NOTIFICATION") as soon as is reasonably practicable, but in no event later than the earlier of seven (7) business days after becoming aware of such Environmental Action Item or at the Closing Date. (d) REMEDIATION; ALLOCATION OF REMEDIATION COSTS; TERMINATION OF AGREEMENT. Seller and Buyer agree that, subject to the provisions hereof, Seller shall remediate or cause to be remediated any Environmental Action Items to the extent required by any governmental authority having requisite jurisdiction. The cost of any remediation undertaken or caused to be undertaken by Seller shall be paid as provided in the following sentence; provided, however, that Buyer may remediate or cause to be remediated any such Environmental Action Item so long as Seller, notwithstanding any other provision of this Agreement to the contrary, has no responsibility for any of the costs related thereto. The cost of any remediation undertaken or caused to be undertaken by Seller shall be paid as follows (the aggregate amount of such costs shall be referred to herein as the "REMEDIATION COSTS"): (i) the Buyer shall pay the first $1,000,000 of Remediation Costs, and (ii) the Seller shall pay the portion of Remediation Costs exceeding $1,000,000; provided, however, that if the Remediation Costs shall exceed $3,500,000, Seller shall have the right to declare this Agreement null and void with no obligations of one party to the other thereafter by giving written notice to that effect to Buyer. For purposes of this Section 5.13(d), the Remediation Costs shall be determined using the estimate of the environmental engineer/consultant who performed the Phase II Environmental Audits ("REMEDIAL COST ESTIMATE"), subject to Seller's right in its sole discretion to request a second estimate from an environmental engineer/consultant selected by it. If the difference between the estimates is 10% or less of the amount of the first estimate, then the Remedial Cost Estimate shall be deemed conclusive and shall be binding. If the difference between the two estimates is more than 10% of the amount of the first estimate and the parties cannot reach agreement, then the two environmental engineers/consultants shall select a third environmental engineer/consultant to produce a third estimate, and the aggregate cost of the remediation shall be the amount of the third estimate. In the event that the first two environmental engineers/ consultants are unable to agree upon a third, then the third environmental engineer/consultant shall be selected from a list of names prepared by the first two environmental engineers/consultants with the parties striking names in order with the party striking first to be determined by the flip of a coin. The cost of the second environmental engineer/consultant shall be paid -33- by Seller and the cost of the third environmental engineer/consultant shall be paid one-half by Seller and one-half by Buyer. (e) DEFINITIONS. Except as otherwise defined in this Section 5.13 or in this Agreement: (i) "PHASE I ENVIRONMENTAL AUDIT" means an inspection, investigation and audit of the Properties Owned with respect to all Environmental Laws and Environmental Action Items which shall include a view of the Properties Owned, inquiry into present and past uses of the Properties Owned to the extent necessary to enable Buyer to avail itself of the so-called "Innocent Purchaser" defense contained in Section 101(35) of the Comprehensive Environmental Response, Compensation and Liability Act, review of records of the United States Environmental Protection Agency and applicable state or local environmental protection agencies, field observations, review of applicable air and water discharge permits, solid and hazardous waste disposal permits, if any, the status thereof and all requirements associated therewith, and such additional investigations (without physical sampling or analysis) as Buyer and the applicable environmental engineer or consultant shall determine are appropriate; provided, however, that at a minimum, the Phase I Environmental Audit shall be conducted in accordance with the 1993 ASTM standard promulgated therefor. (ii) "PHASE II ENVIRONMENTAL AUDIT" means such additional investigation and analysis, including physical sampling and analysis, as Buyer and the applicable environmental engineer or consultant shall determine are appropriate. (iii) "ENVIRONMENTAL AUDIT RESPONSE" means the written notification to be provided to Seller -34- by Buyer based upon the results of the applicable Environmental Audit, such notification to either (A) state that there are no events or conditions which require further investigation or constitute Environmental Action Items; or (B) specifically identify and describe, referring to relevant portions from the applicable Environmental Audit Report, any events or conditions identified in the Environmental Audit Report which, in the reasonable judgment of Buyer, require further investigation or constitute an Environmental Action Item. (iv) "ENVIRONMENTAL ACTION ITEM" means any condition or circumstance which violates, is not in compliance with, or is not consistent with any Appropriate Governmental Standard without regard to whether any such condition or circumstance otherwise would or would not be required to be reported pursuant to any applicable Environmental Laws and without regard to whether any such condition or circumstance would or would not be a violation of, or a condition required to be addressed or remediated by, any applicable Environmental Law. (v) "APPROPRIATE GOVERNMENTAL STANDARD" means the following, in each case as in effect at the time the relevant task pursuant to this Agreement is being performed: (A) with respect to the presence of any hazardous, toxic or other pollutants, contaminants, chemicals or materials regulated by Environmental Laws in any environmental medium or media, the relevant clean-up or remediation standards that would be applied by the applicable governmental authority having jurisdiction over the Properties Owned; and, (B) with respect to all other conditions or circumstances, any applicable Environmental Law. -35- (vi) "ENVIRONMENTAL AUDIT REPORT" means the written report of the applicable environmental engineer or consultant with respect to the Phase I Environmental Audit or the Phase II Environmental Audit, as the case may be. Any Phase II Environmental Audit Report shall either state the applicable environmental engineer or consultant's opinion as to the actions to be taken in order to remediate any Environmental Action Item to the extent necessary so that such conditions or circumstances would no longer constitute Environmental Action Items, or specify the additional work necessary to render such opinion. Any Phase II Environmental Audit Report shall, on the basis of actual bids or otherwise, estimate the cost to remediate Environmental Action Items as specified above. 5.14 VACATION POLICY. Seller shall cooperate with Buyer to generally encourage employees of the Bank to take their pro rata portion of vacation time consistent with Seller's vacation policy currently in effect, as appropriate. ARTICLE 6 CONDITIONS TO CLOSING 6.1 CONDITIONS TO CLOSING - THE SELLER AND THE BUYER. The respective obligations of the Seller and the Buyer to effect the Acquisition shall be subject to satisfaction of the following conditions at or prior to the Closing Date, neither of which may be waived by the parties hereto: (a) All necessary material approvals, authorizations and consents of all governmental agencies or authorities required to consummate the Acquisition and the other transactions contemplated by this Agreement (including by Schedule 5.3 hereto) shall have been obtained and shall remain in full force and effect, and all waiting periods relating to such approvals, authorizations or consents shall have expired; no such approval may be deemed by Buyer to not have been obtained by reason of any divestiture or holding separate required in any approval or consent of the Federal Reserve Board or the United States -36- Department of Justice or pursuant to the order of a court of competent jurisdiction; and (b) Neither the Seller nor the Buyer nor any of their Subsidiaries shall be subject to any order, decree or injunction of any court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated by this Agreement. 6.2 CONDITIONS TO CLOSING - THE BUYER. The obligations of the Buyer to effect the Acquisition shall be subject to satisfaction of the following additional conditions on or prior to the Closing Date unless waived by the Buyer pursuant to Section 7.4 hereof: (a) The representations and warranties of the Seller set forth in Article 3 hereof, as supplemented by the Seller as contemplated by the following sentence, shall be true and correct, in all material respects, as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (or on the date when made in the case of any representation and warranty which specifically relates to an earlier date)(PROVIDED, that where any such representation and warranty already includes a Material Adverse Effect or materiality exception, no further materiality exception is to be permitted by this clause), except (i) as otherwise contemplated by this Agreement or consented to in writing by the Buyer and (ii) for any breach of any representation or warranty of Seller which breach relates to or arises out of any of the Retained Assets and Liabilities. The Seller shall have provided to the Buyer, no later than five days prior to the Closing Date, supplements to each Schedule attached hereto or other information so that such Schedule shall set forth, as of the Closing Date, all the information contemplated by the representation of Seller to which it relates; (b) The Seller and the Bank shall have in all material respects performed all of the obligations and complied with all covenants required by this Agreement; PROVIDED, that where any such covenant already includes a Material Adverse Effect or materiality exception, no further materiality exception is to be permitted by this clause; (c) The Seller shall have delivered to the Buyer a certificate, dated the Closing Date and signed by either its Chief Operating Officer, Chief Banking Officer or Chief Financial Officer to the effect that the conditions set forth in this Section 6.2 have been satisfied; (d) The Seller shall have executed and delivered to the Buyer a Tax Agreement substantially in the -37- form of Exhibit A hereto (the "Tax Agreement"), and such Tax Agreement shall be in full force and effect; (e) The Bank and its Subsidiaries shall have received the resignations of any of their respective directors not selected by the Buyer to serve as directors after the Closing Date; and (f) The certificate(s) for the Stock shall have been received in accordance with Section 2.4(b)(ii) hereof. 6.3 CONDITIONS TO CLOSING - THE SELLER. The obligations of the Seller to effect the Acquisition shall be subject to satisfaction of the following additional conditions on or prior to the Closing Date unless waived by the Seller pursuant to Section 7.4 hereof. (a) The representations and warranties of the Buyer set forth in Article 4 hereof shall be true and correct, in all material respects, as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (or on the date when made in the case of any representation and warranty which specifically relates to an earlier date)(PROVIDED, that where any such representation and warranty already includes a Material Adverse Effect or materiality exception, no further materiality exception is to be permitted by this clause), except as otherwise contemplated by this Agreement or consented to in writing by the Seller or except where such inaccuracy would not, individually or in the aggregate, materially adversely affect the Buyer's ability to consummate the transactions contemplated by this Agreement; (b) The Buyer shall have in all material respects performed all obligations and complied with all covenants required by this Agreement; PROVIDED, that where any such covenant already includes a Material Adverse Effect or materiality exception, no further materiality exception is to be permitted by this clause; (c) The Buyer shall have delivered to the Seller a certificate, dated as of the Closing Date and signed by its Chairman or President to the effect that the conditions set forth in this Section 6.3 have been satisfied; (d) The Buyer shall have executed and delivered to the Seller the Tax Agreement, and the Tax Agreement shall be in full force and effect; and (e) The Purchase Price shall have been paid in accordance with Section 2.2 above. -38- ARTICLE 7 TERMINATION, INDEMNIFICATION, WAIVER AND AMENDMENT 7.1 TERMINATION. This Agreement may be terminated: (a) at any time on or prior to the Closing Date, by the mutual consent in writing of the parties hereto; (b) at any time on or prior to the Closing Date, by either party hereto in writing, if (i) the other party has, in any material respect, breached any covenant or agreement contained herein(PROVIDED, that where any such covenant already includes a Material Adverse Effect or materiality exception, no further materiality exception is to be permitted by this clause) or (ii) any representation or warranty of the other party contained herein is or becomes inaccurate or misleading in any material respect (PROVIDED; that where any such representation and warranty already includes a Material Adverse Effect or materiality exception, no further materiality exception is to be permitted by this clause), and in either case if such breach or inaccuracy has not been cured or otherwise corrected within forty-five (45) days after the date on which written notice of such breach or inaccuracy is given to the party committing such breach and, in the reasonable judgment of the party terminating this Agreement, cannot be cured or otherwise corrected by the close of business on October 1, 1997; (c) by either party hereto in writing, if any of the applications for prior approval referred to in Section 5.1 hereof is denied, and the time period for appeals and requests for reconsideration has run; (d) by Seller in writing, pursuant to Section 5.13(d) hereof; or (e) by either party hereto in writing, if the Closing Date has not occurred by the close of business on October 1, 1997. 7.2 EFFECT OF TERMINATION. In the event this Agreement is terminated pursuant to Section 7.1 hereof, this Agreement shall become null and void and have no further force or effect, except that the provisions relating to confidentiality and expenses set forth in Sections 5.5 and 8.1, respectively, shall survive any such termination. 7.3 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION. (a) Except as otherwise specifically provided in this Agreement, all -39- representations, warranties, covenants and other agreements in this Agreement or in any instrument delivered pursuant hereto shall survive the Closing and any investigation or inquiry made by the Seller or the Buyer, as the case may be, provided that any claim for a breach of any such representation, warranty, covenant or other agreement must be made within the following periods: (i) with respect to the matters addressed in Section 3.18, prior to the lapse of time within which federal, state or local taxing authorities are entitled to assert any tax liability on the part of the Bank for tax periods ending at or prior to the Closing Date; and (ii) with respect to all representations, warranties, covenants and agreements not specified in clause (i) above, within one (1) year after the Closing Date. (b) The Seller agrees to indemnify the Buyer (and its directors, officers, agents and employees) against, and the Buyer agrees to indemnify the Seller (and its directors, officers, agents and employees) against, and each of them agrees to protect, to defend and to hold harmless the other (and the other's directors, officers, agents and employees) from all Damages in excess of $1,000,000 arising out of or resulting from any inaccuracy in, or breach of, any of the representations, warranties, covenants or other agreements of each of them contained herein or in any certificate or instrument delivered in connection herewith (except, in the case of a breach of the representation contained in Section 3.20, for Remediation Costs as to which the provisions relating to indemnification herein shall be inapplicable and which shall be paid solely as provided for in Section 5.13 hereof), which inaccuracy or breach is asserted and a claim for indemnification with respect thereto is made within the survival period set forth in Section 7.3(a), provided, however, that neither party's individual liability under this Section 7.3(b) shall exceed in the aggregate $15,000,000. Notwithstanding anything to the contrary herein, from and after the Closing Date, subject to the terms and conditions of this Agreement, Seller shall indemnify and protect, defend and hold harmless Buyer (and its directors, officers, agents and employees) from and against all Damages arising out of or resulting from (a) the Retained Assets and Liabilities, (b) the transfer of the Retained Assets and Liabilities from the Bank to another affiliate of KeyCorp and (c) that certain lawsuit entitled KAAREN WOOTTEN V. KEYCORP, ET.AL., currently pending in the U.S. District Court of the Northern District -40- of New York, as to which the Bank is a defendant. Notwithstanding the provisions of Section 7.3(a)(ii) or any other provisions to the contrary herein, the Buyer shall indemnify and protect, defend and hold harmless Seller and Holding Company (and their respective directors, officers, agents and employees) from and against all Damages arising out of or resulting from any failure on the part of Buyer or any of its affiliates to perform under any leases or subleases, including, without limitation, those Damages which arise under that certain Guaranty or Guaranties to which the Holding Company is a party as guarantor and which relate to those leases or subleases, provided that such failure to perform is asserted, and a claim for indemnification with respect thereto is made, during the term of such leases or subleases, as the same may be extended from time to time, plus any applicable statute of limitations period. (c) In the event that the Buyer seeks indemnification from the Seller pursuant to Section 7.3(b) with respect to any environmental claim, (i) notwithstanding anything to the contrary set forth in paragraph (d) below, the Seller shall have the right to control any remediation of such real property which may be required by any federal, state or local governmental agency or authority, and, in the event of a suit, shall assume the primary defense of and shall have the authority to negotiate, compromise and settle such claim. In the event the Seller elects to assume control over any remediation, it will, at the request of the Buyer, proceed expeditiously with the remediation, with a view both to the cost of the efficient completion of the remediation and the time constraints of the Buyer. The Buyer shall retain the right to employ its own counsel and to participate in the defense of any such claim, but shall be solely responsible for its own costs and expenses in connection with such participation. The Buyer agrees to cooperate with the Seller in the investigation of any such claim. (d) In any case under this Agreement where one party may be required to indemnify the other against any claim or legal action, other than indemnification under the Tax Agreement, which shall be governed in accordance with the terms and conditions of the Tax Agreement, indemnification shall be provided in accordance with the procedure outlined below: (i) Provided that prompt notice is given of a claim or suit for which indemnification might be claimed, unless the failure to provide such notice does not materially prejudice the interests of the party to whom such notice is to be provided, the indemnifying party -41- promptly will defend, contest, or otherwise protect against any such claim or suit at its own cost and expense. (ii) The indemnified party may, but will not be obligated to, participate at its own expense in a defense thereof by counsel of its own choosing, but the indemnifying party shall be entitled to control the defense unless the indemnified party has relieved the indemnifying party from liability with respect to the particular matter; PROVIDED that the indemnifying party may only settle or compromise the matter subject to indemnification without the consent of the indemnified party if such settlement includes a complete release of all indemnified parties as to the matters in dispute; and PROVIDED FURTHER that the indemnified party will not unreasonably withhold or delay consent to any settlement or compromise that requires its consent. (iii) In the event the indemnifying party fails to timely defend, contest or otherwise protect against any such claim or suit, the indemnified party may, but will not be obligated to, defend, contest or otherwise protect against the same, and make any compromise or settlement thereof and recover the entire costs thereof from the indemnifying party, including reasonable attorneys' fees, disbursements and all amounts paid as a result of such claim or suit or the compromise or settlement thereof; PROVIDED, HOWEVER, that if the indemnifying party undertakes the defense of such matter, the indemnified party shall not thereafter be entitled to recover from the indemnifying party for its costs incurred in the defense thereof other than the reasonable costs of investigation undertaken by the indemnified party and reasonable costs of providing assistance. (iv) The indemnified party shall cooperate and provide such -42- assistance as the indemnifying party may reasonably request in connection with the defense of the matter subject to indemnification and in connection with recovering from any third parties amounts that the indemnifying party may pay or be required to pay by way of indemnification hereunder, PROVIDED that the indemnified party shall not be required to file a claim with its insurers as to any matter subject to indemnification. The indemnified party shall protect its position with respect to any matter that may be the subject of indemnification hereunder in the same manner as it would any similar matter where no indemnification is available. 7.4 WAIVER. Except with respect to any required regulatory approval, each party hereto, by written instrument signed by an executive officer of such party, may at any time extend the time for the performance of any of the obligations or other acts of the other party hereto and may waive (a) any inaccuracies of the other party in the representations or warranties contained in this Agreement or any document delivered pursuant hereto, (b) compliance with any of the covenants, undertakings or agreements of the other party, or satisfaction of any of the conditions precedent to its obligations (other than those conditions set forth in Section 6.1(a)), contained herein or (c) the performance by the other party of any of its obligations set out herein. 7.5 AMENDMENT OR SUPPLEMENT. This Agreement may be amended or supplemented at any time by mutual written agreement of the Buyer and the Seller. ARTICLE 8 MISCELLANEOUS 8.1 EXPENSES. Except as provided by Section 5.13, or otherwise agreed to herein or in writing by the parties hereto, each party hereto shall bear and pay all costs and expenses incurred by it in connection with the transactions contemplated in this Agreement, including fees and expenses of its own financial consultants, accountants and counsel. 8.2 ENTIRE AGREEMENT, ETC. (a) This Agreement, the Confidentiality Agreement and the Tax Agreement contain the entire agreement between the parties -43- with respect to the transactions contemplated hereunder and supersede all prior arrangements or understandings with respect thereto, written or oral. (b) The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors. Nothing in this Agreement is intended to confer any rights, remedies, obligations or liabilities upon any party other than the parties hereto and their respective successors and permitted assigns. 8.3 NO ASSIGNMENT. Neither of the parties hereto may assign any of its rights or obligations under this Agreement to any other person, except that the Buyer may assign its rights hereunder to an affiliate of the Buyer with prior notice to the Seller, PROVIDED that such assignment shall not, in the Seller's reasonable judgment, be likely to cause any undue delay, expense or burden in completing the transactions contemplated by this Agreement and PROVIDED FURTHER that such designation shall not relieve the Buyer of any of its obligations under this Agreement. 8.4 NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by telecopy, telex, cable or telegram, by overnight express or by registered or certified mail, postage prepaid, addressed as follows: If to the Seller: KeyCorp 127 Public Square Cleveland, Ohio 44114 Attention: Kent E. Allen, Vice President Telephone No.: (216) 689-5534 Facsimile No.: (216) 689-3610 With a required copy to: KeyCorp 127 Public Square Cleveland, Ohio 44114 Attention: Daniel R. Stolzer, Esq., Senior Vice President and Senior Managing Counsel Telephone No.: (216) 689-4110 Facsimile No.: (216) 689-4121 -44- If to the Buyer: Community First Bankshares, Inc. 520 Main Avenue Fargo, North Dakota 58124 Attention: Donald R. Mengedoth, President Facsimile No.: (701) 237-4517 With a required copy to: Lindquist & Vennum P.L.L.P. 4200 IDS Center Minneapolis, MN 55402 Attention: Steven J. Johnson, Esq. Facsimile No.: (612) 321-3207 A party may change its address for notice purposes by written notice to the other party hereto. 8.5 CAPTIONS. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 8.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 8.7 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio applicable to agreements made and entirely to be performed within such jurisdiction except to the extent federal law may be applicable. 8.8 EFFECT OF INVESTIGATIONS. No investigation by the parties hereto made heretofore or hereafter, whether pursuant to this Agreement or otherwise, shall affect the representations and warranties of the parties which are contained herein and each such representation and warranty shall survive such investigation, subject, however, to Section 7.3(a) hereof. 8.9 SEVERABILITY. In the event that any one or more provisions of this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, by any court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement and the parties hereto shall use their best efforts to substitute a valid, legal and enforceable provision which, insofar as practicable, implements the purposes and intents of this Agreement. -45- 8.10 SPECIFIC ENFORCEABILITY. The parties hereto recognize and hereby acknowledge that it is impossible to measure in money the damages that would result to a party by reason of the failure of either of the parties to perform any of the obligations imposed on it by this Agreement. Accordingly, if any party should institute an action or proceeding seeking specific enforcement of the provisions hereof, each party against which such action or proceeding is brought hereby waives the claim or defense that the party instituting such action or proceeding has an adequate remedy at law and hereby agrees not to assert in any such action or proceeding the claim or defense that such a remedy at law exists. -46- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument by their duly authorized officers as of the day and year first above written. KEYCORP By: /s/ Kent E. Allen ---------------------------------- Name: Kent E. Allen Title: Vice President COMMUNITY FIRST BANKSHARES, INC. By: /s/ Donald R. Mengedoth ---------------------------------- Name: Donald R. Mengedoth Title: President -47- KEY BANK OF THE ROCKY MOUNTAINS, INC. By: /s/ Kent E. Allen ---------------------------------- Name: Kent E. Allen Title: Authorized Official EX-3.1 3 RESTATED CERT OF INCORP EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF COMMUNITY FIRST BANKSHARES, INC. ARTICLE I NAME The name of the corporation is Community First Bankshares, Inc. ARTICLE II REGISTERED OFFICE The address of the corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, in the County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III PURPOSES The nature of the business or purposes to be conducted or promoted by the corporation shall include any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV CAPITAL STOCK 4.1) AUTHORIZED CAPITAL STOCK. The total number of shares of stock which the corporation shall have authority to issue is Thirty-Two Million (32,000,000) shares, divided into Thirty Million (30,000,000) shares of Common Stock, $.01 par value per share ("Common Stock"), and Two Million (2,000,000) shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). The designations and the powers, preferences, and rights, and the qualifications, limitations, or restrictions of the shares of each class of capital stock shall be as provided in this Article IV and by applicable law. 4.2) GENERAL. a) PREEMPTIVE RIGHTS. Unless otherwise provided by the Board of Directors, no holder of capital stock of the corporation shall have any preferential, preemptive, or other rights of subscription to any shares of any class of capital stock of the corporation allotted or sold or to be allotted or sold now or hereafter authorized, or to any obligations convertible into the capital stock of the corporation of any class, or any right of subscription to any part thereof. b) STOCK RIGHTS AND OPTIONS. The Board of Directors shall have the power to create and issue rights, warrants, or options entitling the holders thereof to purchase from the corporation any shares of its capital stock of any class or series, upon such terms and conditions and at such times and prices as the Board of Directors may provide, which terms and conditions shall be incorporated in instrument or instruments evidencing such rights. 4.3) COMMON STOCK. Subject to all of the rights of the Preferred Stock, and except as may be expressly provided herein with respect to the Preferred Stock, by applicable law or by the Board of Directors pursuant to this Article IV: a) VOTING RIGHTS GENERALLY. Each holder of record of the Common Stock shall be entitled to one vote for each share of Common Stock held by him or her at each meeting of the shareholders with respect to any matter, other than the election of directors, on which such shareholders have a right to vote. The right to vote provided herein shall be subject to the provisions of the Bylaws of the corporation in effect from time to time with respect to closing the transfer books and fixing a record date for the determination of shares entitled to vote. b) CUMULATIVE VOTING FOR DIRECTORS. At all elections of directors, each holder of record of the Common Stock shall be entitled to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) he or she would be entitled to cast for the election f directors with respect to his or her shares of Common Stock multiplied by the number of directors to be elected, and such holder may cast all of such votes for a single director candidate or may distribute them among any number of such candidates. c) DIVIDENDS. Each holder of record of Common Stock of the corporation shall be entitled to receive when as declared by the Board of Directors, out of earnings or surplus legally available therefor, dividends, payable either in cash, in property, or ins hares of the capital stock of the corporation. 4.4) PREFERRED STOCK. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more class or series. Subject to the provisions hereof and the limitations prescribed by law, the Board of Directors is expressly authorized by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the Secretary of State of the State of Delaware a statement with respect to the adoption of the resolutions pursuant to the Delaware General Corporation Law (or other law hereafter in effect relating to the same or substantially similar subject matter), to establish the number of shares to be included in each class or series and to fix 2 the designation and relative powers, preferences and rights and the qualifications and limitations or restrictions thereof relating to the shares f each such class or series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the distinctive serial designation of such class or series and the number of shares constituting such class or series, provided that the aggregate number of shares constituting all classes or series of Preferred Stock shall not exceed nine hundred thousand (900,000); (b) the annual dividend rate on shares of such class or series, if any, whether dividends shall be cumulative and, if so, from which date or dates; (c) whether the shares of such class or series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption date; (d) the obligations, if any, of the corporation to retire shares of such class or series pursuant to a sinking fund; (e) whether shares or such class or series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (f) whether the shares of such class or series shall have voting rights provided by law, and, if so, the terms of such voting rights; (g) the rights of the shares of such class or series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation; and (h) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such class or series. The shares of Preferred Stock of any one class or series shall be identical with each other in all respects except as to the dates from and after which dividends thereon shall cumulate, if cumulative. ARTICLE V EXISTENCE 3 The corporation is to have perpetual existence. ARTICLE VI STOCKHOLDER MEETING AND BOOKS Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the corporation may be kept (subject to applicable law) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the corporation. ARTICLE VII DIRECTORS 7.1) In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the Bylaws of the corporation. 7.2) Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. ARTICLE VIII DIRECTOR LIABILITY 8.1) A director of the corporation shall not be liable to the corporation or the stockholders of the corporation for monetary damages for a breach of the fiduciary duty of care as a director, except to the extent such exception from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same currently exists or hereafter is amended. 8.2) The provisions of this Article shall not be deemed to limit or preclude indemnification of a director by the corporation for any liability of a director which has not been eliminated by the provisions of this Article. 4 ARTICLE IX AMENDMENT OF CERTIFICATE The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. 5 EX-10.1 4 96' ANNUL INCENT PLAN EXHIBIT 10.1 COMMUNITY FIRST BANKSHARES, INC. ANNUAL INCENTIVE PLAN 1996 1996 AIP GROUP TARGET INCENTIVE MAXIMUM I CEO 40% 80% II EVP'S 30% 60% III SVP'S 20% 40% IV VP'S 10% 20% SPLIT 60% INTERNAL & 40% EXTERNAL TARGET INTERNAL EXTERNAL I 40% 24% 16% II 30% 18% 12% III 20% 12% 8% IV 10% 6% 4% INTERNAL AWARD CALCULATION Based on performance versus plan EPS as target. No award if less than 90% of plan. Double internal amount @ 115% of plan (see schedule). Round up at .5 (plan) and down at .5. Fully Diluted AWARD % OF BASE SALARY % OF PLAN EPS I II III IV Under 90 1.86 0 0 0 0 91 1.88 2.4 1.8 1.2 .6 92 1.90 4.8 3.6 2.4 1.2 93 1.93 7.2 5.4 3.6 1.8 94 1.95 9.6 7.2 4.8 2.4 95 1.97 12.0 9.0 6.0 3.0 96 1.99 14.4 10.8 7.2 3.6 97 2.01 16.8 12.6 8.4 4.2 98 2.03 19.2 14.4 9.6 4.8 99 2.05 21.6 16.2 10.8 5.4 100 2.07 24.0 18.0 12.0 6.0 101 2.09 25.6 19.2 12.8 6.9 102 2.11 27.2 20.4 13.6 6.8 103 2.13 28.8 21.6 14.4 7.2 104 2.15 30.4 22.8 15.2 7.6 105 2.17 32.0 24.0 16.0 8.0 106 2.19 33.6 25.2 16.8 8.4 107 2.21 35.2 26.4 17.6 8.8 108 2.24 36.8 27.6 18.4 9.2 109 2.26 38.4 28.8 19.2 9.6 110 2.28 40.0 30.0 20.0 10.0 111 2.30 41.6 31.2 20.8 10.4 112 2.32 43.2 32.4 21.6 10.8 113 2.34 44.8 33.6 22.4 11.2 114 2.36 46.4 34.8 23.2 11.6 115+ 2.38 48.0 36.0 24.0 12.0 COMPENSATION COMMITTEE RESERVED RIGHT TO ADJUST FOR FDIC PREMIUM REDUCTION VARIANCE FROM APPROVED PLAN (4CENTS PER 100). 2 EXTERNAL AWARD CALCULATION SNL peer group (20 banks) for CURRENT PERFORMANCE YEAR based on group as of December 31, 1995. Combines incentive for ROE and growth (see matrix). SNL 20 BANK GROUP Percentile 75th or higher 100% 150% 200% ROE 50th 50% 100% 150% 49th or lower 0% 50% 100% 49th or lower 50th 75th or higher Percentile asset growth rate External award calculation: % OF SALARY AT PERFORMANCE LEVEL TARGET 50% 100% 150% 200% I 16% 8% 16% 24% 32% II 12% 6% 12% 18% 24% III 8% 4% 8% 12% 16% IV 4% 2% 4% 6% 8% The SELECTED PEER GROUP reflects our selection of the NINETEEN OTHER INSTITUTIONS most like the subject institution to be used as a peer group in comparing relative compensation levels. For banks with assets of less than $5 billion, the automated process searches in sequence for: 1. Banks in the same state within 40% of total assets. 2. Banks in the same region within 40% of total assets. 3. Banks in the same state within 80% of total assets. 4. Banks in the same region within 80% of total assets. 5. Any bank within 40% of total assets. 6. Any bank within 80% of total assets. 7. Banks closest in asset size. If at any point in the sequence nineteen banks are found, the sequence stops and those banks form the Selected Peer Group. If step six is reached and there are still not nineteen other banks, the banks closest in asset size anywhere in the country are chosen to round out the peer group. 3 EX-13.1 5 AR FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------------- Earnings Total interest income. . . . . . . . . . . . . . . . $ 229,426 $192,868 $143,237 $121,146 $115,309 Total interest expense . . . . . . . . . . . . . . . 95,234 82,891 53,468 47,271 50,870 Net interest income. . . . . . . . . . . . . . . . . 134,192 109,977 89,769 73,875 64,439 Net income . . . . . . . . . . . . . . . . . . . . . 32,510 29,953 22,729 18,614 15,108 - -------------------------------------------------------------------------------------------------------------------------------- PER COMMON AND COMMON EQUIVALENT SHARE - -------------------------------------------------------------------------------------------------------------------------------- Primary earnings per share . . . . . . . . . . . . . . $1.85 $ 1.82 $ 1.48 $ 1.32 $ 1.07 Fully diluted earnings per share . . . . . . . . . . . 1.79 1.74 1.42 1.30 1.07 Net book value . . . . . . . . . . . . . . . . . . . . 12.92 12.01 9.69 9.10 7.96 Dividends paid . . . . . . . . . . . . . . . . . . . . .58 .48 .44 .40 .34 - -------------------------------------------------------------------------------------------------------------------------------- AT YEAR-END - -------------------------------------------------------------------------------------------------------------------------------- Total assets . . . . . . . . . . . . . . . . . . . . . $ 3,116,398 $ 2,769,976 $ 2,130,619 $ 1,883,794 $ 1,576,275 Total loans. . . . . . . . . . . . . . . . . . . . . . 2,064,108 1,767,193 1,330,146 1,037,666 813,550 Allowance for loan losses. . . . . . . . . . . . . . . 26,215 22,712 17,333 14,332 11,196 Total deposits . . . . . . . . . . . . . . . . . . . . 2,537,440 2,359,716 1,794,565 1,627,989 1,374,859 Common equity. . . . . . . . . . . . . . . . . . . . . 221,583 181,004 134,701 125,071 103,911 - -------------------------------------------------------------------------------------------------------------------------------- KEY PERFORMANCE RATIOS - -------------------------------------------------------------------------------------------------------------------------------- Return on average common equity. . . . . . . . . . . . 15.69% 18.19% 16.77% 16.64% 15.10% Return on average assets . . . . . . . . . . . . . . . 1.13% 1.24% 1.13% 1.10% 1.04% Net interest margin. . . . . . . . . . . . . . . . . . 5.32% 5.06% 4.95% 4.74% 4.85% Dividend payout ratio. . . . . . . . . . . . . . . . . 32.40% 27.59% 30.99% 30.77% 31.78% Average common equity to average assets. . . . . . . . 6.87% 6.43% 6.43% 6.59% 6.86% Nonperforming assets to period-end loans and OREO. . . 0.70% 0.31% 0.34% 0.62% 1.13% Allowance for loan losses to period-end loans. . . . . 1.27% 1.29% 1.30% 1.38% 1.38% Allowance for loan losses to nonperforming loans . . . 200.68% 608.09% 537.12% 295.99% 224.05% Net charge-offs to average loans . . . . . . . . . . . 0.22% 0.17% -0.00% 0.08% 0.33% Tier 1 capital . . . . . . . . . . . . . . . . . . . . 8.88% 8.51% 10.64% 10.16% 10.97% Total risk-based capital . . . . . . . . . . . . . . . 11.10% 11.18% 13.46% 13.44% 12.47% Leverage ratio . . . . . . . . . . . . . . . . . . . . 6.62% 6.10% 7.12% 6.12% 6.40% - --------------------------------------------------------------------------------------------------------------------------------
1 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. BASIS OF PRESENTATION - -------------------------------------------------------------------------------- The following represents management's discussion and analysis of Community First Bankshares, Inc.'s (the "Company") financial condition as of December 31, 1996 and 1995, and its results of operations for the years ended December 31, 1996, 1995, and 1994. This discussion should be read in conjunction with the consolidated financial statements and related footnotes and the five year summary of selected financial data. The information has been restated to reflect mergers accounted for as a pooling-of-interests as if they had occurred at the beginning of the first period presented. Purchases have been reflected in the Company's results of operations for all periods following the acquisition and are reflected in the Company's financial condition at all dates subsequent to the acquisition. MERGER AND ACQUISITION ACTIVITY - -------------------------------------------------------------------------------- The Company has made a number of acquisitions during these periods. Each of these acquisitions has had an effect upon the Company's results of operations and financial condition. On December 18, 1996, the Company issued approximately 5.2 million shares of common stock to acquire Mountain Parks Financial Corporation ("Mountain Parks"), a one-bank holding company headquartered in Denver, Colorado. At acquisition, Mountain Parks had approximately $600 million in assets at seventeen banking offices located in Colorado. On February 22, 1995, the Company issued approximately 2.4 million shares of common stock to acquire Minowa Bancshares, Inc. ("Minowa"), a three-bank holding company headquartered in Decorah, Iowa. At acquisition, Minowa had approximately $224 million in assets at three banks located in Iowa and Minnesota. On July 3, 1995, the Company issued approximately 1.2 million shares to acquire First Community Bankshares, Inc. ("First Community"), a five-bank holding company headquartered in Fort Morgan, Colorado. At acquisition, First Community had total assets of $153 million at its five Colorado banks. All three acquisitions were accounted for using the pooling of interests method. Also during the periods presented, the Company made the following acquisitions of banks (or associated holding companies), each of which were accounted for as a purchase, except Trinidad, Colorado, which was accounted for as an immaterial pooling of interests. - --------------------------------------------------------------------------- Acquisition Location of Bank or Total Assets at Date of Month and Year Name of Acquired Entity Acquisition (In Millions) - --------------------------------------------------------------------------- October 1996 Trinidad, Colorado $ 70 July 1996 Kiowa, Colorado $ 58 July 1996 Englewood, Colorado $ 19 October 1995 Beach, North Dakota $ 44 September 1995 Aurora, Colorado $ 41 July 1995 Louisville, Colorado $ 36 July 1995 Boulder, Colorado $ 60 May 1995 Alliance, Nebraska $293 May 1994 Denver, Colorado $ 37 April 1994 Fraser, Colorado $ 21 April 1994 Ada, Minnesota $ 17 April 1994 Spooner, Wisconsin $ 83 On February 18, 1997, the Company signed a definitive purchase agreement with KeyCorp, of Cleveland, Ohio to acquire KeyBank N.A. (Wyoming) for a purchase price of $135 million. As of December 31, 1996, KeyBank Wyoming had total assets of $1.2 billion and banking offices in 24 communities in Wyoming. The transaction, which will be accounted for as a purchase, will result in the recognition of goodwill of approximately $60 million. The purchase price is expected to be funded through a combination of the proceeds from the Company's January 1997 issue of $60 million 8-7/8% Cumulative Capital Securities, portions of bank lines of credit, net income received prior to closing and the proceeds of any possible further sales of subordinated debt or equity securities prior to the closing of the transaction. The transaction is subject to regulatory approval and is anticipated to close during the third quarter of 1997. OVERVIEW - -------------------------------------------------------------------------------- For the year ended December 31, 1996, the Company reported record net income of $32.5 million, an increase of $2.5 million, or 8.3%, from the $30.0 million earned during 1995. Fully diluted earnings per share were $1.79, compared to $1.74 in 1995 and $1.42 in 1994. Return on average assets was 1.13% for 1996, compared with 1.24% for 1995. Return on average common shareholders' equity for 1996 and 1995 was 15.69% and 18.19%, respectively. Factors contributing to these changes included approximately $1.4 million of incremental net income provided by entities acquired during 1996 and 1995. Operating results reflect expenses of $2.8 million, net of tax, or $.16 per share on a fully-diluted basis, related to the Company's mergers with Mountain Parks and Financial Bancorp, including a $560,000 write-down to reflect the permanent impairment of the Company's investment in an unconsolidated subsidiary, which is being divested to satisfy regulators' competitive issues. In addition, the Company incurred a total of $1.5 million, net of tax, or $.08 per share on a fully-diluted basis, of expenses and charges to integrate Mountain Parks operations and to conform the loan portfolio of Mountain Parks to the Company's credit policy. Included in these charges is the reversal of $505,000 of accrued, but uncollected, interest at Mountain Park's specialty lending subsidiary. The following supplemental earnings per common share information represents the estimated impact of merger-related charges and integration and conforming adjustments on the Company's operating results, on a fully-diluted basis. See additional discussion of the expenses under "Noninterest expense": - ------------------------------------------------------------------------------ Community First Mountain The Bankshares, Inc.(1) Parks(2) Company - ------------------------------------------------------------------------------ Fully-diluted earnings per share . . . . . . $2.09 $.99 $1.79 Merger-related charges . . . . . . . . . . . .09 .32 .16 Integration and conforming adjustments . . . .00 .30 .08 ----- ----- ----- Earnings per share (excluding merger- related charges and integration and conforming adjustments). . . . . . . $2.18 $1.61 $2.03 ----- ----- ----- ----- ----- ----- (1)The Company, excluding the operating results of Mountain Parks. (2)Earnings per share calculated using number of shares issued. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. Total assets were $3,116 million and $2,770 million at December 31, 1996 and 1995, respectively. The increase of $346 million, or 12.5%, during 1996 was principally due to the 1996 acquisitions of the banks in Englewood, Kiowa, and Trinidad, as well as loan growth in the Company's subsidiary banks. RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- NET INTEREST INCOME The principal source of the Company's earnings is net interest income, the difference between total interest income on earning assets such as loans and investments and interest paid on deposits and other interest-bearing liabilities. The net interest margin is net interest income, on a tax-equivalent basis, expressed as a percentage of average earning assets. The margin is affected by volume and mix of earning assets and interest-bearing liabilities, the level of interest free funding sources, interest rate environment, and income tax rates. As discussed later, management actively monitors its interest rate sensitivity and seeks to balance assets and liabilities to minimize the impact of changes in the interest rate environment. The following table presents the Company's average balance sheets, interest earned or paid and the related yields and rates on major categories of the Company's earning assets and interest-bearing liabilities on a tax equivalent basis for the periods indicated:
Years Ended December 31 1996 - --------------------------------------------------------------------------------------- Interest Average Yields and (Dollars in thousands) Balance Interest Rates - --------------------------------------------------------------------------------------- Assets Loans(1) (2) . . . . . . . . . . . . . . . . . $1,873,073 $185,005 9.88% Investment securities(2) . . . . . . . . . . . 727,822 48,579 6.67% Other earning assets . . . . . . . . . . . . . 17,324 960 5.47% ---------- -------- ----- Total earning assets. . . . . . . . . . . . 2,618,219 234,544 8.96% Noninterest-earning assets . . . . . . . . . . 248,560 ---------- Total assets. . . . . . . . . . . . . . . . $2,866,779 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing checking. . . . . . . . . . . $ 445,501 $ 8,702 1.95% Savings deposits . . . . . . . . . . . . . . . 444,333 11,534 2.60% Time deposits. . . . . . . . . . . . . . . . . 1,114,617 61,419 5.51% Short-term borrowings. . . . . . . . . . . . . 168,311 9,247 5.49% Long-term borrowings . . . . . . . . . . . . . 60,433 4,332 7.17% ---------- -------- ----- Total interest-bearing liabilities. . . . . 2,233,195 95,234 4.26% Demand deposits. . . . . . . . . . . . . . . . 378,325 Noninterest-bearing liabilities. . . . . . . . 35,365 Preferred shareholders' equity . . . . . . . . 22,999 Common shareholders' equity. . . . . . . . . . 196,895 --------- 633,584 --------- Total liabilities and shareholders' equity . . $2,866,779 --------- --------- Net interest income. . . . . . . . . . . . . . $139,310 ------- ------- Net interest spread. . . . . . . . . . . . . . 4.70% ------ ------ Net interest margin. . . . . . . . . . . . . . 5.32% ------ ------
1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Yields and Average Yields and Balance Interest Rates Balance Interest Rates - ---------------------------------------------------------------------------------------------------------------------------- Assets Loans(1) (2) . . . . . . . . . . . . . . . . . $1,545,497 $151,154 9.78% $1,171,925 $104,766 8.94% Investment securities(2) . . . . . . . . . . . 656,435 43,009 6.55% 658,216 39,313 5.97% Other earning assets . . . . . . . . . . . . . 29,369 1,710 5.82% 26,051 1,193 4.58% --------- ------- ---- --------- ------- ---- Total earning assets. . . . . . . . . . . . 2,231,301 195,873 8.78% 1,856,192 145,272 7.83% Noninterest-earning assets . . . . . . . . . . 192,912 149,626 --------- -------- Total assets. . . . . . . . . . . . . . . . $2,424,213 $2,005,818 --------- -------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing checking. . . . . . . . . . . $406,080 $8,805 2.17% $388,466 $6,998 1.80% Savings deposits . . . . . . . . . . . . . . . 349,522 9,748 2.79% 306,147 7,186 2.35% Time deposits. . . . . . . . . . . . . . . . . 963,594 53,227 5.52% 749,027 32,376 4.32% Short-term borrowings. . . . . . . . . . . . . 111,784 6,184 5.53% 83,563 4,029 4.82% Long-term borrowings . . . . . . . . . . . . . 65,379 4,927 7.54% 42,544 2,879 6.77% --------- ------- ---- --------- ------- ---- Total interest-bearing liabilities. . . . . 1,896,359 82,891 4.37% 1,569,747 53,468 3.41% Demand deposits. . . . . . . . . . . . . . . . 317,806 272,245 Noninterest-bearing liabilities. . . . . . . . 31,189 20,224 Preferred shareholders' equity . . . . . . . . 23,000 14,594 Common shareholders' equity. . . . . . . . . . 155,859 129,008 --------- -------- 527,954 436,071 --------- -------- Total liabilities and shareholders' equity . . $2,424,213 $2,005,818 --------- -------- --------- -------- Net interest income. . . . . . . . . . . . . . $112,982 $91,804 --------- -------- --------- -------- Net interest spread. . . . . . . . . . . . . . 4.41% 4.42% ---- ---- ---- ---- Net interest margin. . . . . . . . . . . . . . 5.06% 4.95% ---- ---- ---- ---- - ----------------------------------------------------------------------------------------------------------------------------
(1)Includes nonaccrual loans and loan fees. (2)Interest yields on loans and investments are presented on a tax-equivalent basis to reflect the tax exempt nature of certain assets. The incremental tax rate applied was 35% in 1996, 1995, and 1994. 16 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:
1996 compared to 1995 1995 compared to 1994 - ----------------------------------------------------------------------------------------------------------------------------- (In thousands) Volume Rate Total Volume Rate Total - ----------------------------------------------------------------------------------------------------------------------------- Interest income: Loans(1) (2) . . . . . . . . . . . . . . . . . . . $32,038 $1,813 $33,851 $33,396 $12,992 $46,388 Investment securities(2) . . . . . . . . . . . . . 4,677 893 5,570 (106) 3,802 3,696 Other earning assets . . . . . . . . . . . . . . . (701) (62) (763) 152 365 517 ------- ------ ------- ------- ------- ------- Total interest income. . . . . . . . . . . . . . . . 36,014 2,644 38,658 33,442 17,159 50,601 ------- ------ ------- ------- ------- ------- Interest expense: Savings deposits and interest-bearing checking . . 3,499 (1,816) 1,683 1,335 3,034 4,369 Time deposits. . . . . . . . . . . . . . . . . . . 8,342 (150) 8,192 9,275 11,576 20,851 Short-term borrowings. . . . . . . . . . . . . . . 3,127 (64) 3,063 1,361 794 2,155 Long-term borrowings . . . . . . . . . . . . . . . (373) (222) (595) 1,545 503 2,048 ------- ------ ------- ------- ------- ------- Total interest expense. . . . . . . . . . . . . . . 14,595 (2,252) 12,343 13,516 15,907 29,423 ------- ------ ------- ------- ------- ------- Increase (decrease) in net interest income . . . . . $21,419 $4,896 $26,315 $19,926 1,252 $21,178 ------- ------ ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
(1)Includes loan fees. (2)Interest income is presented on a tax equivalent basis. Net interest income on a tax equivalent basis in 1996 was $139.3 million, a $26.3 million increase from 1995. The increase was primarily due to a 17.3% increase in earning assets and a 26 basis point increase in the net interest margin. The increase in earning assets was due to eight bank acquisitions completed by the Company between the second quarter of 1995 and December 1996, and loan growth in existing markets. Net interest income on a tax equivalent basis in 1995 was $113.0 million, a $21.2 million increase from 1994. The increase was primarily due to a 20.2% increase in earning assets and a 11 basis point increase in the net interest margin. The increase was again driven by bank acquisitions completed by the Company and loan growth in existing markets. The net interest margin was 5.32%, 5.06% and 4.95% in 1996, 1995 and 1994, respectively. This increase in margin was due to a 29 basis point increase in the yield spread between 1995 and 1996, and a change in the mix of earning assets to higher-yielding loans. Average loans to average earning assets increased from 63.1% in 1994, to 69.3% in 1995, and 71.5% in 1996. PROVISION FOR LOAN LOSSES Annual fluctuations in the provision for loan losses result from management's regular assessment of the adequacy of the allowance for loan losses. The provision for loan losses for 1996 was $6.8 million, an increase of $4.1 million or 151.9%, from the $2.7 million provision during 1995. The increased loan loss provision was principally due to the Company's strong loan growth, and $1.8 million of additional provision recorded to integrate and conform the loan portfolio of Mountain Park's non-prime mortgage subsidiary to the Company's credit policy. The amount of the loan loss provision to be recorded in future periods will depend on management's assessment of the adequacy of the allowance for loan losses in relation to the entire loan portfolio. The provision for loan losses for 1995 was $2.7 million, an increase of $872,000, or 47.4% from the 1994 provision of $1.8 million. NONINTEREST INCOME In addition to net interest income, the Company continues to expand noninterest income associated with the Company's community banking operations. The primary sources of noninterest income consist of service charges on deposit accounts, service fees on checking accounts, insurance commissions and fees for trust services. Management regularly weighs opportunities to increase noninterest income by considering the delivery of financial products and services in its markets. Noninterest income for 1996 was $27.4 million, an increase of $4.9 million, or 21.8%, from the $22.5 million earned in 1995. The increase was principally due to an increase in service charges on deposit accounts in 1996 to $12.3 million from the $10.1 million in 1995, an increase of $2.2 million, or 21.8%. The increase is attributed to $353,000 in service charges on deposit accounts at banks acquired during 1996 and $859,000 at banks acquired during 1995. Net investment security gains were $93,000 in 1996. The sales of securities, which resulted in gains due to liquidation of securities at a price in excess of the securities' adjusted book values, were made primarily to provide liquidity required by loan growth at subsidiary banks and to adjust portfolio duration. Noninterest income for 1995 was $22.5 million, an increase of $3.5 million, or 18.4%, from the $19.0 million earned in 1994. The increase was principally due to an increase in service charges on deposit accounts in 1995 from $8.5 million earned during 1994 to $10.1 million earned in 1995, an increase of $1.6 million, or 18.8%. Net investment security gains decreased to $52,000 in 1995. NONINTEREST EXPENSE Noninterest expenses consist of salaries and benefits, occupancy, equipment and other expenses such as legal and postage necessary for the operation of the Company. Management is committed to improving the quality of service while controlling such costs through improved efficiency and consolidation of certain activities to achieve economies of scale. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. The following table presents the components of noninterest expense for the periods indicated: - ----------------------------------------------------------------------------- Years Ended December 31 (In thousands) 1996 1995 1994 - ----------------------------------------------------------------------------- Salaries and employee benefits . . . . . . . . $54,870 $42,796 $35,083 Net occupancy. . . . . . . . . . . . . . . . . 15,085 10,563 9,353 FDIC insurance . . . . . . . . . . . . . . . . 669 2,532 3,720 Legal and accounting . . . . . . . . . . . . . 1,989 1,311 1,403 Other professional service . . . . . . . . . . 1,892 2,700 2,054 Acquisition expenses . . . . . . . . . . . . . 2,928 768 908 Data processing and loan servicing fees. . . . 1,506 1,607 856 Permanent impairment of equity method investment. . . . . . . . . . . . . 940 - - Minority interest. . . . . . . . . . . . . . . 222 175 948 Intangibles. . . . . . . . . . . . . . . . . . 3,362 2,551 1,876 Other . . . . . . . . . . . . . . . . . . . . 20,825 17,590 14,040 ------- ------- ------ Total noninterest expense. . . . . . . . . . $104,288 $82,593 $70,241 ------- ------- ------ ------- ------- ------ - ----------------------------------------------------------------------------- Noninterest expense increased $21.7 million to $104.3 million in 1996. The increase was principally due to an increase in salaries and employee benefits, net occupancy expense, and acquisition and related expenses. The $12.1 million increase in salaries and employee benefits reflects $4.6 million in additional expenses related to acquisitions completed by the Company in 1995 and 1996. The $4.5 million increase in net occupancy is also due primarily to acquisitions completed by the Company. Legal and accounting fees increased $678,000, or 51.7%, from $1,311,000 to $1,989,000 during 1996. The Company incurred acquisition expenses of $2.9 million in 1996 in connection with the mergers with Mountain Parks and Financial Bancorp. These expenses relate to legal, accounting and other professional services expenses incurred to complete the mergers. In addition, the Company incurred noninterest expenses of $1.0 million to facilitate the integration of certain operating activities of Mountain Parks into those of the Company. During 1996, the Company recorded a $940,000 write-down in the value of its investment in an unconsolidated subsidiary, which is being divested to satisfy regulators' competitive issues related to the Mountain Parks merger. Intangible expense increased $811,000, or 31.8%, due to intangible assets, such as goodwill, noncompete agreements and insurance agency customer policy expirations recorded in connection with the Company's acquisitions. Other noninterest expense was $20.8 million, an increase of $3.2 million, or 18.2%, from $17.6 million in 1995. Federal Deposit Insurance Corporation ("FDIC") insurance expense decreased $1.9 million as a result of a reduction in the insurance assessment rate paid by most affiliate banks from a rate of $.23 per $100 to $.04 per $100 of qualifying deposits. This was partially offset by increased deposits obtained through 1996 and 1995 bank acquisitions and an increase in average deposits for 1996 to $2,383 million from $2,037 million in 1995, an increase of $346 million, or 17.0%. Noninterest expense for 1995 was $82.6 million, an increase of $12.4 million, or 17.7%, from the level of $70.2 million during 1994. The increase was principally due to an increase of $7.7 million, or 21.9%, in salaries and employee benefits, of which $4.1 million was due to the 1995 acquisitions and $712,000 was due to the banks acquired during 1994. Net occupancy expense increased $1.2 million to $10.6 million, $1.4 million due to 1995 and 1994 acquisitions. FDIC insurance expense decreased $1.2 million to $2.5 million as a result of a reduction in the insurance assessment rate paid by most affiliate banks effective July 1, 1995, from $.23 per $100 to $.04 per $100 of qualifying deposits. Acquisition expenses of $768,000 were incurred in 1995 in conjunction with the acquisitions of Minowa and First Community. Intangible expense increased $675,000, or 36.0%, due to the additional intangible assets recognized in connection with the Company's acquisitions. Other noninterest expense was $17.6 million, an increase of $3.6 million, or 25.7%, from $14.0 million during 1994. In January 1995, the Company consolidated certain of its bank subsidiaries. At the time of this consolidation, the level of minority interest was decreased. As a result, minority interest expense decreased by $773,000, or 81.5%, from $948,000 to $175,000 in 1995. PROVISION FOR INCOME TAXES The Company records a provision for income taxes currently payable and for taxes payable in the future because of differences in the timing of recognition of certain items for financial statement and income tax purposes. The effective income tax rate differs from the statutory rate primarily due to tax-exempt income from loans, and investments and state income taxes. The effective tax rate was 35.6%, 36.4%, and 38.1% for 1996, 1995, and 1994, respectively. FINANCIAL CONDITION - -------------------------------------------------------------------------------- INVESTMENT OF FUNDS LOANS At December 31, 1996, total loans were $2.1 billion, an increase of $297 million, or 16.7%, from the December 31, 1995, level of $1.8 billion. A significant portion of this increase is attributable to in-market loan growth in the Company's existing markets. In addition, the purchase of three banking institutions in 1996 added $73 million in loans, while the Company's volume of purchased loan assets increased $10 million. The Company has continued to purchase commercial loan assets to enhance earning asset yield performance. Many of such loan assets have been originated by selected Midwestern regional banks and national leasing and finance companies with whom the Company has ongoing relationships. The Company's portfolio of purchased loan assets was $202 million at December 31, 1996, compared to $192 million at December 31, 1995. These assets are subject to the Company's standard credit guidelines, as well as specific requirements for such assets, and bear the credit risks attendant to commercial loans. It is anticipated that the purchased loan asset volume will increase during 1997. 18 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:
December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Percent Percent Percent of Total of Total of Total (Dollars in thousands) Amount Loans Amount Loans Amount Loans - --------------------------------------------------------------------------------------------------------------- Loan category: Real estate . . . . . . . . . . $ 871,432 42.22% $744,477 42.13% $544,809 40.96% Commercial. . . . . . . . . . . 624,456 30.25% 527,620 29.86% 397,869 29.91% Consumer and other. . . . . . . 346,139 16.77% 270,459 15.30% 225,256 16.93% Agricultural. . . . . . . . . . 222,081 10.76% 224,637 12.71% 162,212 12.20% -------- ------ --------- ------- --------- ------- Total loans. . . . . . . . . . . . 2,064,108 100.00% 1,767,193 100.00% 1,330,146 100.00% ----- ----- ------ ----- ----- ------ Less allowance for loan losses . . (26,215) (22,712) (17,333) -------- --------- ---------- Total. . . . . . . . . . . . . . . $2,037,893 $1,744,481 $1,312,813 ---------- ---------- ---------- ---------- ---------- ---------- 1993 1992 - --------------------------------------------------------------------------------------- Percent Percent of Total of Total Amount Loans Amount Loans - --------------------------------------------------------------------------------------- Loan category: Real estate . . . . . . . . . . $ 403,716 38.91% $305,851 37.59% Commercial. . . . . . . . . . . 316,565 30.51% 252,361 31.02% Consumer and other. . . . . . . 170,271 16.41% 138,139 16.98% Agricultural. . . . . . . . . . 147,114 14.18% 117,199 14.41% -------- ------- -------- ------- Total loans. . . . . . . . . . . . 1,037,666 100.00% 813,550 100.00% ------- ------- ------- ------- Less allowance for loan losses . . (14,332) (11,196) ------- ------- Total. . . . . . . . . . . . . . . $1,023,334 $802,354 ---------- -------- ---------- --------
- ----------------------------------------------------------------------------- GENERAL. The Company's loan mix remained relatively constant from 1995 to 1996. Real estate loans continued to be the largest category of loans, representing 42.2% of the total loan portfolio. REAL ESTATE LOANS. A significant portion of the Company's real estate loan portfolio consists of residential real estate first mortgages that have been underwritten and documented to meet secondary mortgage requirements. Substantially all of the Company's real estate loans are based in the Company's primary market area. As of December 31, 1996, $372 million, or 42.7%, of the Company's real estate loan portfolio consisted of residential real estate loans, $118 million, or 13.5%, were secured by farmland, $247 million, or 28.4%, represented commercial and other real estate loans and $134 million, or 15.4%, represented construction loans. During 1996, in connection with the acquisition of Mountain Parks, the Company acquired a residential mortgage subsidiary that specializes in providing mortgage credit to borrowers with blemished or derogatory credit histories. Loans made by this subsidiary are secured primarily by residential real estate but, in some instances, may not have funded the original purchase of such real estate. Although it is the Company's intent to obtain higher collateral than it obtains with its conventional residential real estate loans, these loans inherently represent a higher level of credit risk. At December 31, 1996, the Company had $63.5 million of loans originated by this subsidiary, of which $4.6 million were considered non-performing at that date. COMMERCIAL LOANS. Loans in this category include loans to retail, wholesale, manufacturing and service businesses, including agricultural service businesses and the Company's purchased loan asset portfolio. Commercial loans are underwritten based on the financial strength and repayment ability of the borrower, as well as the collateral securing the loans. CONSUMER AND OTHER LOANS. Loans classified as consumer and other loans include automobile, personal loans, consumer lines of credit and overdrafts. The consumer loan portfolio also includes dealer-generated installment contracts for consumer goods, including automobiles and major home appliances. The majority of these indirect loans are installment loans with fixed interest rates. AGRICULTURAL LOANS. Agricultural loans are made principally to farmers and ranchers. The Company provides short-term credit for operating loans and intermediate-term loans for machinery purchases and other improvements. INVESTMENTS Management augments the quality of the loan portfolio by maintaining a high quality investment portfolio oriented toward U.S. Treasury, U.S. Government agency and government guaranteed mortgage-backed securities. The investment portfolio also provides the opportunity to structure maturities and repricing timetables in a flexible manner and to meet applicable requirements for pledging securities, which are principally adjustable rate, and collateralized mortgage obligations, which are primarily floating rate securities, as tools in managing its interest rate exposure and enhancing its net interest margin. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. The following table sets forth the composition of the Company's held-to- maturity securities portfolio at amortized cost as of the dates indicated: Book Value at December 31 - -------------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- U.S. Treasury. . . . . . . . . . . . . $ - $ - $72,519 U.S. Government agencies . . . . . . . 879 3,318 44,957 Mortgage-backed securities . . . . . . 86,506 106,429 185,753 Collateralized mortgage obligations. . - - 22,811 State and political securities . . . . 56,694 55,267 43,672 Other securities . . . . . . . . . . . 78,269 65,806 12,163 -------- ------- -------- Total. . . . . . . . . . . . . . . . . $222,348 $230,820 $381,875 -------- ------- -------- -------- ------- -------- - -------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES At December 31, 1996, Maturing in - ---------------------------------------------------------------------------------------------------------------------------------- Over One Year Over 5 Years One Year or Less Through 5 Years Through 10 Years Over 10 Years Total - ---------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Weighted Weighted (Dollars in thousands) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) - ---------------------------------------------------------------------------------------------------------------------------------- U.S. Government agencies . . . . . $ - - $ 90 7.63% $ - - $ 789 6.94% $ 879 7.01% Mortgage-backed securities . . . . 1,088 7.97% 9,197 6.96% 40,559 6.10% 35,662 6.51% 86,506 6.38% State and political securities . . 6,122 7.10% 11,728 7.38% 19,908 8.05% 18,936 8.24% 56,694 7.87% Other. . . . . . . . . . . . . . . - - - - - - 78,269 7.37% 78,269 7.37% ------ ----- ------- ----- ------- ----- -------- ----- -------- ----- Total. . . . . . . . . . . . . . . $7,210 7.23% $21,015 7.20% $60,467 6.74% $133,656 7.26% $222,348 7.11% ------ ----- ------- ----- ------- ----- -------- ----- -------- ----- ------ ----- ------- ----- ------- ----- -------- ----- -------- ----- - ----------------------------------------------------------------------------------------------------------------------------------
(1) Interest yields on investments are presented on a tax equivalent basis to reflect the tax exempt nature of current assets. Yields are based on a 35% incremental tax rate and a 3.75% cost of funds. The following table sets forth the composition of the Company's available- for-sale securities portfolio at estimated fair value as of the dates indicated: Book Value at December 31 - ----------------------------------------------------------------------------- (In thousands) 1996 1995 1994 - ----------------------------------------------------------------------------- U.S. Treasury. . . . . . . . . . . . . $120,193 $154,508 $90,028 U.S. Government agencies . . . . . . . 85,311 121,588 33,353 Mortgage-backed securities . . . . . . 236,833 143,359 85,748 Collateralized mortgage obligations. . 43,259 58,053 14,361 State and political securities . . . . 15,122 1,443 - Other . . . . . . . . . . . . . . . . 6,170 7,571 7,874 ------- ------- -------- Total. . . . . . . . . . . . . . . . . $506,888 $486,522 $231,364 ------- ------- -------- ------- ------- -------- - -----------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES At December 31, 1996, Maturing in - ----------------------------------------------------------------------------------------------------------------------------------- Over One Year Over 5 Years One Year or Less Through 5 Years Through 10 Years Over 10 Years Total - ----------------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Weighted Weighted (Dollars in thousands) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury . . . . . . . . . . . $28,586 6.12% $ 91,607 6.04% $ - - $ - - $120,193 6.06% U.S. Government agencies . . . . . . 13,187 6.56% 52,153 5.95% 18,994 7.04% 977 7.21% 85,311 6.30% Mortgage-backed securities . . . . . 1,811 6.73% 10,840 6.31% 8,394 7.28% 215,788 6.75% 236,833 6.75% Collateralized mortgage obligations. 5,436 5.39% 27,209 6.29% 4,933 6.11% 5,681 6.07% 43,259 6.13% Municipal Bonds. . . . . . . . . . . 2,456 9.13% 4,393 6.83% 1,710 8.80% 6,563 6.74% 15,122 7.39% Other. . . . . . . . . . . . . . . . 1,514 7.03% 3,072 8.25% 219 5.97% 1,365 6.22% 6,170 7.42% ------- ----- -------- ----- ------ ----- -------- ----- -------- ----- Total. . . . . . . . . . . . . . . . $52,990 6.34% $189,274 6.12% $34,250 7.05% $230,374 6.73% $506,888 6.48% ------- ----- -------- ----- ------ ----- -------- ----- -------- ----- ------- ----- -------- ----- ------ ----- -------- ----- -------- ----- - -----------------------------------------------------------------------------------------------------------------------------------
(1)Interest yields on investments are presented on a tax equivalent basis to reflect the tax exempt nature of current assets. Yields are based on a 35% incremental tax rate and a 3.75% cost of funds. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. The Company's investments, including available-for-sale and held-to- maturity securities, increased $12 million, or 1.7%, to $729 million at December 31, 1996, from $717 million at December 31, 1995. This increase was due to the addition of $46 million of securities obtained through 1996 bank acquisitions and offset by maturing securities which were not replaced, in response to loan demand. At December 31, 1996, the Company's investments represented 23.4% of total assets, compared to 25.9% at December 31, 1995. CREDIT EXPERIENCE The Company's lending activities are guided by the general loan policy established by the Board of Directors. The Senior Credit Committee of the Company has established loan approval limits for each region of the Company and each subsidiary bank. The limits established for each bank range from $75,000 to $250,000 per borrower (except for the Fargo bank, which has a $750,000 limit per borrower). However, renewals of any criticized or classified loans have a limit of $25,000. Amounts in excess of the individual bank lending authority are presented to the regional credit officers. The regional credit officers for Colorado, Iowa, Minnesota, Nebraska, Wisconsin and the Dakotas have lending authority of $750,000 per nonclassified borrower when a second regional credit officer or the respective regional managing officer concurs. Loans above $1,500,000 per nonclassified borrower and $250,000 per classified borrower are presented to the Senior Credit Committee for approval. Although the Company has a diversified loan portfolio, the economic health of the Company's primary trade area and the ability of many of the bank's borrowers to repay their loans (including real estate and commercial loans, as well as agricultural loans) is dependent to a large extent on the health of the agricultural sector of the economy. The Company has identified and implemented strategies to deal with these factors, including an emphasis on quality local loan growth and the diversification and performance of its earning asset portfolios. NONPERFORMING ASSETS The Company follows regulatory guidelines with respect to classifying loans on a nonaccrual basis. Loans are placed on nonaccrual when they become past due over 90 days or when the collection of interest or principal is considered unlikely. The Company does not return a loan to accrual status until it is brought current with respect to both principal and interest and future principal payments are no longer in doubt. When a loan is placed on nonaccrual status, any previously accrued and uncollected interest is reversed. Interest income of $671,000 on nonaccrual loans would have been recorded during 1996 if the loans had been current in accordance with their original terms. During 1996, the Company recorded interest income of $176,000 related to loans that were on nonaccrual status as of December 31, 1996. The Company considers nonperforming assets to include all nonaccrual loans, restructured loans defined as troubled debt restructurings under SFAS No. 15 and other real estate owned ("OREO"). Nonperforming assets of the Company are summarized in the following table:
- ----------------------------------------------------------------------------------------------------------------------------------- December 31, (Dollars in thousands) 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Loans: Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . $ 12,796 $ 3,252 $ 3,087 $ 3,742 $ 4,395 Restructured loans . . . . . . . . . . . . . . . . . . . . 267 483 140 1,100 602 --------- --------- --------- --------- --------- Nonperforming loans. . . . . . . . . . . . . . . . . . . . 13,063 3,735 3,227 4,842 4,997 OREO 1,426 1,701 1,265 1,622 4,210 --------- --------- --------- --------- --------- Nonperforming assets . . . . . . . . . . . . . . . . . . . $ 14,489 $ 5,436 $ 4,492 $ 6,464 $ 9,207 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Loans 90 days or more past due but still accruing. . . . . . . $ 1,956 $779 $722 $761 $ 1,228 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Nonperforming loans as a percentage of total loans . . . . . . 0.63% 0.21% 0.24% 0.47% 0.61% Nonperforming assets as a percentage of total assets . . . . . 0.46% 0.20% 0.21% 0.34% 0.58% Nonperforming assets as a percentage of total loans and OREO . 0.70% 0.31% 0.34% 0.62% 1.13% Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . $2,064,108 $1,767,193 $1,330,146 $1,037,666 $ 813,550 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $3,116,398 $2,769,976 $2,130,619 $1,883,794 $1,576,275 - -----------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets were $14.5 million at December 31, 1996, an increase of $9.1 million, or 168.5% from $5.4 million at December 31, 1995. Nonperforming loans increased by $9.3 million due principally to an increase in nonaccrual loans at the former Mountain Parks Bank of $7.6 million, including $4.6 million in the specialty lending area. The Company expects the volume of loans originated in its specialty lending area to grow during 1997. However, it is expected that modifications to the underwriting standards and the use of secondary market facilities will enable the Company to improve credit quality and transfer a substantial amount of risk associated with these credits to other investors, thereby reducing the relative levels of nonperforming assets in this area. OREO decreased from $1,701,000 at December 31, 1995, to $1,426,000 at December 31, 1996, a decrease of $275,000, or 16.2%. The ratio of nonperforming assets to total assets at December 31, 1996, was .46%, compared to .20% at December 31, 1995. Nonperforming assets were $5.4 million at December 31, 1995, a decrease of $944,000, or 21.0%, from $4.5 million at December 31, 1994. Nonperforming loans increased by $508,000, resulting principally from a $343,000 increase in restructured loans. OREO increased $436,000, or 34.5%, from $1.3 million at December 31, 1994, to $1.7 million at December 31, 1995. The ratio of nonperforming assets to total assets at December 31, 1995, was .20%, compared to .21% at December 31, 1994. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. ALLOWANCE FOR LOAN LOSSES The current level of the allowance for loan losses is a result of management's assessment of the risks within the portfolio based on the information revealed in credit reporting processes. The Company utilizes a risk-rating system on all loans, including purchased loans, and a monthly credit review and reporting process that results in the calculation of the guidelines reserves based on the risk within the portfolio. This assessment of risk takes into account the composition of the loan portfolio, previous loan experience, current economic conditions and other factors that, in managements' judgment, deserve recognition. Regulators have reviewed the Company's methodology for determining allowance requirements and have made no recommendations for increases in the allowances during the five-year period ended December 31, 1996. The Company has historically maintained a positive variance from the minimum estimated allowance for loan losses based on the analyses that are conducted by bank management and corporate credit personnel. Management has reviewed the allocations in the various classifications of loans and believes the allowance was adequate at all times during the five-year period ended December 31, 1996. The following table sets forth the Company's allowance for loan losses as of the dates indicated:
- ------------------------------------------------------------------------------------------------------------- December 31, (Dollars in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------- Balance at beginning of year . . . . . . . . . $ 22,712 $ 17,333 $ 14,332 $ 11,196 $ 10,502 Allowance of acquired companies. . . . . . . . 784 5,230 1,153 1,714 724 Charge-offs: Real estate. . . . . . . . . . . . . . . . . 1,087 303 109 303 691 Commercial . . . . . . . . . . . . . . . . . 1,176 1,285 484 617 1,514 Consumer and other . . . . . . . . . . . . . 2,265 1,502 584 461 714 Agricultural . . . . . . . . . . . . . . . . 443 373 38 58 88 ------ ------ ------ ------ ------ Total charge-offs. . . . . . . . . . . . . . 4,971 3,463 1,215 1,439 3,007 Recoveries: Real estate. . . . . . . . . . . . . . . . . 269 63 549 162 69 Commercial . . . . . . . . . . . . . . . . . 225 245 247 325 221 Consumer and other . . . . . . . . . . . . . 361 536 218 188 227 Agricultural . . . . . . . . . . . . . . . . 78 57 210 37 27 ------ ------ ------ ------ ------ Total recoveries . . . . . . . . . . . . . . 933 901 1,224 712 544 ------ ------ ------ ------ ------ Net charge-offs. . . . . . . . . . . . . . . . 4,038 2,562 (9) 727 2,463 Provision charged to operations. . . . . . . . 6,757 2,711 1,839 2,149 2,433 ------ ------ ------ ------ ------ Balance at end of year . . . . . . . . . . . . $ 26,215 $ 22,712 $ 17,333 $ 14,332 $ 11,196 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Allowance as a percentage of total loans . . . 1.27% 1.29% 1.30% 1.38% 1.38% Net charge-offs to average loans outstanding . 0.22% 0.17% -0.00% 0.08% 0.33% Total loans. . . . . . . . . . . . . . . . . . $2,064,108 $1,767,193 $1,330,146 $1,037,666 $813,550 Average loans. . . . . . . . . . . . . . . . . $1,873,073 $1,545,497 $1,171,925 $ 909,890 $745,984 - -------------------------------------------------------------------------------------------------------------
At December 31, 1996, the allowance for loan losses was $26.2 million, an increase of $3.5 million from the December 31, 1995, level of $22.7 million. The Company's 1996 acquisitions accounted for $784,000 of the increase, with the remaining increase due to maintaining an adequate reserve in recognition of the Company's loan growth during 1996. At December 31, 1996, the allowance for loan losses as a percentage of total loans was 1.27%, as compared to 1.29% at December 31, 1995. This decrease is attributed to strong loan growth and improvement in loan portfolio credit quality at the Company's bank subsidiaries. At December 31, 1995, the allowance for loan losses was $22.7 million, an increase of $5.4 million from the December 31, 1994, level of $17.3 million. The Company's 1995 acquisitions accounted for $5.2 million of the increase, with the remaining increase due to maintaining an adequate reserve in recognition of the Company's loan growth and the increase in net charge-offs during 1995. At December 31, 1995, the allowance for loan losses as a percentage of total loans was 1.29%, as compared to 1.30% at December 31, 1994. During 1996, net charge-offs were $4.0 million, an increase of $1.4 million from the $2.6 million during 1995. The increase included an increase of $938,000 in consumer and other loan net charge-offs and a $578,000 increase in real estate loan net charge-offs. The Company's provision for loan loss increased from $2.7 million in 1995 to $6.8 million in 1996. During 1995, net charge-offs were $2.6 million, an increase of $2.6 million from the net recoveries of $9,000 in 1994. The principal causes for the increase were the increase of real estate net charge-offs of $680,000; the increase in commercial net charge-offs of $803,000; the increase in agricultural net charge-offs of $488,000; and an increase in Consumer and other net charge- offs of $603,000. The Company's provision for loan loss was $2.7 million in 1995 and $1.8 million in 1994. 22 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:
Allowance as a Percent of Loans Outstanding Allowance for Loan Losses at December 31, by Category at December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Real estate. . . . . . . . . $ 4,059 $ 4,208 $ 3,252 $ 2,801 $ 2,235 0.47% .57% 0.60% 0.69% 0.73% Commercial . . . . . . . . . 4,781 4,400 3,605 3,509 2,858 0.77% .83% 0.91% 1.11% 1.13% Consumer and other . . . . . 1,997 1,690 1,614 1,346 1,031 0.58% .62% 0.72% 0.79% 0.75% Agricultural . . . . . . . . 2,056 1,615 1,737 1,529 1,245 0.93% .72% 1.07% 1.04% 1.06% ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ Total Allocated Allowance. . 12,893 11,913 10,208 9,185 7,369 0.62% 0.67% 0.77% 0.89% 0.91% Total Unallocated Allowance. 13,322 10,799 7,125 5,147 3,827 0.65% 0.62% 0.53% 0.49% 0.47% ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ Total Allowance. . . . . . . $26,215 $22,712 $17,333 $14,332 $11,196 1.27% 1.29% 1.30% 1.38% 1.38% ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ ------- ------- ------- ------- ------- ------ ------ ------ ------ ------
SOURCE OF FUNDS DEPOSITS The Company's major source of funds is provided by core deposits from individuals, businesses and local government units. Core deposits consist of all noninterest-bearing deposits, interest-bearing savings and checking accounts and time deposits of less than $100,000. The following table sets forth a summary of the deposits of the Company at the dates indicated: - -------------------------------------------------------------------------------- December 31, (In thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Noninterest-bearing. . . . . . . . . . . . $ 431,078 $ 398,314 $ 315,667 Interest-bearing: Savings and checking accounts. . . . . . 964,829 $ 73,025 699,412 Time accounts less than $100,000 . . . . 907,658 $ 85,857 664,434 Time accounts greater than $100,000. . . 233,875 202,520 115,052 ---------- ---------- ---------- Total deposits . . . . . . . . . . . . . . $2,537,440 $2,359,716 $1,794,565 ---------- ---------- ---------- ---------- ---------- ---------- Total deposits at December 31, 1996, were $2,537 million, an increase of $177 million, or 7.5%, from $2,360 million at December 31, 1995. The Company's core deposits as a percentage of total deposits were 90.8% and 91.8% as of December 31, 1996, and December 31, 1995, respectively. The increase in total deposits was primarily due to the 1996 bank acquisitions, with aggregate total deposits of $128 million as of the respective acquisition dates. At December 31, 1996, $234 million, or 9.2% of total deposits were in time accounts greater than $100,000. The increase of $31 million, or 15.3%, from $203 million at December 31, 1995, was due to $20 million of deposits obtained through the institutions acquired during 1996. Management believes virtually all the deposits in excess of $100,000 are with persons or entities that hold other deposit relationships with the banks. Maturities of deposits in excess of $100,000 at December 31, 1996, were (in thousands): Maturing in less than three months...... $ 112,912 Maturing in three to six months......... 49,882 Maturing in six to twelve months........ 46,117 Maturing in over twelve months.......... 24,964 ---------- Total deposits in excess of $100,000.... $ 233,875 ---------- ---------- In addition to the availability of core deposits, management has determined it may, in the future employ a brokered deposit program in an effort to attract lower cost sources of funds. The Company intends to continue to expand its core deposit base through acquisitions. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. SHORT-TERM BORROWINGS Short-term borrowings include securities sold under agreements to repurchase, commercial paper, Federal Home Loan Bank advances and federal funds purchased. These funds are used to fund the growth in loans and securities and manage the Company's rate sensitivity risk. They are subject to short-term price swings as the Company's needs change or the overall market rates for short-term investment funds change. The Company's subsidiary banks had arrangements with the Federal Home Loan Bank that provide for borrowing up to $233 million. As of December 31, 1996, $4,829,000 long-term and $152,000,000 short-term advances were outstanding. The Company also had a $14 million balance outstanding on its $15 million short-term commercial paper arrangement at December 31, 1996. The $157 million increase in short-term borrowings from December 31, 1995, is due to strong loan demand at the Company's bank subsidiaries and reflects a transfer of long-term debt to lower rate short-term borrowing facilities. The following table sets forth a summary of the short-term borrowings of the Company during 1996, 1995 and 1994, and as of the end of each such period:
- -------------------------------------------------------------------------------------------------------- Average Maximum Weighted Average Daily Outstanding Average Interest Outstanding Amount at any Interest Rate at (Dollars in thousands) at Year-End Outstanding Month-End Rate Year-End - -------------------------------------------------------------------------------------------------------- 1996 Federal funds purchased and securities sold under agreements to repurchase. . . $ 78,369 $ 56,356 $ 83,451 4.75% 5.55% Commercial paper . . . . . . . . . . . . . 14,062 12,643 14,965 5.72% 5.63% FHLB advances. . . . . . . . . . . . . . . 152,000 96,130 182,000 5.91% 6.30% Other. . . . . . . . . . . . . . . . . . . 3,203 3,182 4,140 5.58% 5.95% --------- --------- Total . . . . . . . . . . . . . . . . $ 247,634 $ 168,311 $ 272,895 5.49% 6.01% --------- --------- --------- --------- 1995 Federal funds purchased and securities sold under agreements to repurchase. . . $ 50,102 $ 67,421 $ 100,627 5.59% 4.69% Commercial paper . . . . . . . . . . . . . 10,000 6,352 10,000 6.11% 5.91% FHLB advances. . . . . . . . . . . . . . . 28,775 36,345 61,975 6.07% 5.88% Other. . . . . . . . . . . . . . . . . . . 2,004 1,666 2,917 5.70% 6.05% --------- --------- Total . . . . . . . . . . . . . . . . $ 90,881 $ 111,784 $ 152,523 5.78% 5.23% --------- --------- --------- --------- 1994 Federal funds purchased and securities sold under agreements to repurchase. . . $ 74,319 $ 65,123 $ 95,854 4.51% 4.99% Commercial paper . . . . . . . . . . . . . - 1,231 4,988 3.86% - FHLB advances. . . . . . . . . . . . . . . 38,400 13,000 44,084 5.22% 6.07% Other. . . . . . . . . . . . . . . . . . . 750 4,209 4,822 3.90% 5.35% --------- --------- Total . . . . . . . . . . . . . . . . $ 113,469 $ 83,563 $ 130,491 4.58% 5.36% --------- --------- --------- --------- - --------------------------------------------------------------------------------------------------------
LONG TERM DEBT Long-term debt of the Company was $47 million as of December 31, 1996, and $81 million as of December 31, 1995. Long-term debt includes $23 million of unsecured subordinated notes issued in April 1993 and $12 million of exchangeable subordinated notes maturing August 15, 2005. The decrease in long- term debt reflects a transfer to lower rate short-term borrowings. On February 28, 1997, the Company issued notice of redemption to the holders of its $23 million in aggregate principal amount of 7.75% Subordinated Notes due 2000 (the "7.75% Notes"). The 7.75% Notes will be redeemed at par plus accrued interest. SHAREHOLDERS' EQUITY Total shareholders' equity increased $40.6 million, or 19.9%, to $244.6 million at December 31, 1996, from $204.0 million at December 31, 1995, as a result of the retention of a majority of earnings, the conversion of debentures and the issuance of common stock. During 1996 the equivalent of 842,253 shares of common stock were issued resulting in an increase in shareholders' equity of $15.0 million. In 1996, the Company increased the number of authorized common shares from 20,000,000 to 30,000,000. The number of authorized preferred shares remained at 2,000,000. The increases are expected to provide the Company greater ability to utilize common and preferred stock in connection with raising additional capital, expanding its business through acquisitions and other general purposes. On February 28, 1997, the Company issued notice of redemption to the holders of its Depositary Shares, which represent ownership of one-quarter share of 7% Cumulative Convertible Preferred Stock (approximately $23 million in stated value). The redemption price is $26.40 (plus accrued and unpaid dividends) for each Depositary Share with a stated value of $25.00 per share. Holders of the Depositary Shares have the right to convert their investment into Common Stock, prior to redemption, at a rate of 1.569 shares of Common Stock for each Depositary Share. The Company expects that virtually all of such holders will elect to convert prior to redemption, which would result in the issuance of up to approximately 1,443,000 shares of Common Stock. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. ASSET/LIABILITY MANAGEMENT - -------------------------------------------------------------------------------- LIQUIDITY MANAGEMENT Liquidity management is an effort of management to provide a continuing flow of funds to meet its financial commitments, customer borrowings needs and deposit withdrawal requirements. The liquidity position of the Company and its subsidiary banks is monitored by the Asset/Liability Management Committee of the Company. The largest category of assets representing a ready source of liquidity for the Company is its short-term financial instruments, which include federal funds sold, interest-bearing deposits at other financial institutions, U.S. Treasury securities and other securities maturing within one year. Liquidity is also provided through the regularly scheduled maturities of assets. The investment portfolio contains a number of high quality issues with varying maturities and regular principal payments. Maturities in the loan portfolio also provide a steady flow of funds, and strict adherence to the credit policies of the Company helps ensure the collectibility of these loans. The liquidity position of the Company is also greatly enhanced by its significant base of core deposits. The liquidity ratio is one measure of a bank's ability to meet its current obligations and is defined as the percentage of liquid assets to deposits. Liquid assets include cash and due from banks, unpledged investment securities with maturities of less than one year and federal funds sold. At year-end 1996, 1995 and 1994, the liquidity ratio was 7.77%, 8.96% and 7.37%, respectively. The level of loans maturing within one year greatly added to the Company's liquidity position in 1996. Including loans maturing within one year, the liquidity ratio was 34.41%, 40.23% and 34.57%, respectively, for the same periods. The Company has a revolving line of credit with its primary lender, which provides for borrowing up to $26 million. This line would be utilized to finance acquisitions which may be completed in 1997. The balance outstanding on this line of credit at December 31, 1996, was $4.1 million. The Company also maintains available lines of federal funds borrowings, as well as seasonal borrowing privileges, at the Federal Reserve Bank of Minneapolis. The Company's subsidiary banks have the ability to borrow an aggregate of $108 million in federal funds from eight nonaffiliated financial institutions. Additionally, most of the Company's subsidiary banks have joined the Federal Home Loan Bank ("FHLB") System. As part of membership, the Company's subsidiary banks purchased a modest amount of stock of FHLB and obtained advance lines of credit which represent an aggregate of $233 million in additional funding capacity. INTEREST RATE SENSITIVITY Interest rate sensitivity indicates the exposure of a financial institution's earnings to future fluctuations in interest rates. Management of interest rate sensitivity is accomplished through the composition of loans and investments and by adjusting the maturities on earning assets and interest-bearing liabilities. Rate sensitivity and liquidity are related since both are affected by maturing assets and liabilities. However, interest rate sensitivity also takes into consideration those assets and liabilities with interest rates that are subject to change prior to maturity. The Company's Asset and Liability Management Committee ("ALCO") attempts to structure the Company's balance sheet to provide for an approximately equal amount of rate sensitive assets and rate sensitive liabilities. In addition to facilitating liquidity needs, this strategy assists management in maintaining relative stability in net interest income despite unexpected fluctuations in interest rates. ALCO uses three methods for measuring and managing interest rate risk: Interest Rate Sensitivity Analysis, Net Interest Income Simulation Modeling, Equity Fair Value Modeling. INTEREST RATE SENSITIVITY ANALYSIS - Management performs an Interest Rate Sensitivity Analysis which represents a point in time net position of assets, liabilities and off-balance sheet instruments subject to repricing in specified time periods. Guidelines established by ALCO, and approved by the Company's Board of Directors, limit the impact on net interest income to five percent given a 100 basis point change in interest rates over one year. However, management believes Interest Rate Sensitivity Analysis alone does not accurately measure the magnitude of changes in net interest income since changes in interest rate do not impact all categories of assets, liabilities and off- balance sheet instruments equally or simultaneously. A summary of the Interest Rate Sensitivity Analysis is presented on page 26. NET INTEREST INCOME SIMULATION MODELING - Net Interest Income Simulation Modeling allows management to analyze the impact of short-term (less than 12 months) interest rate fluctuations using projected balance sheet information. The balance sheet changes are based on forecasted repayments of loans and securities, growth in loans and deposits, and historical pricing spreads. Management uses the model to simulate the impact of immediate and longer-term shifts in the yield curve. The results of these models are reviewed by ALCO and used to develop the Company's strategies. Guidelines established by ALCO limit the impact on net interest income to five percent given a 100 basis point change in interest rates. As of December 31, 1996, the impact of such a change in interest rate would be approximately 1.24 percent. EQUITY FAIR VALUE MODELING - Because Net Interest Income Simulation Modeling is dependent on accurate forecasts, its usefulness is limited to periods exceeding two years. As a result, the Company uses the Equity Fair Value Modeling to measure long-term interest rate exposure. The method estimates the impact of interest rate changes on the estimated discounted future cash flows of the Company's current assets, liabilities, and off-balance sheet instruments. Guidelines established by ALCO limit the change in fair value to 15 percent given a 100 basis point change in interest rates. As of December 31, 1996, the impact of such a change in interest rate would be approximately 6.85 percent. Based on each of these methods of measuring interest rate risk, management believes the Company is slightly asset sensitive as of December 31, 1996. The Company does not engage in the speculative use of derivative financial instruments. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. The following table sets forth the Company's interest rate sensitivity analysis by contractual repricing or maturity at December 31, 1996:
Repricing or Maturing in - ----------------------------------------------------------------------------------------------- 1 Year Over 1 Over 5 (In thousands) or Less to 5 Years Years Total - ----------------------------------------------------------------------------------------------- Rate sensitive assets: Loans. . . . . . . . . . . . . . . . . $ 1,100,161 $ 818,947 $ 145,000 $ 2,064,108 Held-to-maturity securities. . . . . . 81,583 20,764 120,001 222,348 Available-for-sale securities. . . . . 164,572 247,520 94,796 506,888 Other interest-bearing assets. . . . . 7,100 98 - 7,198 ----------- ----------- ----------- ----------- Total rate sensitive assets. . . . . . $ 1,353,416 $ 1,087,329 $ 359,797 $ 2,800,542 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Rate sensitive liabilities: Savings deposits and Interest-bearing checking. . . . . . . $ 964,829 $ - $ - $ 964,829 Time deposits. . . . . . . . . . . . . 901,798 239,065 670 1,141,533 Short-term borrowings. . . . . . . . . 248,065 273 - 248,338 Long-term borrowings . . . . . . . . . 534 33,222 15,648 49,404 ----------- ----------- ----------- ----------- Total rate sensitive liabilities . . . $ 2,115,226 $ 272,560 $ 16,318 $ 2,404,104 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Rate sensitive gap . . . . . . . . . . . $ (761,810) $ 814,769 $ 343,479 $ 396,438 Cumulative rate sensitive gap. . . . . . $ (761,810) $ 52,959 $ 396,438 $ 396,438 - -----------------------------------------------------------------------------------------------
The following sets forth the Company's interest rate sensitivity analysis at December 31, 1996, with respect to the individual categories of loans and provides separate analyses with respect to fixed interest rate loans and floating interest rate loans:
Repricing or Maturing in - ----------------------------------------------------------------------------------------------- 1 Year Over 1 Over 5 (In thousands) or Less to 5 Years Years Total - ----------------------------------------------------------------------------------------------- Loan category: Real estate. . . . . . . . . . . . . . $ 450,660 $ 355,283 $ 65,489 $ 871,432 Agricultural . . . . . . . . . . . . . 178,170 40,320 3,591 222,081 Commercial . . . . . . . . . . . . . . 418,166 166,713 39,577 624,456 Consumer and other . . . . . . . . . . 53,165 256,631 36,343 346,139 ----------- ----------- ----------- ----------- Total loans. . . . . . . . . . . . . . $ 1,100,161 $ 818,947 $ 145,000 $ 2,064,108 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Fixed interest rate loans. . . . . . . . $ 369,102 $ 724,360 $ 141,895 $ 1,235,357 Floating interest rate loans . . . . . . 731,059 94,587 3,105 828,751 ----------- ----------- ----------- ----------- Total loans. . . . . . . . . . . . . . $ 1,100,161 $ 818,947 $ 145,000 $ 2,064,108 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- - -----------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT Risk-based guidelines established by regulatory agencies require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of December 31, 1996, the Company is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk- based, Tier 1 leverage ratios as set forth in the table. - -------------------------------------------------------------------------------- REGULATORY CAPITAL REQUIREMENTS: - -------------------------------------------------------------------------------- Tier 1 Total Risk- Total Risk- (Dollars in thousands) Capital Based Capital Leverage Based Assets - -------------------------------------------------------------------------------- Minimum. . . . . . . . . . . . 4.00% 8.00% 3.00% N/A Well-Capitalized . . . . . . . 6.00% 10.00% 5.00% N/A ----- ------ ----- ------ COMMUNITY FIRST BANKSHARES, INC. December 31, 1996. . . . . . . 8.88% 11.10% 6.62% $2,312,632 December 31, 1995. . . . . . . 8.51% 11.18% 6.10% 1,974,179 - -------------------------------------------------------------------------------- Due to the Company's level of Tier 1 capital and substantial level of earning assets invested in low risk government agency and mortgage-backed securities, the Company's risk-based capital ratios significantly exceed the regulatory minimums. The Company conducts an ongoing assessment of its capital needs in order to maintain an adequate level of capital to support business growth, to ensure depositor protection and to facilitate corporate expansion. Management continues to explore steps to increase its capital levels to permit it to make future acquisitions. Portions of the subordinated debt financing referred to under "Borrowings," above, are treated as Tier 2 capital. This Annual Report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward- looking statements, which speak only as of the date made. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: risks related to the Company's acquisition strategy, including risks of adversely changing results of operations and possible factors affecting the Company's ability to consummate further acquisitions; risks of loans and investments, including dependance on local economic conditions; competition for the Company's customers from other providers of financial services; possible adverse effects of changes in interest rates; and other risks detailed in the Company's filings with the Securities and Exchange Commission, which risks are difficult to predict and many of which are beyond the control of the Company. 26 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Community First Bankshares, Inc. (Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------- December 31 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 175,732 $ 137,551 Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . 3,600 25,965 Interest-bearing deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,598 3,213 Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506,888 486,522 Held-to-maturity securities (Fair Value: 1996 - $223,200, 1995 - $231,704) . . . . . . . . . . 222,348 230,820 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,064,108 1,767,193 Less: Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,215) (22,712) ---------- ---------- Net Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,037,893 1,744,481 Bank premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,705 51,534 Accrued interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,233 28,347 Intangibles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,182 34,898 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,219 26,645 ---------- ---------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,116,398 $2,769,976 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 431,078 $ 398,314 Interest-bearing: Savings and NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964,829 873,025 Time accounts over $100,000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233,875 202,520 Other time accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 907,658 885,857 ---------- ---------- Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,537,440 2,359,716 Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . 78,369 50,102 Other short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,265 40,779 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,750 81,288 Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,027 15,978 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,665 17,153 ---------- ---------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,870,516 2,565,016 Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,311 956 Shareholders' equity: Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,988 23,000 Common stock, par value $.01 per share: Authorized Shares - 30,000,000 Issued Shares - 17,202,684 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 162 Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,029 64,776 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,239 115,154 Unrealized gain on available-for-sale securities, net of tax. . . . . . . . . . . . . . . . 1,368 1,976 Less cost of common stock in treasury - 1996 - 50,810 shares; 1995 - 78,624 shares. . . . . (1,225) (1,064) ---------- ---------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,571 204,004 ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . $3,116,398 $2,769,976 ---------- ---------- ---------- ---------- - ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes. 27 CONSOLIDATED STATEMENTS OF INCOME Community First Bankshares, Inc. (Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------- Years ended December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,530 $ 150,948 $ 104,012 Investment securities . . . . . . . . . . . . . . . . . . 44,936 40,210 38,032 Interest-bearing deposits . . . . . . . . . . . . . . . . 163 366 638 Federal funds sold and resale agreements. . . . . . . . . 797 1,344 555 ---------- ---------- ---------- Total interest income. . . . . . . . . . . . . . . . . . . . 229,426 192,868 143,237 INTEREST EXPENSE: Deposits. . . . . . . . . . . . . . . . . . . . . . . . . 81,655 71,780 46,560 Short-term and other borrowings . . . . . . . . . . . . . 9,247 6,184 4,029 Long-term debt. . . . . . . . . . . . . . . . . . . . . . 4,332 4,927 2,879 ---------- ---------- ---------- Total interest expense . . . . . . . . . . . . . . . . . . . 95,234 82,891 53,468 ---------- ---------- ---------- Net interest income. . . . . . . . . . . . . . . . . . . . . 134,192 109,977 89,769 Provision for loan losses. . . . . . . . . . . . . . . . . . 6,757 2,711 1,839 ---------- ---------- ---------- Net interest income after provision for loan losses. . . . . 127,435 107,266 87,930 NONINTEREST INCOME: Service charges on deposit accounts . . . . . . . . . . . 12,328 10,116 8,467 Insurance commissions . . . . . . . . . . . . . . . . . . 5,213 4,283 3,777 Fees from fiduciary activities. . . . . . . . . . . . . . 3,332 2,718 2,157 Net gains on sales of securities. . . . . . . . . . . . . 93 52 99 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 6,404 5,319 4,492 ---------- ---------- ---------- Total noninterest income . . . . . . . . . . . . . . . . . . 27,370 22,488 18,992 NONINTEREST EXPENSE: Salaries and employee benefits. . . . . . . . . . . . . . 54,870 42,796 35,083 Net occupancy . . . . . . . . . . . . . . . . . . . . . . 15,085 10,563 9,353 FDIC insurance. . . . . . . . . . . . . . . . . . . . . . 669 2,532 3,720 Legal and accounting. . . . . . . . . . . . . . . . . . . 1,989 1,311 1,403 Other professional service. . . . . . . . . . . . . . . . 1,892 2,700 2,054 Acquisition expense . . . . . . . . . . . . . . . . . . . 2,928 768 908 Data processing . . . . . . . . . . . . . . . . . . . . . 1,506 1,607 856 Amortization of intangibles . . . . . . . . . . . . . . . 3,362 2,551 1,876 Permanent impairment of equity method investment. . . . . 940 - - Other . . . . . . . . . . . . . . . . . . . . . . . . . . 21,047 17,765 14,988 ---------- ---------- ---------- Total noninterest expense. . . . . . . . . . . . . . . . . . 104,288 82,593 70,241 ---------- ---------- ---------- Income before income taxes . . . . . . . . . . . . . . . . . 50,517 47,161 36,681 Provision for income taxes . . . . . . . . . . . . . . . . . 18,007 17,208 13,952 ---------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729 ---------- ---------- ---------- ---------- ---------- ---------- Net income applicable to common equity . . . . . . . . . . . $ 30,900 $ 28,343 $ 21,638 ---------- ---------- ---------- ---------- ---------- ---------- Earnings per common and common equivalent share: Primary . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.85 $ 1.82 $ 1.48 Fully diluted . . . . . . . . . . . . . . . . . . . . . . $ 1.79 $ 1.74 $ 1.42 Average common and common equivalent shares outstanding: Primary . . . . . . . . . . . . . . . . . . . . . . . . . 16,699,021 15,543,129 14,580,309 Fully diluted . . . . . . . . . . . . . . . . . . . . . . 18,154,966 17,276,050 16,136,433 - ---------------------------------------------------------------------------------------------------
See accompanying notes. 28 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Community First Bankshares, Inc. (Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock --------------- --------------- Capital Retained Shares Amount Shares Amount Surplus Earnings - -------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 . . . . . . - $ - 14,522,630 $145 $47,943 $ 77,390 Net income . . . . . . . . . . . . . . . - - - - - 22,729 Preferred stock dividends ($4.74 per share) . . . . . . . . . . - - - - - (1,091) Common stock dividends ($.44 per share). . . . . . . . . . . - - - - - (3,794) Purchases of common stock for treasury at cost. . . . . . . . . . . - - - - - - Sales of treasury stock to employee benefit plans . . . . . . . . . . . . - - - - 26 - Issuance of preferred stock. . . . . . . 230,000 23,000 - - (1,048) - Exercise of options, net of stock tendered in payment . . . . . . . . . - - 10,200 - 14 (377) Exercise of warrants, net of stock tendered in payment . . . . . . . . . - - - - - (2,102) Conversion of debentures . . . . . . . . - - 212,089 3 1,980 - Change in unrealized gain on available for sale securities, net of income tax benefit of $4,537. . . . . . . . . . . . . . . . - - - - - - - -------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 . . . . . . 230,000 23,000 14,744,919 148 48,915 92,755 Net income . . . . . . . . . . . . . . . - - - - - 29,953 Preferred stock dividends ($7.00 per share) . . . . . . . . . . - - - - - (1,610) Common stock dividends ($0.48 per share) . . . . . . . . . . - - - - - (5,279) Issuance of common stock . . . . . . . . - - 891,863 9 11,568 - Purchases of common stock for treasury at cost. . . . . . . . . . . - - - - - - Sales of treasury stock to employee benefit plans. . . . . . . . - - - - 22 - Exercise of options, net of stock tendered in payment . . . . . . . . . - - 20,635 - 156 (209) Exercise of warrants, net of stock tendered in payment . . . . . . . . . - - 21,602 - - - Conversion of debentures . . . . . . . . - - 485,338 5 3,915 - Liquidation of investment in subsidiary to shareholders. . . . . . - - - - - (456) Termination of ESOP loan guarantee upon satisfaction of debt . . . . . . - - - - 200 - Change in unrealized loss on available-for-sale securities, net of income taxes of $4,219 . . . . - - - - - - - -------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 . . . . . . 230,000 23,000 16,164,357 162 64,776 115,154 Net income . . . . . . . . . . . . . . . - - - - - 32,510 Preferred stock dividends ($7.00 per share) . . . . . . . . . . - - - - - (1,610) Common stock dividends ($0.58 per share) . . . . . . . . . . - - - - - (6,714) Issuance of common stock . . . . . . . . - - 842,253 8 9,810 5,226 Retirement of common stock . . . . . . . - - (19,125) - (349) - Purchases of common stock for treasury at cost. . . . . . . . . . . - - - - - - Sales of treasury stock to employee benefit plans. . . . . . . . - - - - 162 - Exercise of options, net of stock tendered in payment . . . . . . . . . - - 215,199 2 2,630 (322) Conversion of convertible preferred stock . . . . . . . . . . . . . . . . (125) (12) - - - (5) Change in unrealized loss on available-for-sale securities, net of income tax benefit of $336 . . - - - - - - - -------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 . . . . . . 229,875 $22,988 17,202,684 $172 $77,029 $144,239 ------- ------- ---------- ---- ------- -------- ------- ------- ---------- ---- ------- -------- - -------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- Treasury Stock Unrealized ------------------ Gain(Loss) Shares Amount Total - ---------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 . . . . . . $3,042 272,765 $(3,449) $125,071 Net income . . . . . . . . . . . . . . . - - - 22,729 Preferred stock dividends ($4.74 per share) . . . . . . . . . . - - - (1,091) Common stock dividends ($.44 per share). . . . . . . . . . . - - - (3,794) Purchases of common stock for treasury at cost. . . . . . . . . . . - 102,000 (1,384) (1,384) Sales of treasury stock to employee benefit plans . . . . . . . . . . . . - (19,650) 243 269 Issuance of preferred stock. . . . . . . - - - 21,952 Exercise of options, net of stock tendered in payment . . . . . . . . . - (40,176) 502 139 Exercise of warrants, net of stock tendered in payment . . . . . . . . . - (170,595) 2,153 51 Conversion of debentures . . . . . . . . - - 1,983 Change in unrealized gain on available for sale securities, net of income tax benefit of $4,537. . . . . . . . . . . . . . . . (8,224) - - (8,224) - ---------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 . . . . . . (5,182) 144,344 (1,935) 157,701 Net income . . . . . . . . . . . . . . . - - - 29,953 Preferred stock dividends ($7.00 per share) . . . . . . . . . . - - - (1,610) Common stock dividends ($0.48 per share) . . . . . . . . . . - - - (5,279) Issuance of common stock . . . . . . . . - - - 11,577 Purchases of common stock for treasury at cost. . . . . . . . . . . - 4,000 (56) (56) Sales of treasury stock to employee benefit plans. . . . . . . . - (18,194) 237 259 Exercise of options, net of stock tendered in payment . . . . . . . . . - (51,526) 690 637 Exercise of warrants, net of stock tendered in payment . . . . . . . . . - - - - Conversion of debentures . . . . . . . . - - - 3,920 Liquidation of investment in subsidiary to shareholders. . . . . . - - - (456) Termination of ESOP loan guarantee upon satisfaction of debt . . . . . . - - - 200 Change in unrealized loss on available-for-sale securities, net of income taxes of $4,219 . . . . 7,158 - - 7,158 - ---------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 . . . . . . 1,976 78,624 (1,064) 204,004 Net income . . . . . . . . . . . . . . . - - - 32,510 Preferred stock dividends ($7.00 per share) . . . . . . . . . . - - - (1,610) Common stock dividends ($0.58 per share) . . . . . . . . . . - - - (6,714) Issuance of common stock . . . . . . . . - - - 15,044 Retirement of common stock . . . . . . . - - - (349) Purchases of common stock for treasury at cost. . . . . . . . . . . - 64,900 (1,535) (1,535) Sales of treasury stock to employee benefit plans. . . . . . . . - (22,582) 307 469 Exercise of options, net of stock tendered in payment . . . . . . . . . - (69,349) 1,050 3,360 Conversion of convertible preferred stock . . . . . . . . . . . . . . . . - (783) 17 - Change in unrealized loss on available-for-sale securities, net of income tax benefit of $336 . . (608) - - (608) - ---------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 . . . . . . $1,368 50,810 $(1,225) $244,571 ------ ------ ------- -------- ------ ------ ------- -------- - ----------------------------------------------------------------------------------
See accompanying notes. 29 CONSOLIDATED STATEMENTS OF CASH FLOWS Community First Bankshares, Inc. (In thousands)
- -------------------------------------------------------------------------------------------------- Years ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. . . . . . . . . . . . . . . . . . 6,757 2,711 1,839 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 6,974 5,373 4,447 Amortization of intangibles. . . . . . . . . . . . . . . . . 3,362 2,551 1,876 Net amortization of premiums and discounts on securities . . 1,867 1,946 2,545 Deferred income tax benefit. . . . . . . . . . . . . . . . . (3,906) (4,009) (1,031) Decrease (increase) in interest receivable . . . . . . . . . 422 (2,309) (2,676) Increase in interest payable . . . . . . . . . . . . . . . . 282 4,746 856 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (4,236) (6,066) 6,470 -------- -------- -------- Net cash provided by operating activities. . . . . . . . . . . . 44,032 34,896 37,055 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions, net of cash acquired . . . . . . . . . . . . . . . 14,026 35,667 2,410 Net (decrease) increase in interest-bearing deposits . . . . . . (158) (462) 2,442 Purchases of available-for-sale securities . . . . . . . . . . . (218,601) (86,629) (54,206) Maturities of available-for-sale securities. . . . . . . . . . . 217,771 75,262 78,613 Sales of securities, net of gains. . . . . . . . . . . . . . . . 29,720 50,530 61,607 Purchases of held-to-maturity securities . . . . . . . . . . . . (23,344) (75,871) (94,639) Maturities of held-to-maturity securities. . . . . . . . . . . . 30,986 54,990 85,901 Net increase in loans. . . . . . . . . . . . . . . . . . . . . . (237,802) (139,434) (214,463) Net increase in bank premises and equipment. . . . . . . . . . . (18,194) (10,438) (9,782) Net (decrease) increase in minority interest . . . . . . . . . . 355 (4,828) 235 -------- -------- -------- Net cash used in investing activities. . . . . . . . . . . . . . (205,241) (101,213) (141,882) CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in demand deposits, NOW accounts and savings accounts. . . . . . . . . . . . . . . . . 51,952 (44,603) (26,468) Net (decrease) increase in time accounts . . . . . . . . . . . . (5,807) 141,005 54,234 Net increase (decrease) in short-term and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 156,753 (23,088) 50,525 Proceeds from issuance of long-term debt . . . . . . . . . . . . - 56,624 - Repayment of long-term debt. . . . . . . . . . . . . . . . . . . (34,538) (10,000) (6,450) Net proceeds from issuance of common stock . . . . . . . . . . . 15,044 11,577 66 Net proceeds from issuance of preferred stock. . . . . . . . . . - - 21,952 Purchase of common stock held in treasury. . . . . . . . . . . . (1,535) (56) (1,384) Sale of common stock held in treasury. . . . . . . . . . . . . . 3,829 896 451 Retirement of common stock . . . . . . . . . . . . . . . . . . . (349) - - Preferred stock dividends paid . . . . . . . . . . . . . . . . . (1,610) (1,610) (1,091) Common stock dividends paid. . . . . . . . . . . . . . . . . . . (6,714) (5,279) (3,794) -------- -------- -------- Net cash provided by financing activities. . . . . . . . . . . . 177,025 125,466 88,041 -------- -------- -------- Net increase (decrease) in cash and cash equivalents . . . . . . 15,816 59,149 (16,786) Cash and cash equivalents at beginning of year . . . . . . . . . 163,516 104,367 121,153 -------- -------- -------- Cash and cash equivalents at end of year . . . . . . . . . . . . $179,332 $163,516 $104,367 -------- -------- -------- -------- -------- -------- - --------------------------------------------------------------------------------------------------
See accompanying notes. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. December 31, 1996, 1995 and 1994 1. SIGNIFICANT ACCOUNTING POLICIES Community First Bankshares, Inc. (the "Company") is a multi-bank holding company which, at the end of 1996, served 79 communities in Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin. The Company's community banks provide a full range of banking services, primarily in small and medium- sized communities and the surrounding communities. In addition to its primary emphasis on commercial and consumer banking services, the Company offers trust, insurance and nondeposit investment products and services. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Community First Bankshares, Inc., its wholly-owned data processing, credit origination and insurance agency subsidiaries and its fourteen majority-owned subsidiary banks. Minority interest is reflected in consolidation and is the portion of the subsidiary banks (ranging from 0.00% to 1.29% at December 31, 1996, and from 0.00% to 2.87% and 0.00% to 18.93% at December 31, 1995 and 1994, respectively) that is not owned by the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation. As discussed in Note 2, the Company acquired Mountain Parks Financial Corporation ("Mountain Parks"), on December 18, 1996, Minowa Bancshares, Inc. ("Minowa"), on February 22, 1995, and First Community Bankshares, Inc. ("FCB"), on July 3, 1995. These acquisitions were accounted for using the pooling of interests method. Accordingly, the consolidated financial information has been restated to reflect the results of operations of the four companies on a combined basis for all periods presented. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES Management determines the classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of retained earnings in shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included as an adjustment to interest income from investments. Realized gains and losses and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. LOANS Loans are stated at their principal balance outstanding, less the allowance for loan losses. Interest on loans is recognized on an accrual basis. Loans are placed on nonaccrual when they become past due over 90 days, or earlier, if the collection of interest or principal is considered unlikely. Thereafter, no interest income is recognized unless received in cash and until such time as the borrower demonstrates the ability to pay interest and principal. LOAN FEE INCOME The Company recognizes loan fees and certain direct origination costs as a yield adjustment over the estimated life of the loan, utilizing a method that results in a constant rate of return. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained through charges to expense at an amount that will provide for estimated loan losses. These estimates are based principally on a continual review of the loan portfolio, loan charge-off experience, economic conditions and industry guidelines. Ultimate losses may vary from current estimates, and as adjustments become necessary, the allowance for loan losses is adjusted in the periods in which such losses become known or fail to occur. Actual loan charge-offs and subsequent recoveries are deducted from and added to the allowance, respectively. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is provided on the straight-line method over the estimated lives of the assets and includes amortization of assets recorded under capital leases. Estimated lives range from three to twenty and twenty-five to forty years for equipment and premises, respectively. Accelerated depreciation methods are used for income tax reporting purposes. INTANGIBLE ASSETS Goodwill, the excess cost over net assets acquired, of banking subsidiaries is amortized over a period of fifteen years. At December 31, 1996, goodwill totaled $33,396,000, net of accumulated amortization of $6,765,000. Other intangible assets, principally deposit base intangibles, unexpired premium lists and noncompetition agreements, totaled $5,786,000, net of accumulated amortization of $4,154,000, and are amortized over their estimated useful lives ranging from three to twenty-five years. INCOME TAXES The Company provides for income taxes based on income reported for financial statement purposes, rather than amounts currently payable under statutory tax laws. Deferred taxes are recorded to reflect the tax consequences on future years' differences between the tax bases of assets and liabilities and the financial reporting of amounts at each year-end. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. EARNINGS PER SHARE Primary earnings per common share is calculated by dividing net income adjusted for preferred stock dividends declared by the sum of the weighted average number of shares of common stock outstanding and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants during each period. Fully diluted earnings per common share is based on net income before considering the preferred stock dividends declared and interest expense, net of tax, paid on convertible exchangeable redeemable subordinated debentures (the "Debentures"). Interest expense on the Debentures, net of tax, was $0, $86,000 and $261,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The weighted average number of shares of common stock outstanding is increased by the assumed conversion of convertible preferred stock outstanding and the Debentures outstanding from the beginning of the period or date of issuance, if later, and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants during each period. Such adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per share. CASH AND CASH EQUIVALENTS Cash and cash equivalents is defined as cash and due from banks, federal funds sold and securities purchased under agreements to resell. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. See Footnotes 4 and 14. 2. BUSINESS COMBINATIONS - -------------------------------------------------------------------------------- On December 18, 1996, the Company issued 5,176,672 shares of common stock to complete its merger with Mountain Parks, a one bank holding company with seventeen offices in Colorado. The merger was accounted for using the pooling of interests method. Operating results of the Company and Mountain Parks for the years ended December 31, 1995 and 1994 and the nine months ended September 30, 1996, prior to restatement were: - -------------------------------------------------------------------------------- The Mountain (In thousands, except per share data) Company Parks Combined - -------------------------------------------------------------------------------- Nine months ended September 30, 1996 (unaudited): Net interest income. . . . . . . . . . . . . . . . $75,240 $23,148 $ 98,388 Net income . . . . . . . . . . . . . . . . . . . . 21,070 5,392 26,462 Net income applicable to common equity . . . . . . 19,862 5,392 25,254 Earnings per common and common equivalent share: Primary. . . . . . . . . . . . . . . . . . . . $1.71 $1.40 $1.53 Fully diluted. . . . . . . . . . . . . . . . . $1.61 $1.40 $1.47 Year ended December 31, 1995: Net interest income. . . . . . . . . . . . . . . . $88,148 $21,829 $109,977 Net income . . . . . . . . . . . . . . . . . . . . 22,819 7,134 29,953 Net income applicable to common equity . . . . . . 21,209 7,134 28,343 Earnings per common and common equivalent share: Primary. . . . . . . . . . . . . . . . . . . . $1.85 $2.24 $1.82 Fully diluted. . . . . . . . . . . . . . . . . $1.75 $2.17 $1.74 Year ended December 31, 1994: Net interest income. . . . . . . . . . . . . . . . $73,778 $15,991 $ 89,769 Net income . . . . . . . . . . . . . . . . . . . . 16,940 5,789 22,729 Net income applicable to common equity . . . . . . 15,849 5,789 21,638 Earnings per common and common equivalent share: Primary. . . . . . . . . . . . . . . . . . . . $1.39 $2.32 $1.48 Fully diluted. . . . . . . . . . . . . . . . . $1.37 $2.03 $1.42 - -------------------------------------------------------------------------------- (Operating results of the Company have been restated to reflect the Minowa Bancshares, Inc. and First Community Bankshares, Inc. acquisitions.) (No material adjustments were required to restate combined results of operations.) On July 3, 1995, the Company issued 1,196,445 shares of common stock to acquire First Community Bankshares, Inc. ("FCB"), a five-bank holding company headquartered in Fort Morgan, Colorado. At acquisition, FCB had approximately $153 million in assets and $131 million in deposits at five banks located in Burlington, Englewood, Fort Morgan, Holyoke, and Sterling, Colorado. The Company used the pooling of interests method to account for the transaction. On May 11, 1995, the Company acquired Abbott Bank Group, Inc. ("Abbott"), with offices in Alliance, Nebraska, and ten other central and western Nebraska locations. In the transaction, which was accounted for as a purchase, the Company paid approximately $34,000,000 for 100% of the Abbott common stock. The transaction resulted in the recognition of goodwill of approximately $6,100,000. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. The following unaudited pro forma consolidated financial information for the year ended December 31, 1995, reflects the results of operations as if the acquisition of Abbott had occurred on January 1, 1995. Such unaudited pro forma consolidated financial information may not be indicative of the results of future operations or as they might have been had the acquisitions been effected on the assumed date. - --------------------------------------------------------------------------- Year Ended (In thousands, except per share data) December 31, 1995 - --------------------------------------------------------------------------- Net Interest Income. . . . . . . . . . . . . . . . . . . . . $113,158 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . 29,211 Primary earnings per share . . . . . . . . . . . . . . . . . 1.78 Fully diluted earnings per share . . . . . . . . . . . . . . 1.70 - --------------------------------------------------------------------------- On February 22, 1995, the Company issued 2,400,568 shares of common stock to acquire Minowa, a three-bank holding company headquartered in Decorah, Iowa. At acquisition, Minowa had approximately $224 million in assets and $197 million in deposits at three banks located in Decorah, Iowa; Caledonia, Minnesota; and Mabel, Minnesota. The Company used the pooling of interests method to account for the transaction. During 1996 and 1995, the Company completed the acquisition of several smaller financial institutions in its existing markets. These acquisitions, except as described below, were accounted for using the purchase method and were not material to the financial condition or operating results of the Company. On October 1, 1996, the Company acquired Financial Bancorp, Inc. ("Financial"), a holding company with one bank in Trinidad, Colorado. In the transaction, which was accounted for using the pooling of interests method, the Company issued 538,803 shares of common stock in exchange for 100% of Financial common stock. This merger was not material to the Company's financial condition or operating results. Accordingly, the Company's consolidated financial information has not been restated to reflect this merger. The operating results of Financial are included in the Company's consolidated financial statements subsequent to the date of the merger. On July 31, 1996, the Company acquired High Plains Bancorp, Inc. ("High Plains"), with offices in Kiowa, Elizabeth, and Parker, Colorado. The company paid approximately $7,100,000 for 100% of High Plains common stock. The transaction resulted in the recognition of goodwill of approximately $3,448,000. On July 3, 1996, the Company acquired Charter Bancorporation ("Charter"), Englewood, Colorado. The Company paid approximately $4,600,000 for 100% of Charter common stock. The transaction resulted in the recognition of goodwill of approximately $2,723,000. The equivalent of approximately 232,050 shares of common stock were issued in the transaction. On October 2, 1995, the Company acquired the Farmers & Merchants Bank, Beach, North Dakota ("Beach"), with two offices in Beach and Medora, North Dakota. The Company paid approximately $4,300,000 for 100% of the Beach common stock. The transaction resulted in the recognition of goodwill of approximately $1,100,000. On September 15, 1995, the Company, through a wholly-owned subsidiary, acquired People's Bank and Trust Company, Aurora Colorado ("People's") from Midwest Investment Company. The Company paid approximately $5,596,000 for 100% of the People's common stock. The transaction resulted in the recognition of goodwill of approximately $2,340,000. On July 7, 1995, the Company acquired Financial Holdings, Inc. ("Financial Holdings"), with offices in Boulder and Louisville, Colorado. The Company paid approximately $12,725,000 for 100% of Financial Holdings common stock. The transaction resulted in the recognition of goodwill of approximately $6,137,000. The operating results of all of the companies acquired in purchase transactions subsequent to the dates of acquisition are included in the Company's consolidated financial statements for the years ended December 31, 1996, 1995 and 1994. 3. SUBSEQUENT EVENTS - -------------------------------------------------------------------------------- On February 28, 1997, the Company announced it would redeem its 7% Cumulative Convertible Preferred Stock ("Preferred Stock"). Holders of the Company's Depositary Shares (stated value of $25 per share), which represent ownership of one-quarter share of the Preferred Stock, may elect to convert their shares, prior to redemption, into common stock of the Company ("Common Stock") at a conversion rate of 1.569 shares of Common Stock per Depositary Share or receive the redemption value of $26.40, plus accrued and unpaid dividends. On February 28, 1997, the Company issued notice of redemption to the holders of its $23 million in aggregate principal amount of 7.75% Subordinated Notes due 2000 (the "7.75% Notes"). The 7.75% Notes will be redeemed at par plus accrued interest. On February 18, 1997, the Company signed a definitive purchase agreement with KeyCorp, of Cleveland, Ohio to acquire KeyBank N.A. (Wyoming) with offices in 24 communities throughout the state of Wyoming. The transaction is expected to result in the addition of approximately $1.2 billion in assets and $1.0 billion in deposits. The transaction is subject to regulatory approvals and is expected to be completed during the third quarter of 1997. On January 31, 1997, the Company issued $60 million of 8-7/8% Cumulative Capital Securities, through CFB Capital I, a business trust subsidiary organized in January 1997. Proceeds of the offering will be used for general corporate purposes, which may include without limitation possible future acquisitions, funding investments in, or extension of credit to, the Company's subsidiaries, repayment of maturing obligations and redemption of securities. 4. ACCOUNTING CHANGES - -------------------------------------------------------------------------------- Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. The Company's adoption of SFAS No. 121 did not have a material impact on the Company's financial position. During December 1996, the Company recorded a $940,000 writedown in the value of its investment in an unconsolidated subsidiary, which is being divested to satisfy regulators' competitive issues related to the merger with Mountain Parks. The amount of impairment is based on the estimated net proceeds from the sale of the investment, expected to be completed in early 1997. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a new fair value-based accounting method for stock-based compensation plans. As permitted by SFAS No. 123, management has elected to measure compensation costs as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Note 14 includes the required pro forma disclosures reflecting the impact on net income and earnings per share as if the Company had recorded compensation expense based on the fair value method described in SFAS No. 123. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," addresses whether the transfer of financial assets should be accounted for as a sale and removed from the balance sheet, or as a financing recognized as a borrowing. SFAS No. 125 uses a "financial components" approach to determine the accounting results of the transfers of financial assets and focuses on control to determine whether assets have been sold. If the entity has surrendered control over the transferred assets, the transaction is considered a sale. Control is considered surrendered only if the seller has no legal right to the assets, even in bankruptcy; the buyer has the right to pledge or exchange the assets; and the seller does not maintain effective control over the assets through an agreement to repurchase or redeem them. SFAS No. 125 is effective on a prospective basis for all transactions occurring after December 31, 1996. The Company regularly uses participations of loans to manage its asset/liability mix. The accounting for such transactions is included in SFAS No. 125. However, the adoption of SFAS No. 125 is not expected to have a material effect on the Company's operations or financial position. 5. SECURITIES - -------------------------------------------------------------------------------- The following is a summary of available-for-sale securities and held-to- maturity securities at December 31, 1996 (in thousands):
Available-for-Sale Securities - --------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------- 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 --------- ---------- ---------- --------- --------- ---------- ---------- --------- - --------------------------------------------------------------------------------------- Held-to-Maturity Securities - --------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------- 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 --------- ---------- ---------- --------- --------- ---------- ---------- --------- - ---------------------------------------------------------------------------------------
The following is a summary of available-for-sale securities and held-to- maturity securities at December 31, 1995 (in thousands):
Available-for-Sale Securities - --------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------- United States Treasury . . . . . . . . $ 152,890 $ 1,704 $ 86 $ 154,508 United States Government agencies. . . 121,274 991 677 121,588 Mortgage-backed securities . . . . . . 142,234 1,476 351 143,359 Collateralized mortgage obligations. . 57,887 400 234 58,053 State and political securities . . . . 1,417 26 - 1,443 Other securities . . . . . . . . . . . 7,560 87 76 7,571 --------- ---------- ---------- --------- Total . . . . . . . . . . . . . . . . $ 483,262 $ 4,684 $ 1,424 $ 486,522 --------- ---------- ---------- --------- --------- ---------- ---------- --------- - --------------------------------------------------------------------------------------- Held-to-Maturity Securities - --------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - --------------------------------------------------------------------------------------- United States Government agencies. . . $ 3,318 $ 27 $ 12 $ 3,333 Mortgage-backed securities . . . . . . 106,429 830 935 106,324 State and political securities . . . . 55,267 1,063 116 56,214 Other securities . . . . . . . . . . . 65,806 27 - 65,833 --------- ---------- ---------- --------- Total. . . . . . . . . . . . . . . . . $ 230,820 $ 1,947 $ 1,063 $ 231,704 --------- ---------- ---------- --------- --------- ---------- ---------- --------- - ---------------------------------------------------------------------------------------
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. Proceeds from the sale of available-for-sale securities during the years ended December 31, 1996, 1995 and 1994, were $29,812,000, $50,596,000 and $61,638,000, respectively. Gross gains of $195,000, $633,000 and $428,000 and gross losses of $103,000, $567,000 and $397,000 were realized on those sales during 1996, 1995 and 1994, respectively. The tax effect on the net gains during 1996, 1995 and 1994 was approximately $32,000, $22,000 and $11,000, respectively. There were no sales of held-to-maturity securities during 1996, 1995 or 1994. The amortized cost and estimated fair value of debt securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. - ---------------------------------------------------------------------- Amortized Estimated Available-for-Sale (In thousands) Cost Fair Value - ---------------------------------------------------------------------- Due in one year or less. . . . . . . . . . . . $ 41,050 $ 41,189 Due after one year through five years. . . . . 155,030 155,195 Due after five years through ten years . . . . 21,508 21,500 Due after ten years. . . . . . . . . . . . . . 8,931 8,912 --------- --------- 226,519 226,796 Mortgage-backed securities . . . . . . . . . . 234,782 236,833 Collateralized mortgage obligations. . . . . . 43,320 43,259 --------- --------- Total. . . . . . . . . . . . . . . . . . . . . $ 504,621 $ 506,888 --------- --------- --------- --------- - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- Amortized Estimated Held-to-Maturity (In thousands) Cost Fair Value - ---------------------------------------------------------------------- Due in one year or less. . . . . . . . . . . . $ 5,659 $ 5,695 Due after one year through five years. . . . . 12,280 12,408 Due after five years through ten years . . . . 19,908 20,473 Due after ten years. . . . . . . . . . . . . . 97,995 98,755 --------- --------- 135,842 137,331 Mortgage-backed securities . . . . . . . . . . 86,506 85,869 --------- --------- Total. . . . . . . . . . . . . . . . . . . . . $ 222,348 $ 223,200 --------- --------- --------- --------- - ---------------------------------------------------------------------- At December 31, 1996, the Company held no collateralized mortgage obligations that exceeded 10% of total shareholders' equity. Available-for-sale and held-to-maturity securities carried at $452,478,000 and $398,637,000 at December 31, 1996 and 1995, respectively, were pledged to secure borrowings, public and trust deposits and for other purposes required by law. Securities sold under agreement to repurchase were collateralized by available-for-sale and held-to-maturity securities with an aggregate carrying value of $38,856,000 and $24,222,000 at December 31, 1996 and 1995, respectively. In October 1995, the FASB approved a one-time opportunity for companies to reevaluate the classifications of their investment portfolio and transfer securities from their held-to-maturity account to available-for-sale without consequences to the classification of securities not transferred. The Company utilized this opportunity to transfer $187 million of securities, based on amortized cost from held-to-maturity to available-for-sale. The unrealized losses on these securities at the time of transfer was $758,000. 6. LOANS The composition of the loan portfolio at December 31 was as follows (in thousands): - ------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------- Real estate. . . . . . . . . . . . . . . . . . . . . $ 871,432 $ 744,477 Commercial . . . . . . . . . . . . . . . . . . . . . 624,456 527,620 Consumer and other . . . . . . . . . . . . . . . . . 346,139 270,459 Agriculture. . . . . . . . . . . . . . . . . . . . . 222,081 224,637 ----------- ----------- 2,064,108 1,767,193 Less allowance for loan losses . . . . . . . . . . . (26,215) (22,712) ----------- ----------- Net Loans. . . . . . . . . . . . . . . . . . . . . . $2,037,893 $ 1,744,481 ----------- ----------- ----------- ----------- - ------------------------------------------------------------------------------- At December 31, 1996, real estate loans totaling $289,000,000 were pledged to secure borrowings. 7. ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------------------- Activity in the allowance was as follows (in thousands): - ------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- Balance at beginning of year . . . . . . . $ 22,712 $ 17,333 $ 14,332 Allowance of acquired companies(1) . . . . 784 5,230 1,153 Provision charged to operating expense . . 6,757 2,711 1,839 Loans charged off. . . . . . . . . . . . . (4,971) (3,463) (1,215) Recoveries of loans charged off. . . . . . 933 901 1,224 --------- --------- --------- Balance at end of year . . . . . . . . . . $ 26,215 $ 22,712 $ 17,333 --------- --------- --------- --------- --------- --------- - ------------------------------------------------------------------------------- (1)includes only acquisitions of companies accounted for as purchases. Nonaccrual loans totaled $12,796,000, $3,252,000 and $3,087,000 at December 31, 1996, 1995 and 1994, respectively. The Company includes all loans considered impaired under SFAS No. 114 in nonaccrual loans. The amount of impaired loans was not material at December 31, 1996. Interest income of $671,000 on nonaccrual loans would have been recorded during 1996 if the loans had been current in accordance with their original terms. During 1996, the Company recorded interest income of $176,000 related to loans that were on nonaccrual status as of December 31, 1996. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- Due to the nature of its business and the financing needs of its customers, the Company is involved with a large number of financial instruments, the majority for which an active market does not exist. Accordingly, the Company has used various valuation techniques to estimate the fair value of its financial instruments. These techniques are significantly affected by the assumptions used, including the discount rate, the estimated timing and amount of cash flows and the aggregation methods used to value similar instruments. In this regard, the resulting fair value estimates cannot be substantiated by comparison to independent markets and, in a majority of cases, could not be realized by the immediate sale or settlement of the 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. instrument. Also, the estimates reflect a point in time valuation that could change significantly based on changes in outside economic factors, such as the general level of interest rates. The required disclosures exclude the estimated values of nonfinancial instrument cash flows and are not intended to provide or estimate a market value of the Company. The following assumptions were used by the Company in estimating the fair value of the specific financial instruments. CASH AND CASH EQUIVALENTS The carrying amounts reported in the statement of financial condition approximate fair values for these items that have no interest rate or credit risk. FEDERAL FUNDS PURCHASED AND SHORT-TERM BORROWED FUNDS The carrying amount approximates fair value due to the short maturity of the instruments and floating interest rates which are tied to market conditions. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES Fair values for these items are based on available market quotes. If market quotes are not available, fair values are based on market quotes of comparable securities. INTEREST-BEARING DEPOSITS The fair value of interest-bearing deposits is estimated using a discounted cash flow analysis using current market rates of interest-bearing deposits with similar maturities to discount the future cash flows. LOANS The loan portfolio consists of both variable and fixed rate loans. The carrying amounts of variable rate loans, a majority of which reprice within the next three months and for which there has been no significant change in credit risk, are assumed to approximate fair values. The fair values for fixed rate loans are estimated using discounted cash flow analyses. The discount rates applied are based on the current interest rates for loans with similar terms to borrowers of similar credit quality. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts and certain money market deposits is defined by SFAS No. 107 to be equal to the amount payable on demand at the date of the financial statements. Fair values for fixed rate certificates of deposits are estimated using a discounted cash flow analyses that used the interest rates currently being offered on certificates of deposit to discount the aggregated expected monthly maturities. SHORT-TERM BORROWINGS Federal funds purchased, borrowings under repurchase agreements and other short- term borrowings are at variable rates or have short-term maturities and their fair value is assumed to approximate their carrying amount. LONG-TERM DEBT The fair value of long-term debt is estimated using a discounted cash flow analysis using current market rates of debt with similar maturities to discount the future cash flows. LOAN COMMITMENTS AND LETTERS OF CREDIT The majority of the Company's commitments have variable rates and do not expose the Company to interest rate risk. The Company's commitments for fixed rate loans are evaluated and it is estimated the probability of additional loans being issued under these commitments is not significant and there is not a fair value liability. The estimated fair values of the Company's financial instruments at December 31 are shown in the table below (in thousands):
1996 1995 - ------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------------------------- Financial assets: Cash and due from banks. . . . . . $ 175,732 $ 175,732 $ 137,551 $ 137,551 Federal funds sold and resale agreements . . . . . . . . . . . 3,600 3,600 25,965 25,965 Interest-bearing deposits. . . . . 3,598 3,605 3,213 3,254 Available-for-sale securities. . . 506,888 506,888 486,522 486,522 Held-to-maturity securities. . . . 222,348 223,200 230,820 231,704 Loans. . . . . . . . . . . . . . . 2,064,108 2,054,714 1,767,193 1,778,381 Allowance for loan losses. . . . . (26,215) (26,215) (22,712) (22,712) --------- --------- --------- --------- Net loans. . . . . . . . . . . . . 2,037,893 2,028,499 1,744,481 1,755,669 Financial liabilities: Deposits: Noninterest-bearing. . . . . . . $ 431,078 $ 431,078 $ 398,314 $ 398,314 Interest-bearing: Savings and NOW. . . . . . . . 964,829 964,829 873,025 873,025 Time accounts over $100,000 . . . . . . . . . . 233,875 234,248 202,520 202,875 Other time accounts. . . . . . 907,658 907,723 885,857 893,140 --------- --------- --------- --------- Total deposits . . . . . . . . . . 2,537,440 2,537,878 2,359,716 2,367,354 Federal funds purchased and repurchase agreements. . . . . . 78,369 78,369 50,102 50,102 Other short-term borrowings. . . . 169,265 169,265 40,779 40,779 Long-term debt . . . . . . . . . . 46,750 48,003 81,288 82,583 - -------------------------------------------------------------------------------------
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk. These transactions enable customers to meet their financing needs and enable the Company to manage its interest rate risk. These financial instruments include commitments to extend credit and letters of credit. The contract or notional amounts of these financial instruments at December 31 were as follows (in thousands): - ------------------------------------------------------------------------------ 1996 1995 - ------------------------------------------------------------------------------ Commitments to extend credit . . . . . . . . . . . . . $389,604 $295,735 Standby letters of credit. . . . . . . . . . . . . . . 14,683 14,239 Commercial letters of credit . . . . . . . . . . . . . 990 1,149 - ------------------------------------------------------------------------------ Commitments to extend credit are legally binding and have fixed expiration dates or other termination clauses. The Company's exposure to credit loss on commitments to extend credit, in the event of nonperformance by the counterparty, is represented by the contrac- 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. tual amounts of the commitments. The Company monitors its credit risk for commitments to extend credit by applying the same credit policies in making commitments as it does for loans and by obtaining collateral to secure commitments based on management's credit assessment of the counterparty. Collateral held varies, but may include marketable securities, receivables, inventory, agricultural commodities, equipment and real estate. Because many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent the Company's future liquidity requirements. In addition, the Company also offers various consumer credit line products to its customers that are cancelable upon notification by the Company, which are included above in commitments to extend credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Commercial letters of credit are issued by the Company on behalf of customers to ensure payments of amounts owed or collection of amounts receivable in connection with trade transactions. The Com-pany's exposure to credit loss in the event of nonperformance by the counterparty is the contractual amount of the letter of credit and represents the same exposure as that involved in extending loans. The amount of collateral obtained to support letters of credit is based on a credit assessment of the counterparty. Collateral held may include marketable securities, receivables, inventory, agricultural commodities, equipment and real estate. Because the conditions under which the Company is required to fund letters of credit may not materialize, the liquidity requirements of letters of credit are expected to be less than the total outstanding commitments. The Company's bank subsidiaries grant real estate, agricultural, commercial, consumer and other loans and commitments and letters of credit to customers throughout Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin. Although the Company has a diversified loan portfolio, the ability of a significant portion of its debtors to honor their contracts is dependent upon the agricultural economic sector. The maximum exposure to accounting loss that could occur, if the borrowers fail to perform according to the loan agreements and the underlying collateral proved to be of no value, is the total loan portfolio balances and commitments and letters of credit. 10. BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31 consisted of the following (in thousands): - ------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------- Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,031 $ 8,757 Buildings. . . . . . . . . . . . . . . . . . . . . . . . . 59,359 47,953 Furniture, fixtures and equipment. . . . . . . . . . . . . 44,139 36,117 Leased property under capital lease obligations. . . . . . 5,932 4,500 -------- -------- 119,461 97,327 Less accumulated depreciation. . . . . . . . . . . . . . . 53,756 45,793 -------- -------- $ 65,705 $ 51,534 -------- -------- -------- -------- - ------------------------------------------------------------------------------- 11. SHORT-TERM BORROWINGS - -------------------------------------------------------------------------------- As of December 31, 1996, the Company's subsidiary banks had $152,000,000 in Federal Home Loan Bank ("FHLB") borrowings, which are collateralized by various investment securities and real estate loans. The interest rates on FHLB borrowings are variable rates based on short-term market conditions and the term of the advance, ranging from 5.33% to 7.15% at December 31, 1996. The Company's subsidiaries had additional short-term borrowings of $3,203,000 outstanding at December 31, 1996. The Company has a short-term line of credit bearing interest at the Federal Funds rate plus 2% that provides for borrowing up to $3,000,000 through December 31, 1997, with a commitment fee of 0.2% on the unused amount. As of December 31, 1996, the Company had no balance outstanding under this line of credit. The Company has entered into an agreement that allows for its designated agent to underwrite up to $15,000,000 in commercial paper and has obtained lines of credit to support these borrowings. As of December 31, 1996, there was a $14,062,000 commercial paper balance outstanding with a blended rate of 5.63%. The terms of the lines of credit include certain covenants with which the Company must comply. At December 31, 1996, the Company was in compliance with all covenants pertaining to the lines of credit. 12. LONG-TERM DEBT - -------------------------------------------------------------------------------- Long-term debt consisted of the following at December 31: - ------------------------------------------------------------------------------- (in thousands) 1996 1995 - ------------------------------------------------------------------------------- Parent Company: Subordinated notes payable, interest at 7.75%, payable monthly, maturing April 15, 2000, unsecured. . . . . . . . . . . . . . . . . . . . . . $ 23,000 $ 23,000 Exchangeable subordinated notes payable, interest at 9.00% payable quarterly, maturing August 15, 2005, unsecured . . . . . . . . . . . . . 11,500 11,500 Term note payable to bank, interest at bank's base rate (8.25% and 8.75% at December 31, 1996 and 1995, respectively), payable quarterly, principal payments of $100,000 due annually through October 1, 1999, unsecured . . . . . . . . . . . . . 400 400 Term note payable to bank, interest at Federal Funds rate plus 2% (7.31% at December 31, 1996), payable quarterly, principal payments equal to 6.25% of the amortized balance, semi-annually through July 1, 2003 . . . . . . . . . 4,106 10,002 Subsidiaries: Federal Home Loan Bank advances, interest rates ranging from 5.06% to 8.33%, payable quarterly, with maturities ranging from April 1, 1997 to March 10, 2010 . . . . . . . . . . . . . . . 4,829 36,386 Term Note payable to bank, interest at Reserve Adjusted Eurodollar Rate plus 1.90% (7.40% at December 31, 1996), payable quarterly, principal payments of $75,000 due quarterly through March 1, 2001, with remaining balance due June 1, 2001 . . . . . . . . . . . . . . 2,850 - Other Notes Payable . . . . . . . . . . . . . . . . . . 65 - -------- -------- $ 46,750 $ 81,288 -------- -------- -------- -------- - ------------------------------------------------------------------------------- 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. The 7.75% subordinated notes payable are redeemable, in whole or in part, at the option of the Company at par plus accrued interest to the date of redemption. These notes, of which 60% of the balance qualifies as Tier 2 capital under the Federal Reserve Board guidelines, are direct obligations of the Company and are subordinated to all other indebtedness of the Company. The terms of the subordinated notes payable include certain covenants with which the Company must comply. At December 31, 1996, the Company was in compliance with all covenants pertaining to the subordinated notes payable. In July 1995, the Company issued the exchangeable subordinated notes ("Exchangeable Notes") to retire acquisition related debt, support the Company's growth strategy and for general corporate purposes. One hundred percent of the balance of Exchangeable Notes qualify as Tier 2 Capital under Federal Reserve Board guidelines. On any interest payment date beginning August 15, 1996, the Company may require the holder to exchange all, but not part, of the Exchangeable Notes for shares of the Company's cumulative perpetual preferred stock (the "Exchange Stock"), at the rate of one share of Exchange Stock for each $25 in principal amount of Exchangeable Notes. The Exchange Stock would accrue cumulative dividends, payable quarterly, at a rate equal to the interest rate on the Exchangeable Notes. The Exchangeable Notes are, and the Exchange Stock would be, redeemable in whole or in part at any time after August 15, 1998 at the option of the Company at the declining redemption amounts set forth below plus accrued interest or dividends: If redeemed during the 12-month Percentage of period beginning August 15 principal amount 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.0% 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.5% 2000 and thereafter . . . . . . . . . . . . . . . . . . . . . . 100.0% - -------------------------------------------------------------------------------- Maturities of long-term debt outstanding, primarily of the parent company, at December 31, 1996, were (in thousands): 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,052 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,639 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 784 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,072 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,947 Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,256 --------- $ 46,750 --------- --------- 13. SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- COMMON STOCK In 1995, the Company extended its common stock market repurchase program established in 1992, which provided for the systematic acquisition of up to 600,000 shares of the Company's common stock. In addition, the Company adopted a new common stock market repurchase program providing for a systematic repurchase of up to 600,000 additional shares. The shares acquired are used primarily for the issuance of common stock upon exercise of stock options, issuance of common stock under compensation plans, which include contributions directly to employees or to an employee stock ownership plan, for preferred stock conversion, and issuance of common stock for purposes that do not include business combinations. PREFERRED STOCK On May 11, 1994, the Company completed an offering of 230,000 shares of preferred stock, represented by 920,000 depositary shares. Each depositary share represents ownership of one-quarter of a share of 7% cumulative convertible preferred stock with a stated value of $100 and carries no voting rights. The depositary shares are convertible into common stock at a conversion price of $15.934 per share of common stock, which is equivalent to a rate of 1.569 shares of common stock per depositary share. A total of 1,442,696 shares of authorized common stock at December 31, 1996, was reserved for issuance upon the conversion of the preferred stock. At December 31, 1996, the Company had 1,770,000 shares of undesignated preferred stock with a par value of $.01 per share authorized, but not outstanding. SHAREHOLDERS' RIGHTS PLAN The Company adopted a shareholders' rights plan in January 1995 that attached one right to each share of common stock outstanding on January 19, 1995. Each right entitles the holder to purchase one one-hundredth of a share of a new series of junior participating preferred stock of the Company, which has an initial exercise price of $63. The rights become exercisable only upon the acquisition of 15% or more of the Company's voting stock, or an announcement of a tender offer or exchange offer to acquire an interest of 15% or more by a person or group, without the prior consent of the Company. If exercised, or if the Company is acquired, each right entitles the holder to purchase, at the exercise price, common stock with a market value equal to two times the exercise price. The rights, which may be redeemed by the Company in certain circumstances, expire January 5, 2005. CAPITAL REQUIREMENTS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. As of December 31, 1996, the Company is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk- based, and Tier 1 leverage ratios as set forth in the following table:
At December 31, 1996 - ----------------------------------------------------------------------------------------------------------------------- Tier 1 Total Risk- Total Risk- REGULATORY CAPITAL REQUIREMENTS: (Dollars in thousands) Capital Based Capital Leverage Based Assets - ----------------------------------------------------------------------------------------------------------------------- Minimum. . . . . . . . . . . . . . . . . . . . . . . . . . 4.00% 8.00% 3.00% N/A Well-Capitalized . . . . . . . . . . . . . . . . . . . . . 6.00% 10.00% 5.00% N/A - ----------------------------------------------------------------------------------------------------------------------- Community First Bankshares, Inc. . . . . . . . . . . . . . 8.88% 11.10% 6.62% $ 2,312,632 Bank Subsidiaries: Community First National Bank, Worthington . . . . . . . . 9.21% 10.31% 6.87% $ 255,997 Community First National Bank, Little Falls. . . . . . . . 9.74% 10.96% 7.32% 178,583 Community First National Bank, Fergus Falls. . . . . . . . 9.22% 10.42% 6.82% 133,913 Community First National Bank, Fargo . . . . . . . . . . . 9.76% 10.94% 7.39% 287,776 Community First National Bank, Dickinson . . . . . . . . . 9.21% 10.40% 6.86% 109,775 Community First State Bank, Vermillion . . . . . . . . . . 9.54% 10.72% 6.98% 96,061 Community First State Bank, Redfield . . . . . . . . . . . 10.77% 11.87% 7.56% 120,170 Community First State Bank, Decorah. . . . . . . . . . . . 12.07% 13.32% 7.45% 101,980 Community First State Bank, Alliance . . . . . . . . . . . 9.53% 10.73% 7.84% 259,254 Community First State Bank, Spooner. . . . . . . . . . . . 10.48% 11.56% 7.64% 70,406 Colorado Community First National Bank, Fort Morgan. . . . 11.08% 12.27% 7.76% 118,233 Colorado Community First State Bank, Steamboat Springs . . 9.64% 10.81% 7.10% 86,821 Colorado Community First National Bank, Trinidad . . . . . 20.83% 21.76% 10.45% 36,368 Colorado Community First State Bank of Denver. . . . . . . 10.35% 11.33% 7.62% 438,967 - -----------------------------------------------------------------------------------------------------------------------
At December 31, 1996 - ----------------------------------------------------------------------------------------------------------------------- Tier 1 Total Risk- Total Risk- REGULATORY CAPITAL REQUIREMENTS: (Dollars in thousands) Capital Based Capital Leverage Based Assets - ----------------------------------------------------------------------------------------------------------------------- Minimum. . . . . . . . . . . . . . . . . . . . . . . . . . 4.00% 8.00% 3.00% N/A Well-Capitalized . . . . . . . . . . . . . . . . . . . . . 6.00% 10.00% 5.00% N/A - ----------------------------------------------------------------------------------------------------------------------- Community First Bankshares, Inc. . . . . . . . . . . . . . 8.51% 11.18% 6.10% $ 1,974,179 Bank Subsidiaries: Community First National Bank, Worthington . . . . . . . . 9.50% 10.75% 6.58% $ 218,760 Community First National Bank, Little Falls. . . . . . . . 9.44% 10.61% 7.04% 175,964 Community First National Bank, Fergus Falls. . . . . . . . 8.75% 9.92% 6.52% 124,622 Community First National Bank, Fargo . . . . . . . . . . . 8.95% 10.16% 6.67% 266,701 Community First National Bank, Dickinson . . . . . . . . . 8.95% 10.08% 6.06% 67,568 Community First National Bank, Beach(1). . . . . . . . . . 11.70% 12.13% 7.27% 27,754 Community First State Bank, Vermillion . . . . . . . . . . 10.30% 11.47% 7.36% 89,499 Community First State Bank, Redfield . . . . . . . . . . . 11.41% 12.55% 7.95% 114,206 Community First State Bank, Decorah. . . . . . . . . . . . 14.80% 16.05% 9.57% 106,367 Community First State Bank, Alliance . . . . . . . . . . . 9.57% 10.81% 7.14% 232,426 Community First State Bank, Spooner. . . . . . . . . . . . 12.04% 13.25% 8.17% 59,414 Colorado Community First National Bank, Fort Morgan. . . . 11.98% 13.17% 7.87% 108,852 Colorado Community First State Bank, Steamboat Springs . . 10.33% 10.87% 7.08% 58,826 Colorado Community First National Bank, Fraser(2). . . . . 9.86% 11.02% 7.03% 18,976 Mountain Parks Bank - East(3). . . . . . . . . . . . . . . 12.42% 12.99% 9.07% 120,405 Mountain Parks Bank - West(3). . . . . . . . . . . . . . . 13.65% 14.82% 9.28% 107,410 Boulder Valley Bank and Trust(3) . . . . . . . . . . . . . 9.33% 10.59% 10.62% 80,454 The Bank of Louisville(3). . . . . . . . . . . . . . . . . 13.86% 15.11% 14.44% 43,137 - -----------------------------------------------------------------------------------------------------------------------
(1)Merged into Community First National Bank, Dickinson in January, 1996. (2)Merged into Colorado Community First State Bank, Steamboat Springs in April, 1996. (3)Merged and renamed, Colorado Community First State Bank of Denver in December, 1996. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. 14. EMPLOYEE BENEFIT PLANS - -------------------------------------------------------------------------------- Stock Option Plan - During 1996, the Company approved the 1996 Stock Option Plan under which an additional 2,000,000 shares of the Company's common stock will be reserved for granting of future stock options. Similar to the 1987 Stock Option Plan, the Company may grant key employees incentive or nonqualified options to purchase common stock of the Company at fair market value on the date of the grant, as determined by the Company. The options vest ratably over a three-year period and are exercisable over a five-year term starting one year after the date of grant. Stock options outstanding under the plans are as follows: 1996 1995 - -------------------------------------------------------------------------------- Weighted Weighted Average Average Options Price Per Options Price Per Outstanding Share Outstanding Share - -------------------------------------------------------------------------------- Beginning of Year. . . . . . . 499,777 $ 13.66 398,986 $ 12.78 Options Granted . . . . . . 165,388 21.42 169,207 14.55 Options Exercised . . . . . (75,905) 11.68 (51,284) 9.60 Options Forfeited . . . . . (25,605) 18.31 (17,132) 14.23 -------- --------- -------- --------- End of Year. . . . . . . . . . 563,655 $ 16.02 499,777 $ 13.66 -------- --------- -------- --------- -------- --------- -------- --------- Exercisable at end of year . . 281,463 $ 14.10 206,846 $ 12.84 Weighted average fair value of options granted. . $3.94 $3.27 - -------------------------------------------------------------------------------- The range of exercise prices and the weighted average remaining contractual life of the options outstanding at December 31, 1996, were as follows: - -------------------------------------------------------------------------------- Options Weighted Weighted Outstanding at Average Average Range of Exercise December 31, Exercise Price Remaining Prices Per Share 1996 Per Share Contractual Life - -------------------------------------------------------------------------------- $21.25 to $23.38 . . . . . . . 154,388 $ 21.37 4.1 years $12.50 to $14.75 . . . . . . . 409,267 14.04 2.1 years - -------------------------------------------------------------------------------- At December 31, 1996, a total of 2,576,760 shares of authorized common stock was reserved for exercise of options granted under the 1996 and 1987 Stock Option Plans. As described in Note 4, the Company has elected to measure compensation costs as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, does not recognize compensation expense. SFAS No. 123 requires the Company to disclose pro forma information reflecting net income and earnings per share had the Company elected to record compensation expense based on the fair market value method described in SFAS 123. The fair value of the options was estimated at the grant date using a Black-Sholes option pricing model. Option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following weighted-average assumptions were used in the valuation model: risk-free interest rates of 5.15 percent and 7.45 percent in 1996 and 1995; dividend yield of 2.50 in both 1996 and 1995; stock price volatility factors of .20 in both 1996 and 1995; and expected life of options of four years in both 1996 and 1995. The pro forma disclosures, listed below, include options granted in 1996 and 1995 and are not likely to be representative of the pro forma disclosures for future years. The estimated fair value of the options is amortized to expense over the options' vesting period. - -------------------------------------------------------------------------------- (In thousands, except per share data) 1996 1995 - -------------------------------------------------------------------------------- Pro forma net income . . . . . . . . . . . . . . . . . . . $ 30,662 $ 28,231 Pro forma net income (fully diluted) . . . . . . . . . . . 32,272 29,841 Pro forma earnings per share: Primary. . . . . . . . . . . . . . . . . . . . . . . . $ 1.84 $ 1.82 Fully diluted. . . . . . . . . . . . . . . . . . . . . 1.78 1.73 - -------------------------------------------------------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN The Company has an employee stock ownership plan ("ESOP") that is a defined contribution plan covering all employees who are 21 years of age with more than one year of service. Contributions are calculated using a formula based on the Company's return on average assets on a yearly basis. The contribution expense was $859,000, $444,000 and $267,000 in 1996, 1995 and 1994, respectively. PROFIT-SHARING PLAN The Company offers a contributory profit-sharing and thrift plan that qualifies under section 401(k) of the Internal Revenue Code. The plan covers all employees who are 21 years of age with more than one year of service. The plan provides for an employer-matching contribution of 50% based on each participant's eligible contribution for each plan year, subject to a limitation of the lesser of 6% of the participant's annual compensation or the maximum amount prescribed by the Internal Revenue Code. The Company's contribution was $727,000, $712,000 and $362,000 in 1996, 1995 and 1994, respectively. 15. RESTRICTIONS ON CASH AND DUE FROM BANKS - -------------------------------------------------------------------------------- Bank subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. Balances of $12,518,000 and $20,140,000 at December 31, 1996 and 1995, respectively, exceeded required amounts. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. 16. INCOME TAXES - ------------------------------------------------------------------------------- The components of the provision for income taxes were (in thousands): - ------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- Federal: Current . . . . . . . . . . . . . . . . . . $ 18,455 $ 18,008 $ 12,646 Deferred. . . . . . . . . . . . . . . . . . (3,444) (3,546) (883) -------- -------- -------- 15,011 14,462 11,763 State: Current . . . . . . . . . . . . . . . . . . 3,458 3,209 2,337 Deferred. . . . . . . . . . . . . . . . . . (462) (463) (148) -------- -------- -------- 2,996 2,746 2,189 -------- -------- -------- Provision for income taxes . . . . . . . . . . $ 18,007 $ 17,208 $ 13,952 -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------- The reconciliation between the provision for income taxes and the amount computed by applying the statutory federal income tax rate was as follows (in thousands): - ------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------- Tax at statutory rate (35%). . . . . . . . . . $ 17,681 $ 16,506 $ 12,838 State income tax, net of federal tax benefit. . . . . . . . . 1,805 1,812 1,488 Minority interest. . . . . . . . . . . . . . . - 61 326 Tax-exempt interest. . . . . . . . . . . . . . (1,736) (2,376) (1,087) Amortization of goodwill . . . . . . . . . . . 822 531 285 Other. . . . . . . . . . . . . . . . . . . . . (565) 674 102 -------- -------- -------- Provision for income taxes . . . . . . . . . . $ 18,007 $ 17,208 $ 13,952 -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------- Deferred income tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1995, are as follows (in thousands): - -------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------- Deferred tax assets: Loan loss reserves. . . . . . . . . . . . . $ 8,737 $ 5,675 Contingency reserve . . . . . . . . . . . . 748 537 Deferred compensation . . . . . . . . . . . 863 477 Deferred loan fees. . . . . . . . . . . . . 316 190 Other . . . . . . . . . . . . . . . . . . . 566 818 -------- -------- 11,230 7,697 Deferred tax liabilities: Unrealized gains. . . . . . . . . . . . . . 897 1,220 Depreciation. . . . . . . . . . . . . . . . 87 501 Purchase accounting . . . . . . . . . . . . 151 164 Other . . . . . . . . . . . . . . . . . . . 297 243 -------- -------- 1,432 2,128 -------- -------- Net deferred tax assets. . . . . . . . . . . . $ 9,798 $ 5,569 -------- -------- -------- -------- - -------------------------------------------------------------------- The realization of the Company's deferred tax assets is dependent upon the Company's ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized. 17. COMMITMENTS AND CONTINGENT LIABILITIES - -------------------------------------------------------------------------------- Total rent expense was $1,318,000, $1,789,000 and $1,350,000 in 1996, 1995 and 1994, respectively. Future minimum payments, by year and in the aggregate, under noncancelable leases with initial or remaining terms of one year or more, consisted of the following at December 31, 1996: - ------------------------------------------------------------------------------- (In thousands) Operating Capital - ------------------------------------------------------------------------------- 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 677 $ 1,024 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 537 1,005 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . 437 836 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . 335 763 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1 -------- -------- $ 1,996 $ 3,629 Executory costs (taxes). . . . . . . . . . . . . . . . . (179) -------- Net minimum lease payments . . . . . . . . . . . . . . . 3,450 Less: Amount representing interest. . . . . . . . . . . . . (333) -------- Present value of net minimum lease payments . . . . . $ 3,117 -------- -------- - ------------------------------------------------------------------------------- As a result of certain legal proceedings related to the May 1995 purchase of Alliance, the Company retained a portion of the purchase price in the form of a contingency reserve. Upon resolution of various proceedings, associated balances may be remitted to the former Abbott Bank Group shareholders. At December 31, 1996, the reserve balance was $908,000. All remaining issues subject to the reserve are expected to be resolved within a one-year period. It is management's expectation that resolution of the remaining issues will not exceed the current reserve balance. In the normal course of business, there are various outstanding legal proceedings, claims, commitments and contingent liabilities. In the opinion of management, the Company and its subsidiaries will not be materially affected by the outcome of such matters. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. 18. COMMUNITY FIRST BANKSHARES, INC. - -------------------------------------------------------------------------------- (Parent Company Only) CONDENSED STATEMENTS OF FINANCIAL CONDITION - ------------------------------------------------------------------------------- December 31 (In thousands) 1996 1995 - ------------------------------------------------------------------------------- ASSETS Cash and due from subsidiary banks . . . . . . . . . . . $ 6,548 $ 6,106 Investment in subsidiaries . . . . . . . . . . . . . . . 275,100 241,623 Furniture and equipment. . . . . . . . . . . . . . . . . 1,657 1,148 Receivable from subsidiaries . . . . . . . . . . . . . . 2,336 790 Other assets . . . . . . . . . . . . . . . . . . . . . . 17,389 13,441 -------- -------- Total assets . . . . . . . . . . . . . . . . . . . . . . $303,030 $263,108 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings. . . . . . . . . . . . . . . . . . $ 14,164 $ 10,000 Long-term debt . . . . . . . . . . . . . . . . . . . . . 39,006 44,902 Other liabilities. . . . . . . . . . . . . . . . . . . . 5,289 4,202 Shareholders' equity . . . . . . . . . . . . . . . . . . 244,571 204,004 -------- -------- Total liabilities and shareholders' equity . . . . . . . $303,030 $263,108 -------- -------- -------- -------- - ------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME - ------------------------------------------------------------------------------- Years ended December 31 (In thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- Income: Dividends from subsidiaries . . . . . . . . . $ 29,536 $ 34,453 $ 24,965 Service fees from subsidiaries. . . . . . . . 2,948 3,147 2,982 Interest income . . . . . . . . . . . . . . . 106 607 622 Other . . . . . . . . . . . . . . . . . . . . 467 (304) 91 -------- -------- -------- Total income . . . . . . . . . . . . . . . . . . 33,057 37,903 28,660 Expense: Interest expense. . . . . . . . . . . . . . . 4,403 3,961 2,900 Other expense . . . . . . . . . . . . . . . . 17,323 11,862 9,002 -------- -------- -------- Total expense. . . . . . . . . . . . . . . . . . 21,726 15,823 11,902 -------- -------- -------- Income before income tax benefit, equity in undistributed income of subsidiaries and cumulative effect of accounting change. . . . 11,331 22,080 16,758 Income tax benefit . . . . . . . . . . . . . . . 6,799 4,423 2,889 -------- -------- -------- Income before undistributed income of subsidiaries and cumulative effect of accounting change . . . . . . . . . . . . . . 18,130 26,503 19,647 Equity in undistributed income of subsidiaries . 14,380 3,450 3,082 -------- -------- -------- Net income . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729 -------- -------- -------- -------- -------- -------- Net income applicable to common equity . . . . . $ 30,900 $ 28,343 $21,638 -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- Years ended December 31 (In thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729 Adjustments to reconcile net income to net cash used in operating activities: Equity in income of subsidiaries . . . . . (43,916) (37,903) (28,047) Depreciation . . . . . . . . . . . . . . . 488 474 400 (Decrease) increase in interest payable. . (32) 64 (25) Other, net . . . . . . . . . . . . . . . . (7,650) 1,213 1,725 -------- -------- -------- Net cash used in operating activities. . . . . . (18,600) (6,199) (3,218) CASH FLOWS FROM INVESTING ACTIVITIES: Dividends received from subsidiaries . . . . . . 29,536 34,453 24,965 Purchases of stock in subsidiaries . . . . . . . (14,743) (71,581) (16,858) Net loans to subsidiaries. . . . . . . . . . . . (1,585) 10,197 (14,616) Purchases of available-for-sale securities . . . - (4,393) (44,165) Sales of available-for-sale securities, net of gains. . . . . . . . . . . . . . . . . - 9,543 43,489 Net increase in furniture and equipment. . . . . (997) (578) (208) -------- -------- -------- Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . . . . 12,211 (22,359) (7,393) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in short-term borrowings. . . . . . 4,062 7,145 81 Proceeds from issuance of long-term debt . . . . 18,162 44,006 10,685 Repayment of long-term debt. . . . . . . . . . . (24,058) (27,302) (13,346) Net proceeds from issuance of common stock. . . . . . . . . . . . . . . . . 15,044 11,718 66 Net proceeds from issuance of preferred stock . . . . . . . . . . . . . . . - - 21,952 Purchase of common stock held in treasury. . . . (1,535) (56) (1,384) Sale of common stock held in treasury. . . . . . 3,829 754 451 Retirement of common stock . . . . . . . . . . . (349) - - Preferred stock dividends paid . . . . . . . . . (1,610) (1,610) (1,091) Common stock dividends paid. . . . . . . . . . . (6,714) (5,279) (3,794) -------- -------- -------- Net cash provided by financing activities. . . . 6,831 29,376 13,620 -------- -------- -------- Net increase in cash and cash equivalents. . . . 442 818 3,009 Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . 6,106 5,288 2,279 -------- -------- -------- Cash and cash equivalents at end of year . . . . $ 6,548 $ 6,106 $ 5,288 -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------- 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. Certain restrictions exist regarding the extent to which bank subsidiaries may transfer funds to the Company in the form of dividends, loans or advances. Federal law prevents the Company from borrowing from bank subsidiaries unless the loans are secured by specified U.S. obligations. Secured loans to the Company or any individual affiliate are generally limited in amount to 10% of the banks' equity. Further, loans to the Company and all affiliates in total are limited to 20% of the banks' equity. As of December 31, 1996 and 1995, $27,066,000 and $23,978,000, respectively, of individual subsidiary banks' capital was available for credit extension to the parent company. At December 31, 1996 and 1995, bank subsidiaries had no credit extended to the Company. Payment of dividends to the Company by its subsidiary banks is subject to various limitations by bank regulatory agencies. Undistributed earnings of the bank subsidiaries available for distribution as dividends under these limitations were $26,691,000 and $20,216,000 as of December 31, 1996 and 1995, respectively. 19. RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Company and its subsidiaries, including their immediate families, companies in which they are principal owners and trusts in which they are involved, are loan customers of the bank subsidiaries. The aggregate dollar amounts of these loans were $12,700,000 and $15,400,000 at December 31, 1996 and 1995, respectively. During 1996, 1995 and 1994, $5,779,000, $6,115,000 and $40,830,000 of new loans were made and repayments totaled $8,479,000, $23,878,000 and $42,745,000, respectively. 20. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- Years ended December 31 (In thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- Noncash transfers of held-to-maturity securities to available-for-sale securities. . $ 22,659 $187,320 $ - Unrealized (loss) gain on available-for-sale securities . . . . . . . . . . . . . . . . . . (993) 11,545 (13,128) Income taxes paid. . . . . . . . . . . . . . . . 23,485 20,745 15,790 Interest paid. . . . . . . . . . . . . . . . . . 94,185 76,154 52,214 - ------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S LETTER - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE BOARD OF DIRECTORS AND SHAREHOLDERS COMMUNITY FIRST BANKSHARES, INC. We have audited the accompanying consolidated statements of financial condition of Community First Bankshares, Inc., and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Mountain Parks Financial Corporation, which statements reflect total assets constituting 16% of the related consolidated financial statements totals for 1995, and which reflect net income constituting 24% and 25% of the related consolidated totals for the years ended December 31, 1995 and 1994, respectively. We also did not audit the 1994 consolidated financial statements of Minowa Bancshares, Inc. and First Community Bankshares, Inc., which statements reflect net income constituting 8% and 9%, respectively, for the year ended December 31, 1994, of the related consolidated financial statement totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Mountain Parks Financial Corporation, Minowa Bancshares, Inc. and First Community Bankshares, Inc. is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1995 and 1994, the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community First Bankshares, Inc., and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Minneapolis, Minnesota January 23, 1997, except for Note 3, as to which the date is February 28, 1997. - -------------------------------------------------------------------------------- 43 CONSOLIDATED STATEMENT OF CONDITION - Community First Bankshares, Inc. FIVE YEAR SUMMARY (In thousands)
- ---------------------------------------------------------------------------------------------------------------- December 31 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks. . . . . . . . . . . . . $ 175,732 $ 137,551 $ 96,232 $ 85,468 $ 70,518 Federal funds sold and securities purchased under agreement to resell . . . . . . . . . . 3,600 25,965 8,135 35,685 46,826 Interest-bearing deposits. . . . . . . . . . . . 3,598 3,213 6,377 10,272 12,288 Available-for-sale securities. . . . . . . . . . 506,888 486,522 231,364 326,041 185,077 Held-to-maturity securities: U.S. Treasury . . . . . . . . . . . . . . . . - - 72,519 44,162 17,556 U.S. Government agencies. . . . . . . . . . . 879 3,318 44,957 34,654 116,825 Mortgage-backed securities. . . . . . . . . . 86,506 106,429 185,753 177,381 145,592 Collateralized mortgage obligations . . . . . - - 22,811 25,151 63,890 State and political securities. . . . . . . . 56,694 55,267 43,672 34,990 29,680 Other . . . . . . . . . . . . . . . . . . . . 78,269 65,806 12,163 11,343 20,458 ---------- ---------- ---------- ---------- ---------- Total securities . . . . . . . . . . . . . 729,236 717,342 613,239 653,722 579,078 Loans. . . . . . . . . . . . . . . . . . . . . . 2,064,108 1,767,193 1,330,146 1,037,666 813,550 Less: allowance for loan losses . . . . . . . (26,215) (22,712) (17,333) (14,332) (11,196) ---------- ---------- ---------- ---------- ---------- Net loans . . . . . . . . . . . . . . . . . . 2,037,893 1,744,481 1,312,813 1,023,334 802,354 Other assets . . . . . . . . . . . . . . . . . . 166,339 141,424 93,823 75,313 65,211 ---------- ---------- ---------- ---------- ---------- Total assets. . . . . . . . . . . . . . . . . $3,116,398 $2,769,976 $2,130,619 $1,883,794 $1,576,275 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing . . . . . . . . . . . . . $ 431,078 $ 398,314 $ 315,667 $ 273,382 $ 200,104 Interest-bearing. . . . . . . . . . . . . . . 2,106,362 1,961,402 1,478,898 1,354,607 1,174,755 ---------- ---------- ---------- ---------- ---------- Total deposits . . . . . . . . . . . . . . 2,537,440 2,359,716 1,794,565 1,627,989 1,374,859 Short-term borrowings. . . . . . . . . . . . . . 247,634 90,881 113,469 62,194 59,452 Long-term debt . . . . . . . . . . . . . . . . . 46,750 81,288 38,092 48,354 18,015 Other liabilities. . . . . . . . . . . . . . . . 40,003 34,087 26,792 20,186 20,038 ---------- ---------- ---------- ---------- ---------- Total liabilities . . . . . . . . . . . . . . 2,871,827 2,565,972 1,972,918 1,758,723 1,472,364 Shareholders' equity . . . . . . . . . . . . . . 244,571 204,004 157,701 125,071 103,911 ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity. . $3,116,398 $2,769,976 $2,130,619 $1,883,794 $1,576,275 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- - ----------------------------------------------------------------------------------------------------------------
44 CONSOLIDATED STATEMENT OF INCOME - Community First Bankshares, Inc. FIVE YEAR SUMMARY (Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------- Years Ended December 31 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,530 $ 150,948 $ 104,012 $ 81,931 $ 73,410 Investment securities . . . . . . . . . . . . . . . . . 44,936 40,210 38,032 37,479 38,890 Other . . . . . . . . . . . . . . . . . . . . . . . . . 960 1,710 1,193 1,736 3,009 --------- --------- --------- --------- --------- Total interest income. . . . . . . . . . . . . . . . 229,426 192,868 143,237 121,146 115,309 INTEREST EXPENSE: Deposits. . . . . . . . . . . . . . . . . . . . . . . . 81,655 71,780 46,560 42,873 47,727 Short-term and other borrowings . . . . . . . . . . . . 9,247 6,184 4,029 1,994 2,072 Long-term debt. . . . . . . . . . . . . . . . . . . . . 4,332 4,927 2,879 2,404 1,071 --------- --------- --------- --------- --------- Total interest expense . . . . . . . . . . . . . . . 95,234 82,891 53,468 47,271 50,870 --------- --------- --------- --------- --------- Net interest income. . . . . . . . . . . . . . . . . . . . 134,192 109,977 89,769 73,875 64,439 Provision for loan losses. . . . . . . . . . . . . . . . . 6,757 2,711 1,839 2,149 2,433 --------- --------- --------- --------- --------- Net interest income after provision for loan losses. . . . 127,435 107,266 87,930 71,726 62,006 NONINTEREST INCOME: Service charges on deposit accounts . . . . . . . . . . 12,328 10,116 8,467 7,571 6,328 Insurance commissions . . . . . . . . . . . . . . . . . 5,213 4,283 3,777 3,442 1,963 Fees from fiduciary activities. . . . . . . . . . . . . 3,332 2,718 2,157 2,103 1,993 Net gains on sales of securities. . . . . . . . . . . . 93 52 99 1,910 1,101 Other . . . . . . . . . . . . . . . . . . . . . . . . . 6,404 5,319 4,492 3,132 3,255 --------- --------- --------- --------- --------- Total noninterest income . . . . . . . . . . . . . . 27,370 22,488 18,992 18,158 14,640 NONINTEREST EXPENSE: Salaries and employee benefits. . . . . . . . . . . . . 54,870 42,796 35,083 29,931 25,188 Net occupancy . . . . . . . . . . . . . . . . . . . . . 15,085 10,563 9,353 8,413 6,675 FDIC insurance. . . . . . . . . . . . . . . . . . . . . 669 2,532 3,720 3,193 2,812 Professional service fees . . . . . . . . . . . . . . . 3,881 4,011 3,457 3,776 4,424 Data processing and loan servicing fees . . . . . . . . 1,506 1,607 856 722 752 Other . . . . . . . . . . . . . . . . . . . . . . . . . 28,277 21,084 17,772 14,819 13,141 --------- --------- --------- --------- --------- Total noninterest expense. . . . . . . . . . . . . . 104,288 82,593 70,241 60,854 52,992 --------- --------- --------- --------- --------- Income before income taxes and cumulative effect of accounting change . . . . . . . . . . . . . . 50,517 47,161 36,681 29,030 23,654 Provision for income taxes . . . . . . . . . . . . . . . . 18,007 17,208 13,952 10,775 8,546 --------- --------- --------- --------- --------- Income before cumulative effect of accounting change . . . 32,510 29,953 22,729 18,255 15,108 Cumulative effect of accounting change . . . . . . . . . . - - - 359 - --------- --------- --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 32,510 $ 29,953 $ 22,729 $ 18,614 $ 15,108 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Preferred dividend . . . . . . . . . . . . . . . . . . . . 1,610 1,610 1,091 - - Net income applicable to common equity . . . . . . . . . . $ 30,900 $ 28,343 $ 21,638 $ 18,614 $ 15,108 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Earnings per common and common equivalent share: Primary . . . . . . . . . . . . . . . . . . . . . . . . $ 1.85 $ 1.82 $ 1.48 $ 1.32 $ 1.07 Fully diluted . . . . . . . . . . . . . . . . . . . . . $ 1.79 $ 1.74 $ 1.42 $ 1.30 $ 1.07 Average common shares outstanding: Primary . . . . . . . . . . . . . . . . . . . . . . . . 16,699,021 15,543,129 14,580,309 14,098,585 14,080,526 Fully diluted . . . . . . . . . . . . . . . . . . . . . 18,154,966 17,276,050 16,136,433 14,396,532 14,087,606 - ---------------------------------------------------------------------------------------------------------------------
45 QUARTERLY RESULTS OF OPERATIONS Community First Bankshares, Inc. (Unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995 (in thousands, except per share data):
- -------------------------------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 Interest income. . . . . . . . . . . . . . . . . . . . . . $ 53,664 $ 55,537 $ 58,711 $ 61,514 Interest expense . . . . . . . . . . . . . . . . . . . . . 22,651 22,871 24,002 25,710 --------- --------- --------- --------- Net interest income. . . . . . . . . . . . . . . . . . . . 31,013 32,666 34,709 35,804 Provision for loan losses. . . . . . . . . . . . . . . . . 915 1,416 2,241 2,185 --------- --------- --------- --------- Net interest income after provision for loan losses. . . . 30,098 31,250 32,468 33,619 Net gains on sales of securities . . . . . . . . . . . . . 3 (1) (8) 100 Noninterest income . . . . . . . . . . . . . . . . . . . . 5,938 6,701 6,499 8,138 Noninterest expense. . . . . . . . . . . . . . . . . . . . 22,868 23,813 25,810 31,797 --------- --------- --------- --------- Income before income taxes . . . . . . . . . . . . . . . . 13,171 14,137 13,149 10,060 Provision for income taxes . . . . . . . . . . . . . . . . 4,590 4,849 4,556 4,012 --------- --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . . . 8,581 9,288 8,593 6,048 Preferred stock dividends. . . . . . . . . . . . . . . . . 402 403 403 402 --------- --------- --------- --------- Net income applicable to common equity . . . . . . . . . . $ 8,179 $ 8,885 $ 8,190 $ 5,646 --------- --------- --------- --------- --------- --------- --------- --------- Earnings per common and common equivalent shares: Primary. . . . . . . . . . . . . . . . . . . . . . . . . $ .50 $ .54 $ .49 $ .33 Fully diluted. . . . . . . . . . . . . . . . . . . . . . $ .48 $ .52 $ .47 $ .32 Average common and common equivalent shares: Primary. . . . . . . . . . . . . . . . . . . . . . . . .16,433,410 16,469,875 16,695,233 17,195,727 Fully diluted. . . . . . . . . . . . . . . . . . . . . .17,896,237 17,935,189 18,145,732 18,664,010 - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1995 Interest income. . . . . . . . . . . . . . . . . . . . . . $ 40,324 $ 46,409 $ 51,755 $ 54,380 Interest expense . . . . . . . . . . . . . . . . . . . . . 16,802 20,181 22,742 23,166 --------- --------- --------- --------- Net interest income. . . . . . . . . . . . . . . . . . . . 23,522 26,228 29,013 31,214 Provision for loan losses. . . . . . . . . . . . . . . . . 585 582 762 782 --------- --------- --------- --------- Net interest income after provision for loan losses. . . . 22,937 25,646 28,251 30,432 Net gains on sales of securities . . . . . . . . . . . . . (41) (94) 8 179 Noninterest income . . . . . . . . . . . . . . . . . . . . 4,763 5,492 6,201 5,980 Noninterest expense. . . . . . . . . . . . . . . . . . . . 17,583 20,469 21,484 23,057 --------- --------- --------- --------- Income before income taxes . . . . . . . . . . . . . . . . 10,076 10,575 12,976 13,534 Provision for income taxes . . . . . . . . . . . . . . . . 3,716 4,001 4,581 4,910 --------- --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . . . 6,360 6,574 8,395 8,624 Preferred stock dividends. . . . . . . . . . . . . . . . . 402 402 404 402 --------- --------- --------- --------- Net income applicable to common equity . . . . . . . . . . $ 5,958 $ 6,172 $ 7,991 $ 8,222 --------- --------- --------- --------- --------- --------- --------- --------- Earnings per common and common equivalent shares: Primary . . . . . . . . . . . . . . . . . . . . . . . . $ .40 $ .41 $ .50 $ .50 Fully diluted . . . . . . . . . . . . . . . . . . . . . $ .38 $ .39 $ .48 $ .48 Average common and common equivalent shares: Primary . . . . . . . . . . . . . . . . . . . . . . . .14,751,100 15,027,266 16,063,302 16,329,391 Fully diluted . . . . . . . . . . . . . . . . . . . . .16,684,541 16,764,555 17,548,746 17,808,232 - --------------------------------------------------------------------------------------------------------
46 MARKET PRICE RANGE OF COMMON SHARES The Company's common shares trade on the Nasdaq National Market under the symbol CFBX. The following table sets forth for the periods indicated the high and low sales prices for the Company's common stock: - --------------------------------------------------------------------------- 1996 1995 High Low High Low - --------------------------------------------------------------------------- First Quarter. . . . . . . . . 22 3/4 20 15 3/4 13 1/4 Second Quarter . . . . . . . . 24 1/4 22 1/4 17 14 1/8 Third Quarter. . . . . . . . . 23 7/8 22 1/2 19 1/4 16 3/4 Fourth Quarter . . . . . . . . 28 3/4 23 1/8 23 3/4 19 - --------------------------------------------------------------------------- SHAREHOLDERS As of February 14, 1997, the Company had 1,080 shareholders of record and an estimated 3,400 additional beneficial holders whose stock was held in street name by brokerage houses. DIVIDEND POLICY The Board of Directors has adopted a policy by declaring regular quarterly dividends equal to approximately 25 percent of earnings. A dividend of 12 cents per share was paid quarterly in 1995, and the rate was increased to 14 cents per share for each of the first three quarters in 1996 and increased to 16 cents per share for the fourth quarter of 1996. 56 EX-21.1 6 SUBSIDAIRIES EXHIBIT 21.1 COMMUNITY FIRST BANKSHARES, INC. SUBSIDIARIES
OWNERSHIP SUBSIDIARY BANK: LOCATION: PERCENTAGE Community First National Bank Fergus Falls, MN 100.000% Community First National Bank Fargo, ND 100.000% Community First State Bank Vermillion, ND 100.000% Community First State Bank Redfield, SD 100.000% Community First State Bank Decorah, IA 99.880% Community First State Bank Alliance, NE 99.537% Community First State Bank Spooner, WI 99.493% Colorado Community First National Bank Ft. Morgan, CO 100.000% Colorado Community First State Bank Steamboat Springs, CO 100.000% Colorado Community First National Bank Trinidad, CO 100.000% Colorado Community First State Bank - CO Denver, CO 100.000% NONBANK SUBSIDIARIES: Community First Financial, Inc. Fargo, ND 100.000% Community First Service Corporation Fargo, ND 100.000% Community Insurance, Inc. Fargo, ND 100.000% Community First Properties, Inc. Fargo, ND 100.000% Mountain Parks Data Corporation Fargo, ND 100.000% OTHER AFFILIATES:
Vail Banks Inc. Vail, CO 24.690% SUBSIDIARIES OF SUBSIDIARIES (100% OWNED): Community First Insurance Agencies, Inc. Fargo, SD (Subsidiary of Community First State Bank [Vermillion, SD]) CFIN, Inc. Las Vegas, NV (Subsidiary of Community First State Bank [Spooner]) OWNERSHIP SUBSIDIARIES OF SUBSIDIARIES: (CONTINUED) LOCATION PERCENTAGE Equity Lending, Inc. Edina, MN (Subsidiary of Colorado Community First State Bank - CO [Denver, CO]) Mountain Parks Financial Services, Inc. Denver, CO Subsidiary of Colorado Community First State Bank - CO [Denver, CO]) Community First Minnesota Holdings, Inc. Georgetown, (Subsidiary of British Community First National Cayman Islands Bank [Fergus Falls]) CFIRE, Inc. Fargo, ND (Subsidiary of Community First Minnesota Holdings, Inc.) Community First Colorado Holdings, Inc. Georgetown, (Subsidiary of British Community Colorado Cayman Islands Community First National Bank [Ft. Morgan]) Colorado CFIRE, Inc. Fargo, ND (Subsidiary of Community First Colorado Holdings, Inc.)
2 EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Community First Bankshares, Inc. of our report dated January 23, 1997, except Note 3, as to which the date is February 28, 1997, included in the 1996 Annual Report to Shareholders of Community First Bankshares, Inc. We also consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-44921) and in the related Prospectus pertaining to the Community First Bankshares, Inc. 1987 Stock Option Plan and in the Registration Statement (Form S-8, No. 33-48160) and in the related Prospectus pertaining to the Community First Bankshares, Inc. 401(k) Retirement Plan of our report dated January 23, 1997, with respect to the consolidated financial statements of Community First Bankshares, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1996. Minneapolis, Minnesota March 24,1997 -----END PRIVACY-ENHANCED MESSAGE-----