-----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, Bry7BZyHXUoBE2IEv9sLmMS2FM3GYgDMTgIiSSALcpXqWMu1rs3h3I2js7a2dB2l D5E0pIV7J9dOAsAHxp+UdA== 0001047469-98-009456.txt : 19980312 0001047469-98-009456.hdr.sgml : 19980312 ACCESSION NUMBER: 0001047469-98-009456 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980311 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: SEC FILE NUMBER: 000-19368 FILM NUMBER: 98563921 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 FORM 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 /x/ SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from ________ to ________ COMMISSION FILE NO. 0-19368 COMMUNITY FIRST BANKSHARES, INC. (Exact name of registrant as specified in its charter) DELAWARE 46-0391436 ------------------------------- ----------------------- (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 PREFERRED STOCK PURCHASE RIGHTS 8-7/8% CUMULATIVE CAPITAL SECURITIES, $25 LIQUIDATION AMOUNT* 8.20% 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 6, 1998, assuming as market value the price of $52.75 per share, the average between the high and low sale prices on the Nasdaq National Market, the aggregate market value of shares held by nonaffiliates was approximately $958 million. As of March 6, 1998, the Company had outstanding 20,324,732 shares of Common Stock, $.01 par value, net of treasury shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report to Shareholders and the Proxy Statement for the Company's Annual Meeting of Shareholders to be held April 28, 1998, are incorporated by reference into Parts II and III, respectively, of this Form 10-K, to the extent described in such Parts. * The 8-7/8% Cumulative Capital Securities (the "CFB I Capital Securities") were issued by CFB Capital I ("CFB Capital I"), a wholly owned Delaware business trust subsidiary of the Company. The Company has also fully and unconditionally guaranteed all of CFB Capital I's obligations under the CFB I Capital Securities. ** The 8.20% Cumulative Capital Securities (the "CFB II Capital Securities") were issued by CFB Capital II ("CFB Capital II"), a wholly owned Delaware business trust subsidiary of the Company. The Company has also fully and unconditionally guaranteed all of CFB Capital II's obligations under the CFB II Capital Securities. TABLE OF CONTENTS
Page No. -------- PART I Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . 4 Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . 15 Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . 15 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . . . . . . . . 16 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . 16 Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . 16 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . 16 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . . . 16 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . 16 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . 17 Item 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . 17 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . 17 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . 17 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 17 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3 PART I ITEM 1. BUSINESS GENERAL Community First Bankshares, Inc. (the "Company"), is a multi-bank holding company that as of December 31, 1997 operated banks and bank branches (the "Banks") in 109 communities in Arizona, Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming. Total assets of the Company were approximately $4.9 billion as of December 31, 1997. The Company completed a significant acquisition in January 1998 and currently has three pending acquisitions. See "Pending Acquisitions" and "Recent Significant Acquisitions." The Banks are community banks that provide a full range of commercial and consumer banking services primarily to individuals and businesses in small and medium-sized communities and the surrounding market areas. The Company encourages local autonomy by local Bank presidents, while providing to the Banks the benefits of holding company affiliation. The Company maintains a subsidiary bank phantom stock program, pursuant to which presidents of the subsidiary Banks participate in the equity appreciation of their respective local Banks. The Company believes this program is important to provide these individuals with a direct incentive to improve the performance of their Banks. COMMUNITY BANKING STRATEGY The Company's strategy is to operate and continue to acquire banks and bank branches in communities which generally have populations between 3,000 and 50,000 and are located in the Company's key target acquisition states of Arizona, Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming, and additionally in the adjacent states of Idaho, Illinois, Missouri, New Mexico, Oklahoma and Utah (this seventeen state area is collectively referred to as the "Acquisition Area"). Such communities are believed to provide the Company with the opportunity for a stable, relatively low-cost deposit base. The individual banks and bank branches sought to be acquired by the Company generally have approximately $20 million to $150 million in assets. The Company provides the Banks with the advantages of affiliation with a multi-bank holding company, such as access to its lines of financial services including trust products and administration, insurance and investment services, data processing services, credit policy formulation and review, investment management and specialized staff support. The Company grants substantial autonomy to managers of the Banks with respect to day-to-day operations, customer service decisions and marketing. The Banks are encouraged to participate in community activities, support local charities and community development, and otherwise enhance their images in their communities. THE BANKS The Banks provide a full range of commercial and consumer banking services primarily to individuals and businesses in small and medium-sized communities and the surrounding market areas. The Banks draw most of their deposits from and make most of their loans within their respective market areas. The Banks owned by the Company as of December 31, 1997, were located in Arizona, Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming. 4 COMMUNITIES SERVED The Banks, as of December 31, 1997, were located in communities with populations ranging from approximately 200 to 20,000, except for Fargo, North Dakota, Englewood, Colorado, a suburb of Denver, and Phoenix, Arizona. Each of the Banks serves a market area with greater population because, in many cases, there are few or no other financial institutions within a reasonable distance from the community in which the Bank is located. The economies of the Banks' communities, especially those in Nebraska, North Dakota and South Dakota, depend primarily on farming, farm service and agricultural supply businesses. Agriculture in these communities is affected by many factors beyond the control of the Banks, including weather, governmental policies, fluctuating commodity prices, demand and production and natural disasters. As with other small, nonmetropolitan communities in the Upper Midwest, many of the communities in which the Banks presently operate have experienced and are expected to experience no growth or a decline in population. The Company has operated profitably in these communities. However, if reductions in population or adverse economic trends in specific communities result in decreased profitability in the Banks or offices located in those communities, the Company may consider selling such Banks or offices or reducing the level of services provided in such communities. ACQUISITION STRATEGY The Company intends to continue its growth by making acquisitions of community banks and other financial institutions in selected communities in the Acquisition Area. The Company believes it is well-positioned to acquire and profitably operate community banks because of its experience in operating community banks, its ability to provide centralized management to those banks and its access to capital. The Company believes many owners of community banks are seeking to sell their banks for a variety of reasons, including lack of shareholder liquidity, management succession problems, the difficulty of compliance with current multiple-layered bank regulations and increasing competition from non-bank organizations. The Company believes there are over 2,000 community banks that are possible acquisition candidates in the Acquisition Area. The Company competes with individuals and institutions, including major regional bank holding companies, for suitable acquisition candidates within the Acquisition Area. Acquisition competitors of the Company in the Acquisition Area range from regional bank holding companies to individual bank owners who own or control banks in the Acquisition Area. The process of industry consolidation is likely to accelerate as a result of the adoption of the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"). The IBBEA largely eliminated restrictions on interstate banking and since June 1, 1997, has permitted interstate branching, subject to special "opt-in" and "opt-out" provisions which states may enact by law. Most states have adopted implementing legislation. Certain aspects of the IBBEA were clarified and amended in 1997 with the passage of the Riegle-Neal Clarification Act. The Economics and Growth Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") streamlined application processes and eased regulations in several areas facilitating acquisitions and expansion of nonbanking activities. The effect of this legislation is likely to both facilitate the Company's acquisitions and to increase the number of potential acquirers of banks in the Acquisition Area. The Company has established a due diligence review process to evaluate acquisition targets and has established acquisition parameters for target acquisitions relating to market factors, financial performance and certain nonfinancial factors. Market factors considered by the Company include the size and long-term viability of the community and market area served by the target bank, the dominance of the acquisition target (which should be the largest or second largest financial institution in the market) and the proximity of other existing Banks owned by the Company. In exploring markets in regions not currently served by the Company, management looks for similarities between the new market areas and the Company's existing market areas in 5 terms of culture and economic bases. Financial analyses performed by the Company in evaluating acquisition prospects include review of historical performance, comparison to peers and the Company's Banks in terms of key operating performance ratios (including earnings, staffing and loan quality) and target ratios. The Company determines the price it is willing to pay for an institution based on, among other factors, the anticipated ten-year average return on invested equity capital. Nonfinancial considerations in evaluating an acquisition prospect include the quality of the management team's skill and the demand on management resources to integrate the target institution. Finally, each target acquisition must undergo an extensive review of loan asset quality, operating procedures and deposit structure before the Company commits to a purchase. The Company's level of future acquisitions will depend, in part, on its ability to attract and retain management level employees capable of performing efficient review of credit quality standards of proposed acquisition candidates. Acquisition opportunities presented to the Company that have not met the requirements described above have not been pursued. Because of limited growth opportunities in many of the existing markets served by the Company, management believes future growth in the business earnings of the Company will largely depend on consummation of acquisitions consistent with the Company's acquisition strategy. Successful completion of acquisitions by the Company depends upon such factors as the availability of suitable acquisition candidates, necessary regulatory approvals and necessary approvals of holders of the Company's and other providers of credit, compliance with applicable capital requirements and, in the case of expansion into new states, the availability of additional management resources required to operate banks in widely dispersed geographical areas. PENDING ACQUISITIONS The Company routinely solicits and reviews acquisition opportunities and, at any given time, may have bids outstanding or may be involved in negotiations with the owners of financial institutions or other parties relative to a particular financial institution, its branches or its deposit accounts. On January 12, 1998, the Company signed a definitive merger agreement with FNB, Inc. ("FNB"), a two-bank holding company headquartered in Greeley, Colorado. At December 31, 1997, FNB had total assets of $118 million and offices in Greeley and Fort Collins, Colorado. To facilitate completion of the transaction, which is expected to be accounted for using the pooling of interests method of accounting, the Company will issue approximately 570,000 shares of common stock to holders of FNB common stock. The transaction is subject to regulatory approval and is expected to close during the second quarter of 1998. On January 8, 1998, the Company signed a definitive merger agreement with Community Bancorp, Inc. ("CBI"), a one-bank holding company headquartered in Thornton, Colorado. At December 31, 1997, CBI had total assets of $78 million and offices in Thornton and Arvada, Colorado. To facilitate completion of the transaction, which is expected to be accounted for using the pooling of interests method of accounting, the Company will issue approximately 452,000 shares of common stock to holders of CBI common stock. The transaction is subject to regulatory approval and is expected to close during the second quarter of 1998. On November 7, 1997, the Company entered into an agreement to acquire Pioneer Bank of Longmont, Longmont, Colorado ("Pioneer"). At December 31, 1997, Pioneer had total assets of $130 million and five banking offices in four Colorado communities. On completion of the merger and subject to adjustments set forth in the acquisition agreement, the Company expects to issue approximately 700,000 shares of its common stock to the holders of Pioneer common stock. Completion of the acquisition is subject to regulatory approvals, approval by the Pioneer shareholders and other conditions. The transaction is anticipated to be completed during the second quarter of 1998 and is expected to be accounted for as a pooling of interests. 6 RECENT SIGNIFICANT ACQUISITIONS On January 23, 1998, the Company acquired 37 banking offices located in Arizona, Colorado and Utah (the "Bank One Branches") from three subsidiary banks of Banc One Corporation (the "Bank One Banks"). At closing, the Bank One Branches had total deposits of approximately $730 million and loans of approximately $61 million. The Company paid a purchase price premium of approximately $43.8 million, equal to 6% of the deposits of the Bank One Branches at closing. The acquisition was accounted for as an acquisition of assets and assumption of liabilities and resulted in the recognition by the Company of deposit-based intangibles in an amount equal to the purchase price premium of approximately $43.8 million. Following the closing, the 25 Arizona offices and four Utah offices acquired from the Bank One Banks were merged into the Republic bank in Phoenix, Arizona that was recently acquired by the Company. The eight acquired Colorado offices were merged into the Company's existing Colorado affiliate bank. In January 1998, the Company signed an agreement to sell one of the former Bank One Branches located in Colorado. On December 1, 1997, the Company acquired First National Summit Bankshares, Inc., Gunnison, Colorado ("Summit"), a bank holding company that owned and operated a national bank with banking facilities in five Colorado communities. At closing, Summit had total assets of approximately $90 million, total deposits of approximately $82 million and total stockholders' equity of approximately $7 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 314,800 shares of common stock to the former holders of Summit common stock and paid approximately $1 million in cash to holders of Summit preferred stock cancelled in the merger. The value of the Company's common stock issued in the merger was approximately $15 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. On November 24, 1997, the Company acquired Republic National Bancorp, Inc., Phoenix, Arizona ("Republic"), a bank holding company that owned and operated a national bank in Phoenix, Arizona. At closing, Republic had total assets of approximately $54 million, total deposits of approximately $49 million and total stockholders' equity of approximately $4 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 368,000 shares of common stock to the former holders of Republic common stock. The value of the Company's common stock issued in the merger was approximately $17.4 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. On July 14, 1997, the Company purchased KeyBank National Association, Cheyenne, Wyoming ("KeyBank Wyoming"), from KeyCorp, its parent corporation, ("KeyCorp"), for a purchase price of $135 million. KeyBank Wyoming has been renamed "Community First National Bank." At closing, KeyBank Wyoming had total assets of approximately $1.1 billion and 28 banking offices located in 24 communities in Wyoming, including Cheyenne, Laramie, Casper, Sheridan and Jackson. The Company believes its Wyoming banking network is the largest in Wyoming, providing a full range of commercial and consumer banking services throughout the state. The transaction was accounted for as a business combination using the purchase method of accounting and resulted in the recognition of goodwill by the Company of approximately $60 million. On December 18, 1996, the Company acquired Mountain Parks Financial Corp. ("Mountain Parks"), a bank holding company that operated a state chartered bank with full service commercial banking facilities in 17 Colorado communities. At closing, Mountain Parks had total assets of approximately $600.0 million and total stockholders' equity of approximately $60.9 million. Upon completion of the merger, which was accounted for as a pooling of interest, the Company issued approximately 5.2 million shares of common stock to the former holders of Mountain Parks common stock. The market value of the Company's common stock issued in the merger was approximately $142.2 million, based on the closing price of the Company's common stock on the 7 Nasdaq National Market on December 18, 1996. The Mountain Parks banking offices are located in winter ski and summer recreational areas in the Colorado mountains and in the greater Denver/Boulder metropolitan area. Pursuant to commitments made with the Federal Reserve to address resulting concentrations in certain Colorado banking markets, on April 4, 1997, the Company sold Mountain Parks banking offices in two Colorado communities. ADMINISTRATION OF BANKS The Company provides policy and management direction and specialized staff support in general areas while relying on Bank managers for day-to-day operations, customer service decisions and community relations. The Company is responsible for policy-related functions, such as supervisory credit review, audits, personnel policies and internal examination activities. Resource allocations for administrative support by the Company are balanced to provide adequate support services for the Banks' operations, while carefully controlling service costs charged to the Banks. The major areas of administration are as follows: CREDIT. The Company's lending activities are guided by the general loan policy established by the Board of Directors. The Senior Credit Committee of the Company has established loan approval limits for each region of the Company and each subsidiary Bank. Amounts in excess of the individual Bank lending authority are presented to the Regional Credit Officers. Loans above $1,500,000 per nonclassified borrower and $250,000 per classified borrower are presented to the Senior Credit Committee for approval. The Company's credit policy establishes guidelines for approval of all credits, including local loans and purchased loans and loan participations. The credits of the Banks are subject to internal review by Bank officers every 12 months. The loan portfolios of the Banks are subject to examination by the Company's credit examination staff every 12 to 24 months, the frequency of which is based on a variety of factors, including the credit quality of the institution. The credit examination staff is also responsible for credit review with respect to the assets of banks to be acquired by the Company. FINANCE. The Board of Directors of the Company has established policies in the areas of asset/liability management, investments, capital expenditures, accounting procedures and capital and dividend management. Policies are implemented and monitored for compliance by the Chief Financial Officer and the Asset/Liability Committee of the Company. OPERATIONS. Community First Service Corporation ("CFSC"), a subsidiary of the Company, provides data processing and operations support services to the Banks by contract. CFSC's system is designed to provide for all Bank and customer data processing needs at the lowest possible cost and can be expanded to accommodate future growth and additional service applications. The Company believes CFSC has sufficient capacity to provide services to the banks the Company has agreed to acquire. In addition to its own office facilities in Fargo, North Dakota, CFSC also has a data processing facility in Golden, Colorado. Additional expenditures for equipment, consistent with the increased data processing volumes, would likely be necessary if additional significant acquisitions occur during 1998. OTHER SERVICES. The Company provides other services for the benefit of the Banks, such as outside professional services, central human resources services, benefits administration, marketing guidance and centralized purchasing of supplies. INSURANCE AGENCIES 8 The Company currently owns and operates insurance agencies located in 32 communities served by the Banks through its subsidiaries, Community Insurance, Inc. ("CII"), and Community First Insurance Agencies, Inc. ("CFIA"). These agencies are primarily engaged in the sale of property and casualty insurance and make some sales of other types of insurance, such as life, accident and crop hail insurance. The Company had commission revenue of $5.4 million in 1997. OTHER ACTIVITIES The Company has steadily consolidated Banks located in each state into single legal charters with multiple locations. As of December 31, 1997, the Company had 10 separately chartered subsidiary Banks and 6 nonbank subsidiaries. The subsidiary Banks of the Company in seven locations maintain trust departments, but their services are more broadly available and the Company may expand its trust activities in the future. Trust services are made available to customers in several locations through local trust officers or by appointment with members of the trust department. Most of the Banks also sell annuities. Federal bank regulation permits bank holding companies to engage in other limited activities, such as the distribution of certain types of securities, and future changes in such regulation may further expand the types of activities in which the Company may engage. Although the Company intends to maintain its focus on the banking business in its targeted market areas, the Company will consider other permitted business activities as opportunities arise. COMPETITION Commercial banking is highly competitive. In the conduct of certain aspects of their business, the Banks compete with other commercial banks, savings and loan institutions, issuers of fixed income investments, finance corporations, credit unions and money market funds, among other types of institutions. The Banks compete with these institutions in such areas as obtaining new deposits, offering new types of services and setting loan rates and interest rates on various types of deposits, as well as other aspects of the banking business. Management believes community residents and businesses prefer to deal with local banks and the Banks have generally been able to compete successfully in their respective communities because of the Company's emphasis on local ownership and the autonomy of Bank management in community relations. At the same time, the Company provides the Banks with the advantages of centralized sophisticated administration and the opportunity to make larger loans and diversify their lending activity through Bank group participations. Further, because most of the Banks have a significant market share in the communities they serve, the Company believes the Banks can, to a degree, influence deposit and loan pricing in their markets and are subject to less competition based on deposit and loan pricing than would be the case in larger metropolitan markets with more competitors. However, the Banks have experienced increased price competition from credit unions in certain market areas in recent periods. Recent changes in government regulation of banking, particularly the legislation which removes restrictions on interstate banking and permits interstate branching, or legislation in certain states to permit statewide branching, may increase competition by both out-of-state and in-state banking organizations and by other financial institutions. See "Supervision and Regulation," below. The Banks compete with other financial institutions, including government lending agencies, for high quality loans in the Banks' market areas and for purchases of loan assets and investment assets. While management believes the Banks will continue to compete successfully in their communities, there is no assurance that future competition will not adversely affect the Banks' earnings. EMPLOYEES The Company had 2,241 employees at December 31, 1997, including 1,681 full-time employees and 560 part-time employees. Of these individuals, 128 were employed at the holding company level, 1,841 (including 9 1,381 full-time employees) were employed at the Bank level, 200 were employed by CFSC and 72 were employed by CII and CFIA. SUPERVISION AND REGULATION GENERAL. In addition to a variety of generally applicable state and federal laws governing businesses and employers, the Company and the Banks are extensively regulated by federal and state laws applicable only to financial institutions. Virtually all aspects of the Company's operations are subject to specific requirements or restrictions and general regulatory oversight from laws regulating consumer finance transactions, such as Truth In Lending Act, Home Mortgage Disclosure Act and Equal Credit Opportunity Act, to laws regulating collections and confidentiality, such as Fair Debt Collections Practices Act, Fair Credit Reporting Act and Right to Financial Privacy Act. With few exceptions, state and federal banking laws have as their principal objective either the maintenance of the safety and soundness of the Federal Deposit Insurance System or the protection of consumers or classes of consumers, rather than the specific protection of security holders of the Company. With the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the FDIC Improvement Act of 1991 ("FDICIA") and the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"), Congress enacted comprehensive legislation affecting the commercial banking and thrift industries. FIRREA, among other things, abolished the Federal Savings and Loan Insurance Corporation and established two new insurance funds under the jurisdiction of the FDIC: the Bank Insurance Fund ("BIF"), which insures most commercial banks, including the Banks, and the Savings Association Insurance Fund, which insures most thrift institutions. In addition to effecting far-reaching restructuring of the financial industry, FIRREA provided a phased-in increase in the rate of annual insurance assessments paid by insured depository institutions. FDICIA increased funding for the BIF and expanded regulation of depository institutions and their affiliates, including parent holding companies. FDICIA further provided authority for special assessments against insured deposits and for the development of a system of assessing deposit insurance premiums based upon the institutions's risk. IBBEA generally liberalized multi-state expansion. Effective September 29, 1995, IBBEA significantly eased restrictions on interstate acquisition of banks by bank holding companies. Beginning June 1, 1997, banks located in different states may merge and operate the resulting institution as a single charter with interstate branches. However, the legislation includes special "opt-out" and "opt-in" provisions that individual states may adopt prior to the effective date of interstate branching. IBBEA does NOT affect the branching laws within a state, and imposes concentration limits limiting the resulting organization's market share to 30% of state deposits and 10% of total United States deposits. Congress continues to consider wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. It cannot be predicted whether or in what form any of these proposals will be adopted or the extent to which the business of the Company may be affected thereby. BANK HOLDING COMPANY REGULATION. The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"). As a result, the Company's activities are subject to certain limitations under the BHC Act, and transactions between the Company and the Banks and other affiliates are subject to certain restrictions. As a registered bank holding company, the Company is required to file semiannual reports with the Federal Reserve Board ("FRB") and such other information as the FRB may require, and is subject to examination by the FRB. The FRB has the authority to issue cease and desist orders against the Company and its nonbank subsidiaries if the FRB determines that actions by the Company are unsafe, 10 unsound or violate the law. Under certain circumstances, redemptions, dividends or distributions by the Company with respect to its equity securities may be considered unsafe or unsound practices. As a bank holding company, the acquisition of "control" of the Company by an individual or a "company" is subject to the prior approval of the FRB. The term "company" is broadly defined to include any corporation, partnership, association or trust or similar organization, while the definition or control for these purposes may be met by (i) the ownership, control or power to vote 10% or more of the outstanding shares of any class of voting stock of the Company, directly or indirectly, (ii) control over the election priority of Directors of the Company, or (iii) the power to exercise, directly or indirectly, controlling influence over the management or policies of the Company. Under the BHC Act, a bank holding company must obtain prior FRB approval before it acquires direct or indirect ownership or control of any voting shares of any bank or other bank holding company if, after such acquisition, it will own or control directly or indirectly more than 5% of the voting stock of the target, unless it already owns a majority of the voting stock of the target. A bank holding company also must obtain prior FRB approval before it acquires all or substantially all of the assets of a bank or merges or consolidates with another bank holding company. A bank holding company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of a company that is not a bank or a bank holding company, and must engage in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. The FRB, by order or regulation, may authorize a bank holding company to engage in or acquire stock in a company engaged in activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities the FRB has determined by regulation to be incidental to the business of banking are: making and servicing loans or certain types of leases, engaging in discount brokerage activities, performing certain data processing services and providing insurance brokerage services under certain conditions and subject to certain limitations. In reviewing any application or proposal by a bank holding company, the FRB is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the community to be served, as well as the probable effect of the transaction upon competition. Recent decisions by the FRB under the BHC Act have underscored the importance placed by the FRB upon the record of the applicant and its subsidiary banks in meeting the credit needs of its community in accordance with the Community Reinvestment Act of 1977. BANK REGULATION. The Banks are subject to detailed federal and state laws and regulations. National bank subsidiaries of the Company are primarily supervised by the Office of the Comptroller of the Currency (the "OCC"), a bureau of the United States Department of Treasury. The OCC regularly examines national banks in such areas as reserves, loans, investments, trust services, management practices, Community Reinvestment Act compliance and other aspects of bank operations. These examinations are designed for the protection of the deposit insurance system and the enforcement of federal and state laws and regulations, and not for the shareholders of the Company. In addition to undergoing these regular examinations, national banks must furnish reports containing detailed and accurate financial statements and schedules to the OCC quarterly. Bank subsidiaries of the Company that are chartered under state law are regulated and supervised by the respective state's banking agency. In addition, state-chartered banks, as members of the FDIC, are regulated and supervised by the FDIC. Each of these agencies conducts regular examinations of each Bank, generally on an alternate basis, reviewing the adequacy of the reserves, quality of the loans and investments, propriety of 11 management practices, compliance with laws and regulations, including the Community Reinvestment Act, trust, and other aspects of Bank operations. These examinations are designed for the protection of the deposit insurance system and the enforcement of federal and state laws and regulations, and are not conducted for the benefit of the shareholders of the Company. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, investments a bank may make, reserves a bank must maintain, loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches. The OCC, in the case of national banks, and the FDIC, in the case of state-chartered, nonmember banks, are the respective primary regulatory authorities under the Financial Institution Supervisory Act, and are thereby provided authority under that Act to impose penalties, initiate civil and administrative actions and take other steps intended to prevent a bank from engaging in an unsafe or an unsound practice in the conduct of its business. In extreme cases, the FDIC has authority to revoke deposit insurance, and may assess civil money penalties and impose cease and desist orders against the bank and affiliated individuals, including the bank's attorneys and accountants. Under FDICIA, federal banking authorities are also authorized to establish safety and soundness standards for banks, thrifts and their parent holding companies covering a wide range of operational and managerial matters, including asset quality, earnings, stock valuation and employee compensation. Under current law, national and state bank subsidiaries of the Company are subject to state law restrictions in branching, including restrictions on the number, location and characteristics of branches. The laws vary from liberal branching states, like North Dakota and Wisconsin, which allow banks to branch freely, subject only to application and approval, to states like Iowa and Nebraska, which severely restrict branching, although they allow banks to combine and retain preexisting locations. In June 1993, the FDIC adopted a risk-based premium schedule that increases the assessment rates for depository institutions. Under the new schedule, which took effect for the assessment period beginning January 1, 1994, each financial institution is assigned to one of three capital groups: well capitalized, adequately capitalized or undercapitalized, as defined in the regulations implementing the prompt corrective action provisions of the FDICIA; and further assigned to one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state supervisors and other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a particular institution depends upon the risk assessment classification so assigned to the institution by the FDIC. Because the BIF has reached its required reserve level of 1.25% of insured deposits, banks in the lowest risk classification pay no deposit insurance premiums currently. Each of the Banks currently qualifies for the lowest level of deposit insurance. EXECUTIVE OFFICERS The executive officers of the Company are as follows:
Name Age Position - ---- --- -------- Donald R. Mengedoth 53 President, Chief Executive Officer and Chairman of the Board Mark A. Anderson 40 Executive Vice President, Chief Financial Officer, Chief Information Officer, Secretary and Treasurer Ronald K. Strand 51 Executive Vice President - Banking Group 12 David E. Groshong 49 Executive Vice President - Financial Services Thomas R. Anderson 42 Senior Vice President - Treasury Randall L. Dancliff 50 Senior Vice President and Wyoming Region Manager Cynithia U. Davis 45 Senior Vice President and Arizona/Utah Region Manager Keith A. Dickelman 43 Senior Vice President and Eastern Colorado Region Manager Thomas E. Hansen 45 Senior Vice President and Central Region Manager Bruce A. Heysse 46 Senior Vice President - Acquisitions Thomas A. Hilt 55 Senior Vice President - Operations and Administration Gary A. Knutson 50 Senior Vice President and Integration Manager David A. Lee 54 Senior Vice President and Eastern Region Manager Charles A. Mausbach 46 Senior Vice President and Western Colorado Region Manager Harriette S. McCaul 47 Senior Vice President - Human Resources Patricia J. Staples 42 Senior Vice President - Marketing Craig A. Weiss 36 Senior Vice President - Finance
Donald R. Mengedoth has been President, Chief Executive Officer, Chairman of the Board and a director of the Company since its organization in 1986. He was Senior Vice President of First Bank System, Inc. ("FBS") from 1982 to 1987 and has worked in the banking business since 1966, including management positions in retail banking operations, human resources and commercial lending. From 1984 to 1987, Mr. Mengedoth was Regional Managing Director of FBS. From 1979 to 1982, Mr. Mengedoth was Vice President - Operations for FBS. Prior to that time, he was Senior Vice President of First Bank Milwaukee. Mark A. Anderson has been Executive Vice President, Chief Financial Officer, Secretary and Treasurer of the Company since its organization in 1986 and Chief Information Officer since February 1998. He was Vice President and Regional Controller for FBS from 1984 to 1987. From 1979 to 1984, he held various positions with FBS-affiliated banks in the finance and credit analysis areas. Mr. Anderson is a Chartered Financial Analyst and a Certified Management Accountant. Ronald K. Strand has been Executive Vice President - Banking Group since February 1993. He was previously Senior Vice President and Regional Manager for South Dakota and North Dakota for the Company from January 1991 to February 1993. Previously, Mr. Strand had been Vice President and Regional Manager for the Company and President, Chief Executive Officer and a director of the Company's affiliate bank in Wahpeton, North Dakota since 1988. Prior to his affiliation with the Company, he served as President and Chief 13 Executive Officer of Norwest Bank of North Dakota, N.A., Wahpeton, from 1985 until 1988. He was employed by Norwest for a total of 15 years, having previously worked in Norwest banks in Jamestown, North Dakota, and Moorhead, Minnesota. David E. Groshong has been Executive Vice President - Financial Services since May 1996. He was previously Chairman and Chief Executive Officer of the Company's affiliate bank in Alliance, Nebraska from May 1995 to May 1996. Previously, Mr. Groshong had been President and Chief Executive of the Company's affiliate bank in Fergus Falls, Minnesota since 1992 and as Senior Vice President and Senior Loan Officer of the Fargo Bank since 1985. He was employed by Norwest Bank of Minnesota, N.A. for a total of eight years and prior to that worked in the consumer finance industry. Thomas R. Anderson has been Senior Vice President - Treasury since February 1998. He was previously Vice President/Funds Manager of the Company from 1988 to 1997 and Funds Management Officer from 1987 to 1988. Prior to 1987, he was employed by Norwest Corporation for seven years, most recently as a Senior Financial Analyst. Randall L. Dancliff has been Senior Vice President and Wyoming Region Manager since July 1997. He was President and Chief Executive Officer of KeyBank Wyoming since April 1995 until the acquisition of KeyBank Wyoming by the Company in July 1997. Prior to that, he served as President, Chief Operating Officer and Chief Financial Officer of KeyBank Wyoming from 1992 to April 1995, and as Regional Vice President of KeyBank Cheyenne from 1985 to 1991. From 1973 through 1985, he served in a variety of capacities with First Wyoming Bank, the predecessor to KeyBank Wyoming. Cynthia U. Davis has been Senior Vice President and Arizona/Utah Region Manager since October 1997. From October 1987 to October 1997, she held various positions for Banc One Corporation, including positions as Vice President, Retail Delivery for Banc One Corporation and Vice President Region Manager for 36 Bank One banking centers in Northern Arizona. She has a total of 23 years of banking experience in Arizona, Idaho and California. Keith A. Dickelman has been Senior Vice President and Eastern Colorado Region Manager since January 1998. He was previously President of Community First National Bank, Fergus Falls, Minnesota from 1995 to 1997 and from 1992 to 1995 served as a Senior Loan Officer and Senior Vice President of Community First National Bank, Fargo, North Dakota. Thomas E. Hansen has been Senior Vice President and Central Region Manager since April 1993. He also served as President, Chief Executive Officer and director of the Company's affiliate bank in Fargo, North Dakota from April 1993 to December 1996. Previously, he was employed by Norwest Bank Fargo for 19 years, most recently as President. Bruce A. Heysse has been Senior Vice President - Acquisitions since July 1996. He was Senior Vice President and Integration Manager of the Company from November 1995 to June 1996. He was Vice President and Senior Credit Officer of the Company from 1987 to November 1995. He began his banking career at the Company's affiliate bank in Wahpeton, North Dakota, and had a total of 11 years of banking experience prior to joining the Company. Thomas A. Hilt has been Senior Vice President - Operations and Administration of the Company since 1987 and President of Community First Service Corporation, the Company's data processing subsidiary, since 1988. He was Vice President and Manager - Operations Support for the Regional Division of FBS from 1984 to 1987. Prior to 1984, he held various positions with FBS since 1967, including responsibility for systems development, programming, audit and examination functions. Gary A. Knutson has been Senior Vice President and Integration Manager since July 1996 and previously was Senior Vice President and Western Region Manager of the Company since September 1993. He was President, Chief Executive Officer and director of the Company's affiliate bank in Wahpeton, North Dakota from January 1991 to September 1993. He began his banking career at the Company's affiliate bank in Lidgerwood, North Dakota, and had a total of 14 years of banking experience prior to joining the Company. 14 David A. Lee has been Senior Vice President and Eastern Region Manager of the Company since January 1991. He had been a Region Manager of the Company since 1988. He was President and Chief Executive Officer and a director of the Company's affiliate bank in Little Falls from 1987 to January 1991. Mr. Lee held various positions with FBS from 1966 to 1987. Charles A. Mausbach has been Senior Vice President and Western Colorado Region Manager since March 1998. He was President of Community First National Bank, Worthington, Minnesota from October 1992 to February 1998. Harriette S. McCaul, Ph.D., has been Senior Vice President of Human Resources since February 1997. Previously, she was the Dean of the College of Business Administration at North Dakota State University in Fargo, North Dakota. She joined NDSU in 1983 and held various teaching and administrative positions in the Business Department and human resources area. Prior to that time, she was an instructor at Moorhead State University, Moorhead, Minnesota, and the director of faculty and staff benefits at the University of Kansas. Patricia J. Staples has been Senior Vice President - Marketing since July 1994. Previously, Ms. Staples was employed as the public relations manager with MeritCare Health System for 10 years. Craig A. Weiss has been Senior Vice President - Finance since February 1998. He was previously Vice President Finance of the Company from 1988 to 1997 and Finance and Accounting Manager from 1987 to 1998. Prior to 1987, he was employed by First Bank System, most recently as a Regional Financial Analyst. Mr. Weiss is a certified public accountant. ELECTION. The Company's officers are elected by the Board of Directors. The officers serve until their successors are elected or until their earlier resignation, removal or death. ITEM 2. PROPERTIES In January 1996, the Company formed a new subsidiary, Community First Properties, Inc. ("CFPI"), for the purpose of acquiring and owning the space currently occupied by the Company. CFPI owns all of the portions of the office building not owned by the Company's Fargo Bank subsidiary at 520 Main Avenue, Fargo, North Dakota. The Company maintains its offices at 520 Main Avenue, Fargo, North Dakota, consisting of approximately 34,000 square feet at an annual rental of $409,000, payable to its subsidiary, CFPI. The Company believes these facilities will be adequate for the foreseeable future. The Company also utilizes office space at affiliate banks located in Denver, Colorado and Cheyenne, Wyoming as well as leasing approximately 4,000 square feet of office space in Phoenix, Arizona at an annual rental of approximately $90,000. Each of the Banks owns its main office and those of its branches, and these facilities range in size from approximately 1,200 to 36,000 square feet. During 1997, the Company constructed and owns a 47,000 square foot two-story building in Fargo, North Dakota which is leased to CFSC. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company and its subsidiaries are subject to various legal actions and proceedings in the normal course of business, some of which may involve substantial claims for compensatory damages. In some cases, these actions and proceedings relate in whole or in part to activities of banks prior to their acquisition and may be covered by agreements of former owners of these banks to indemnify the Company. Although litigation is subject to many uncertainties and the ultimate exposure with respect to current matters cannot be 15 ascertained, management does not believe that the final outcome will have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information as to the principal market on which the Company's common stock is traded, market price information for the common stock of the Company, the approximate number of holders of record as of December 31, 1997, and the Company's dividend policy is incorporated herein by reference from the inside back cover of the 1997 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1997, consisting of data captioned "Financial Highlights" on page 1 of the 1997 Annual Report to Shareholders, "Consolidated Statement of Condition--Five-Year Summary" on page 44 of the Annual Report and "Consolidated Statement of Income-Five Year Summary" on page 45 of the Annual Report are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 15 through 26 of the 1997 Annual Report to Shareholders is incorporated hereby by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth on pages 25 and 26 of the 1997 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations-Asset/Liability Management" is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Statements of Financial Condition of the Company as of December 31, 1997 and 1996, and the related Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each of the three years ended December 31, 1997, the Notes to the Consolidated Financial Statements and the Report of Ernst & Young LLP, independent auditors, contained in the Company's 1997 Annual Report to Shareholders on pages 27 through 43 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 16 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth in the Company's 1998 Proxy Statement under the caption "Election of Directors" is incorporated herein by reference. Information regarding the executive officers of the Company is included under separate caption in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information set forth in the 1998 Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference, except that information under the captions "Compensation Committee Report on Executive Compensation" and "Comparative Stock Performance" is not so incorporated. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth in the 1998 Proxy Statement under the caption "Security Ownership of Principal Shareholders and Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth in the 1998 Proxy Statement under the caption "Certain Transactions" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS FORM 10-K: 1. FINANCIAL STATEMENTS. See Item 8, above. 2. FINANCIAL STATEMENT SCHEDULES. All financial statement schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 3. PRO FORMA FINANCIAL INFORMATION. None. (b) REPORTS ON FORM 8-K. None. 17 (c) EXHIBITS.
Exhibit Number Description - -------- ----------- 2.1 Master Agreement dated July 22, 1994, between the Registrant and Bank of Colorado Holding Company, including as Exhibit A the form of Purchase and Assumption Agreement executed by Colorado Community First State Bank of Steamboat Springs and Vail Bank (incorporated by reference to Exhibit 2.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 [the "1994 Form 10-K"]). 2.2 Agreement and Plan of Merger dated as of August 12, 1994, between the Registrant and Minowa Bancshares, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 [File No. 33-84746], as declared effective by the Securities and Exchange Commission (the "Commission") on January 23, 1995). 2.3 Agreement and Plan of Merger dated as of November 28, 1994, between the Registrant and Abbott Bank Group, Inc. (incorporated by reference to Exhibit 10.2 to the Form 8-K report of the Registrant dated January 20, 1995). 2.4 Restated Agreement and Plan of Merger dated as of December 6, 1994, among the Registrant, Colorado Acquisition Corporation and First Community Bankshares, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K report of the Registrant dated January 20, 1995). 2.5 Stock Purchase Agreement dated as of June 7, 1995 by and among BNCCORP, Inc., Gregory Cleveland and Tracy Scott, and the Registrant relating to Farmers & Merchants Bank of Beach (incorporated by reference to Exhibit 2.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 [the "1995 Form 10-K"]). 2.6 Agreement and Plan of Merger dated as of March 8, 1996 among the Registrant, Trinidad Acquisition Corporation and Financial Bancorp, Inc. (the holding company for Trinidad National Bank) (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 [File No. 333-6239], as declared effective by the Commission on August 9, 1996). 18 Exhibit Number Description - -------- ----------- 2.7 Agreement and Plan of Reorganization dated as of June 25, 1996 between the Registrant and Mountain Parks Financial Corp. (incorporated by reference to the Appendix to the Registrant's Joint Proxy Statement with Mountain Parks Financial Corp. included in the Registration Statement on Form S-4 [File No. 333-14439], as declared effective by the Commission on November 7, 1996). 2.8 Stock Purchase Agreement dated as of February 18, 1997 by and among the Registrant, KeyCorp and Key Bank of the Rocky Mountains, Inc. (incorporated by reference to Exhibit 2.8 to the Registrant's Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed with the Commission as of May 8, 1997 [the "1996 Form 10-K"]). 2.9 Restated Agreement and Plan of Merger dated as of August 22, 1997, including Agreement and First Amendment to Agreement dated as of the same date, between the Registrant and First National Summit Bankshares, Inc.(incorporated by reference to Appendices A and B to the Proxy Statement-Prospectus contained in the Registrant's Registration Statement on Form S-4 [File No. 333-38997] filed with the Commission on October 29, 1997). 2.10 Restated Agreement and Plan of Merger dated as of August 28, 1997 between the Registrant and Republic National Bancorp, Inc. (incorporated by reference to Appendix A to the Proxy Statement-Prospectus contained in Registrant's Registration Statement on Form S-4 [File No. 333-38225] filed with the Commission on October 20, 1997). 2.11 Office Purchase and Assumption Agreement dated as of the 10th day of September, 1997 by and between Bank One, Arizona, National Association, Bank One, Colorado, National Association, Bank One, Utah, National Association and the Registrant, (incorporated by reference to Exhibit 2.6 to the Registrant's Registration Statement on Form S-4 [File No. 333-36091], filed with the Commission on September 22, 1997). 2.12 Agreement and Plan of Merger dated as of November 6, 1997 among the Registrant, Community First National Bank and Pioneer Bank of Longmont (incorporated by reference to Exhibit 2.7 to the Registrant's Registration Statement on Form S-4 [File No. 333-37527], filed with the Commission on November 21, 1997). 2.13 First Amendment to Agreement and Plan of Merger dated as of the 19th day of December, 1997 by and among the Registrant, Community First National Bank and Pioneer Bank of Longmont. 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the 1996 Form 10-K). 3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 [File No. 33-41246], as declared effective by the Commission on August 13, 1991 [the "1991 S-1"]). 19 Exhibit Number Description - -------- ----------- 4.1 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant (incorporated by reference to Exhibit A to Exhibit 1 to the Registrant's Registration Statement on Form 8-A, filed with the Commission on January 9, 1995 [the "Form 8-A"]). 4.2 Form of Rights Agreement dated as of January 5, 1995, between the Registrant, and Norwest Bank Minnesota, National Association, which includes as Exhibit B thereto the form of Rights Certificate (incorporated by reference to Exhibit 1 to the Form 8-A.) 4.3 Subordinated Indenture dated February 5, 1997, between the Registrant and Wilmington Trust Company, as Indenture Trustee, including form of Junior Subordinated Indenture (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 [File No. 333-19921] filed with the Commission as of January 30, 1997 [the "1997 CFB Capital I Form S-3"]). 4.4 Amended and Restated Trust Agreement of CFB Capital I dated February 5, 1997, including Form of Capital Security Certificate of CFB Capital I (incorporated by reference to Exhibit 4.5 to the 1997 CFB Capital I Form S-3). 4.5 Capital Securities Guarantee Agreement dated as of February 5, 1997, between the Registrant and Wilmington Trust Company as Trustee (incorporated by reference to Exhibit 4.7 to the 1997 CFB Capital I Form S-3). 4.6 Indenture dated June 24, 1997 relating to the Registrant's 7.30% Subordinated Notes Due 2004 (the "New Notes") between the Registrant and Norwest Bank Minnesota, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 [File No. 333-36091] as declared effective by the Commission on November 10, 1997 [the "1997 Subordinated Note Form S-4"]). 4.7 Registration Rights Agreement dated as of June 24, 1997, among the Registrant, Piper Jaffray Inc. and Keefe, Bruyette & Woods, Inc. (incorporated by reference to Exhibit 4.2 to the 1997 Subordinated Note Form S-4). 4.8 Subordinated Indenture dated December 10, 1997, between the Registrant and Wilmington Trust Company, as Indenture Trustee, including form of Junior Subordinated Indenture (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 [File No. 333-37521] as declared effective by the Commission on December 4, 1997 [the "1997 CFB Capital II Form S-3"]). 4.9 Amended and Restated Trust Agreement of CFB Capital I dated December 10, 1997, including Form of Capital Security Certificate of CFB Capital II (incorporated by reference to Exhibit 4.5 to the 1997 CFB Capital II Form S-3). 20 Exhibit Number Description - -------- ----------- 4.10 Capital Securities Guarantee Agreement dated as of December 10, 1997, between the Registrant and Wilmington Trust Company as Trustee (incorporated by reference to Exhibit 4.7 to the 1997 CFB Capital II Form S-3). 10.1 1997 Annual Incentive Plan for Holding Company Management. 10.2 Restated 1987 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-8 [File No. 33-46744], as declared effective by the Commission on May 6, 1992).* 10.3 Form of Tax Sharing Agreement between the Registrant and each of its subsidiary Banks (incorporated by reference to Exhibit 10.3 to the 1995 Form 10-K). 10.4 Form of Service Agreement for Data Processing between Community First Service Corporation and each of the subsidiary Banks of the Registrant (incorporated by reference to Exhibit 10.4 to the 1995 Form 10-K). 10.5 Form of Bank Services Agreement between the Registrant and each of its subsidiary Banks (incorporated by reference to Exhibit 10.5 to the 1995 Form 10-K). 10.6 Form of Agency Agreement between the Registrant and each of its subsidiary Banks, and Assignment of Agency Agreement and Second Assignment of Agency Agreement, which assign the Registrant's interest in the Agency Agreement to Community First Financial, Inc. (relating to the Registrant's subsidiary Banks) (incorporated by reference to Exhibit 10.6 to the 1995 Form 10-K). 10.7 Lease dated April 27, 1993, between Community First Properties, Inc. (formerly Fargo Tower Partners) and the Registrant (incorporated by reference to Exhibit 10.11 to the 1994 10-K). 10.8 Promissory Note dated July 14, 1997 (Term Note) in the principal amount of $30,000,000, issued to Norwest Bank Minnesota, National Association ("Norwest"), as Agent, on behalf of Harris Trust and Savings Bank ("Harris"), Bank of America National Trust and Savings Association ("Bank of America") and Norwest. 10.9 Promissory Notes dated July 14, 1997 (Current Notes), each in the principal amount of $8,333,333.33, issued to each of Harris, Bank of America, and Norwest. 10.10 Credit Agreement dated July 14, 1997 among the Company, Harris, Bank of America, Norwest as a lender, and Norwest as Agent. 21 Exhibit Number Description - -------- ----------- 10.11 Form of Indemnification Agreement entered into by and between the Registrant and the Registrant's officers and directors (incorporated by reference to Exhibit 10.33 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 [the "1993 Form 10-K"]). 10.12 1996 Stock Option Plan, as approved by the Board of Directors on February 6, 1996 (incorporated by reference to Exhibit 10.15 to the 1995 Form 10-K).* 10.13 Supplemental Executive Retirement Plan, effective as of August 1, 1995.* 13.1 Annual Report to Shareholders. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule
________________ *Executive compensation plans and arrangements. 22 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY FIRST BANKSHARES, INC. ("Registrant") Dated: March 10, 1998 By/s/ Donald R. Mengedoth ------------------------------------- Donald R. Mengedoth President, Chief Executive Officer and Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant, in the capacities and on the dates indicated. Signature and Title Date - ------------------- ----- /s/ Donald R. Mengedoth March 10, 1998 - --------------------------------------- Donald R. Mengedoth President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) /s/ Mark A. Anderson March 10, 1998 - --------------------------------------- Mark A. Anderson Executive Vice President, Chief Financial Officer, Secretary, Treasurer and Chief Information Officer (Principal Financial and Accounting Officer) /s/ Patricia A. Adam March 10, 1998 - --------------------------------------- Patricia A. Adam, Director /s/ James T. Anderson March 10, 1998 - --------------------------------------- James T. Anderson, Director /s/ Patrick E. Benedict March 10, 1998 - --------------------------------------- Patrick E. Benedict, Director 23 Signature and Title Date - ------------------- ----- /s/ Patrick Delaney March 10, 1998 - --------------------------------------- Patrick Delaney, Director March 10, 1998 - --------------------------------------- John H. Flittie, Director /s/ Darrell G. Knudson March 10, 1998 - --------------------------------------- Darrell G. Knudson, Director /s/ Thomas C. Wold March 10, 1998 - --------------------------------------- Thomas C. Wold, Director /s/ Harvey L. Wollman March 10, 1998 - --------------------------------------- Harvey L. Wollman, Director /s/ Dennis M. Mathisen March 10, 1998 - --------------------------------------- Dennis M. Mathisen, Director 24 EXHIBIT INDEX Exhibit No. Decscription - ----------- ------------ 2.13 First Amendment to Agreement and Plan of Merger dated as of the 19th day of December, 1997 by and among the Registrant, Community First National Bank and Pioneer Bank of Longmont 10.1 1997 Annual Incentive Plan for Holding Company Management 10.8 Promissory Note dated July 14, 1997 (Term Note) in the principal amount of $30,000,000, issued to Norwest Bank Minnesota, National Association ("Norwest"), as Agent, on behalf of Harris Trust and Savings Bank ("Harris"), Bank of America National Trust and Savings Association ("Bank of America") and Norwest. 10.9 Promissory Notes dated July 14, 1997 (Current Notes), each in the principal amount of $8,333,333.33, issued to each of Harris, Bank of America, and Norwest. 10.10 Credit Agreement dated July 14, 1997 among the Company, Harris, Bank of America, Norwest as a lender, and Norwest as Agent. 13.1 Annual Report to Shareholders 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 27 Financial Data Schedule EX-2.13 2 EXHIBIT 2.13 EXHIBIT 2.13 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER is dated as of the 19th day of December, 1997 and made and entered into by and among COMMUNITY FIRST BANKSHARES, INC., a Delaware corporation ("CFB"), COMMUNITY FIRST NATIONAL BANK, a de novo national banking association, ("Acquisition Subsidiary") and PIONEER BANK OF LONGMONT, a Colorado banking corporation ("Pioneer"). WHEREAS, the parties hereto are parties to an Agreement and Plan of Merger dated November 6, 1997 (the "Merger Agreement"); and WHEREAS, the parties desire to make certain changes to the Merger Agreement, as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound hereby, the parties hereto agree as follows: 1. AMENDMENT OF SECTION 2.1(c)(ii) OF THE MERGER AGREEMENT. Section 2.1(c)(ii) of the Merger Agreement is amended and restated in its entirety as follows: (ii) If the CFB Trading Value is greater than $52.50 per share, then the Exchange Rate shall be reduced so that the product of the CFB Trading Value multiplied by the Exchange Rate shall be $36,750,000. 2. AMENDMENT OF SECTION 7.1(c) OF THE MERGER AGREEMENT. Section 7.1(c) of the Merger Agreement is amended and restated in its entirety as follows: (c) by either CFB or Pioneer if the Merger shall not have been consummated on or before May 30, 1998, unless the failure of consummation shall be due to the failure of the party seeking to terminate to perform or observe in all material respects the covenants and agreements hereunder to be performed or observed by such party; or Except as hereinabove set forth, there are no other changes to the Merger Agreement, and the same is expressly ratified and confirmed. IN WITNESS WHEREOF, CFB, Acquisition Subsidiary and Pioneer have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first above written. COMMUNITY FIRST BANKSHARES, INC. By: /s/ Mark A. Anderson ------------------------------------ Name: Mark A. Anderson Title: Executive Vice President COMMUNITY FIRST NATIONAL BANK By: /s/ Mark A. Anderson ------------------------------------ Name: Mark A. Anderson Title: Executive Vice President PIONEER BANK OF LONGMONT By: /s/ Daniel L. Allen ------------------------------------ Name: Daniel L. Allen Title: President and Chief Executive Officer 2 EX-10.1 3 EXHIBIT 10.1 EXHIBIT 10.1 COMMUNITY FIRST BANKSHARES, INC. ANNUAL INCENTIVE PLAN 1997
1997 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 50% INTERNAL & 50% EXTERNAL
TARGET INTERNAL EXTERNAL ------ -------- -------- I 40% 20% 20% II 30% 15% 15% III 20% 10% 10% IV 10% 5% 5%
1 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.
Award % of Base Salary Fully Diluted --------------------------------- % of Plan EPS I II III IV - ---------- ---- - -- --- -- Under 90 2.16 0 0 0 0 91 2.18 2.0 1.5 1.0 .5 92 2.20 4.0 3.0 2.0 1.0 93 2.23 6.0 4.5 3.0 1.5 94 2.25 8.0 6.0 4.0 2.0 95 2.27 10.0 7.5 5.0 2.5 96 2.29 12.0 9.0 6.0 3.0 97 2.31 14.0 10.5 7.0 3.5 98 2.33 16.0 12.0 8.0 4.0 99 2.35 18.0 13.5 9.0 4.5 100 2.37 20.0 15.0 10.0 5.0 101 2.39 21.3 16.0 10.7 5.3 102 2.41 22.7 17.0 11.3 5.7 103 2.43 24.0 18.0 12.0 6.0 104 2.45 25.3 19.0 12.7 6.3 105 2.47 26.7 20.0 13.3 6.7 106 2.49 28.0 21.0 14.0 7.0 107 2.51 29.3 22.0 14.7 7.3 108 2.53 30.7 23.0 15.3 7.7 109 2.55 32.0 24.0 16.0 8.0 110 2.57 33.3 25.0 16.7 8.3 111 2.59 34.7 26.0 17.3 8.7 112 2.61 36.0 27.0 18.0 9.0 113 2.63 37.3 28.0 18.7 9.3 114 2.65 38.7 29.0 19.3 9.7 115+ 2.67 40.0 30.0 20.0 10.0
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 20% 10% 20% 30% 40% II 15% 7.5% 15% 22.5% 30% III 10% 5% 10% 15% 20% IV 5% 2.5% 5% 7.5% 10%
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-10.8 4 EXHIBIT 10.8 PROMISSORY NOTE $30,000,000.00 July 14, 1997 FOR VALUE RECEIVED, the undersigned, COMMUNITY FIRST BANKSHARES, INC., a Delaware corporation with offices in Fargo, North Dakota, promises to pay to the order of Norwest Bank Minnesota, National Association, as agent ("Agent") on behalf of Harris Trust And Savings Bank ("Harris"), Bank Of America National Trust And Savings Association ("B of A") and Norwest Bank Minnesota, National Association (as a lender, "Norwest") (Harris, B of A and Norwest hereinafter referred to as the "Banks") at the Agent's Norwest Center Office, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America, the principal sum of THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00), together with interest on the unpaid balance hereof from the date hereof until this Note is fully paid at annual rates determined in accordance with the provisions of the Credit Agreement defined below. Interest on this Note shall be calculated on the basis of actual number of days elapsed in a 360-day year. This Note constitutes the Term Note issued pursuant to the provisions of that certain Credit Agreement of even date herewith (the "Credit Agreement") made between the undersigned, the Banks and the Agent. Reference is hereby made to the Credit Agreement for statements of the terms pursuant to which accrued interest on this Note is payable. Reference is also hereby made to the Credit Agreement for statements of the terms pursuant to which the indebtedness evidenced hereby was created, may be prepaid voluntarily and may be accelerated. The loan evidenced by this Note is comprised of Tranche A, in the amount of $6,000,000.00, and Tranche B, in the amount of $24,000,000.00. The principal of this Note shall be repayable as follows: A. The principal of Tranche A shall be repayable as follows: Six (6) semi-annual installments, each in the amount of $1,000,000.00, commencing January 31, 1998 and continuing on the 31st day of each consecutive July and January thereafter through and including July 31, 2000, at which time all then-remaining outstanding principal of Tranche A shall be due and payable. B. The principal of Tranche B shall be repayable as follows: Six (6) semi-annual installments, each in the amount of $875,000.00, commencing January 31, 1998 and continuing on the 31st day of each consecutive July and January thereafter through and including July 31, 2000; plus, nine (9) semi-annual installments each in the amount of $1,875,000.00, commencing January 31, 2001 and continuing on the 31st day of each consecutive July and January thereafter through and Page 1 of 2 including January 31, 2005; plus, one (1) final installment in an amount equal to all then-remaining unpaid principal of Tranche B shall be due and payable on July 31, 2005. This Note replaces, but shall not be deemed payment or satisfaction of, that certain Promissory Note of even date made by the undersigned in the face amount of $30,000,000.00 payable to the Agent on behalf of the Banks, and which contained an incomplete name for B of A. Unless prohibited by law, the undersigned agrees to pay all costs of collection, including reasonable attorney's fees and legal expenses, incurred by the holder hereof in the event this Note is not duly paid. The holder hereof may change any terms of payment of this Note, including extensions of time and renewals, and release any security for, or any party to, this Note, without notifying or releasing any accommodation maker, endorser or guarantor from liability in connection with this Note. Presentment or other demand for payment, notice of dishonor and protest are hereby waived by the undersigned and each endorser or guarantor. This Note shall be governed by the substantive laws of the State of Minnesota. COMMUNITY FIRST BANKSHARES, INC. By: /s/ Mark A. Anderson ------------------------------------ Mark A. Anderson, Executive Vice President, Chief Financial Officer and Secretary By: /s/ Donald R. Mengedoth ------------------------------------ Donald R. Mengedoth, President and Chief Executive Officer Page 2 of 2 EX-10.9 5 EXHIBIT 10.9 PROMISSORY NOTE $8,333,333.33 July 14, 1997 FOR VALUE RECEIVED, the undersigned, COMMUNITY FIRST BANKSHARES, INC., a Delaware corporation with offices in Fargo, North Dakota, promises to pay on July 13, 1998 to the order of Harris Trust And Savings Bank (the "Bank") at the Norwest Center Office of the Bank's agent, Norwest Bank Minnesota, National Association, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America, the principal sum of EIGHT MILLION THREE HUNDRED THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE AND 33/100 DOLLARS ($8,333,333.33), or so much thereof as is disbursed and remains outstanding hereunder as shown by the Bank's liability record on the dates payments are due hereunder, together with interest on the unpaid balance hereof from the date hereof until this Note is fully paid at annual rates determined in accordance with the provisions of the Credit Agreement defined below. Interest on this Note shall be calculated on the basis of actual number of days elapsed (i) in a 365-day year in the case of the Base Rate Borrowings and Federal Funds Borrowings (as defined in the Credit Agreement), and (ii) in a 360-day year in the case of Eurodollar Borrowings (as defined in the Credit Agreement). This Note constitutes a Current Note issued pursuant to the provisions of that certain Credit Agreement of even date herewith (the "Credit Agreement") made between the undersigned, the Bank, Bank of America National Trust And Savings Association, and Norwest Bank Minnesota, National Association (as lender and as agent). Reference is hereby made to the Credit Agreement for statements of the terms pursuant to which accrued interest on this Note is payable. Reference is also hereby made to the Credit Agreement for statements of the terms pursuant to which the indebtedness evidenced hereby was created, may be prepaid voluntarily, may be reborrowed and may be accelerated. This Note replaces, but shall not be deemed payment or satisfaction of, that certain Promissory Note of even date made by the undersigned in the face amount of $8,333,333.33 payable to the Bank and which bore a maturity date of July 31, 1998. Unless prohibited by law, the undersigned agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses, incurred by the holder hereof in the event this Note is not duly paid. The holder hereof may change any terms of payment of this Note, including extensions of time and renewals, and release any security for, or any party to, this Note, without notifying or releasing any accommodation maker, endorser or guarantor from liability in connection with this Note. Presentment or other demand for payment, notice of dishonor and protest are hereby waived by the undersigned and each endorser or guarantor. This Note shall be governed by the substantive laws of the State of Minnesota. COMMUNITY FIRST BANKSHARES, INC. By: /s/ Mark A. Anderson ------------------------------------ Mark A. Anderson, Executive Vice President, Chief Financial Officer and Secretary By: /s/ Donald R. Mengedoth ------------------------------------ Donald R. Mengedoth, President and Chief Executive Officer PROMISSORY NOTE $8,333,333.33 July 14, 1997 FOR VALUE RECEIVED, the undersigned, COMMUNITY FIRST BANKSHARES, INC., a Delaware corporation with offices in Fargo, North Dakota, promises to pay on July 13, 1998 to the order of Bank Of America National Trust And Savings Association (the "Bank") at the Norwest Center Office of the Bank's agent, Norwest Bank Minnesota, National Association, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America, the principal sum of EIGHT MILLION THREE HUNDRED THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE AND 33/100 DOLLARS ($8,333,333.33), or so much thereof as is disbursed and remains outstanding hereunder as shown by the Bank's liability record on the dates payments are due hereunder, together with interest on the unpaid balance hereof from the date hereof until this Note is fully paid at annual rates determined in accordance with the provisions of the Credit Agreement defined below. Interest on this Note shall be calculated on the basis of actual number of days elapsed (i) in a 365-day year in the case of the Base Rate Borrowings and Federal Funds Borrowings (as defined in the Credit Agreement), and (ii) in a 360-day year in the case of Eurodollar Borrowings (as defined in the Credit Agreement). This Note constitutes a Current Note issued pursuant to the provisions of that certain Credit Agreement of even date herewith (the "Credit Agreement") made between the undersigned, the Bank, Harris Trust And Savings Bank, and Norwest Bank Minnesota, National Association (as lender and as agent). Reference is hereby made to the Credit Agreement for statements of the terms pursuant to which accrued interest on this Note is payable. Reference is also hereby made to the Credit Agreement for statements of the terms pursuant to which the indebtedness evidenced hereby was created, may be prepaid voluntarily, may be reborrowed and may be accelerated. This Note replaces, but shall not be deemed payment or satisfaction of, that certain Promissory Note of even date made by the undersigned in the face amount of $8,333,333.33 payable to the Bank and which bore a maturity date of July 31, 1998. Unless prohibited by law, the undersigned agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses, incurred by the holder hereof in the event this Note is not duly paid. The holder hereof may change any terms of payment of this Note, including extensions of time and renewals, and release any security for, or any party to, this Note, without notifying or releasing any accommodation maker, endorser or guarantor from liability in connection with this Note. Presentment or other demand for payment, notice of dishonor and protest are hereby waived by the undersigned and each endorser or guarantor. This Note shall be governed by the substantive laws of the State of Minnesota. COMMUNITY FIRST BANKSHARES, INC. By: /s/ Mark A. Anderson ------------------------------------ Mark A. Anderson, Executive Vice President, Chief Financial Officer and Secretary By: /s/ Donald R. Mengedoth ------------------------------------ Donald R. Mengedoth, President and Chief Executive Officer PROMISSORY NOTE $8,333,333.33 July 14, 1997 FOR VALUE RECEIVED, the undersigned, COMMUNITY FIRST BANKSHARES, INC., a Delaware corporation with offices in Fargo, North Dakota, promises to pay on July 13, 1998 to the order of Norwest Bank Minnesota, National Association (the "Bank") at the Bank's Norwest Center Office, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America, the principal sum of EIGHT MILLION THREE HUNDRED THIRTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE AND 33/100 DOLLARS ($8,333,333.33), or so much thereof as is disbursed and remains outstanding hereunder as shown by the Bank's liability record on the dates payments are due hereunder, together with interest on the unpaid balance hereof from the date hereof until this Note is fully paid at annual rates determined in accordance with the provisions of the Credit Agreement defined below. Interest on this Note shall be calculated on the basis of actual number of days elapsed (i) in a 365-day year in the case of the Base Rate Borrowings and Federal Funds Borrowings (as defined in the Credit Agreement), and (ii) in a 360-day year in the case of Eurodollar Borrowings (as defined in the Credit Agreement). This Note constitutes a Current Note issued pursuant to the provisions of that certain Credit Agreement of even date herewith (the "Credit Agreement") made between the undersigned, the Bank (as lender and agent), Bank Of America National Trust And Savings Association, and Harris Trust And Savings Bank. Reference is hereby made to the Credit Agreement for statements of the terms pursuant to which accrued interest on this Note is payable. Reference is also hereby made to the Credit Agreement for statements of the terms pursuant to which the indebtedness evidenced hereby was created, may be prepaid voluntarily, may be reborrowed and may be accelerated. This Note replaces, but shall not be deemed payment or satisfaction of, that certain Promissory Note of even date made by the undersigned in the face amount of $8,333,333.33 payable to the Bank and which bore a maturity date of July 31, 1998. Unless prohibited by law, the undersigned agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses, incurred by the holder hereof in the event this Note is not duly paid. The holder hereof may change any terms of payment of this Note, including extensions of time and renewals, and release any security for, or any party to, this Note, without notifying or releasing any accommodation maker, endorser or guarantor from liability in connection with this Note. Presentment or other demand for payment, notice of dishonor and protest are hereby waived by the undersigned and each endorser or guarantor. This Note shall be governed by the substantive laws of the State of Minnesota. COMMUNITY FIRST BANKSHARES, INC. By: /s/ Mark A. Anderson ------------------------------------ Mark A. Anderson, Executive Vice President, Chief Financial Officer and Secretary By: /s/ Donald R. Mengedoth ------------------------------------ Donald R. Mengedoth, President and Chief Executive Officer EX-10.10 6 EXHIBIT 10.10 CREDIT AGREEMENT THIS CREDIT AGREEMENT is made as of the 14th day of July, 1997, and is by and among COMMUNITY FIRST BANKSHARES, INC., a Delaware corporation with offices located in Fargo, North Dakota (the "Borrower"), HARRIS TRUST AND SAVINGS BANK ("Harris"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("B of A"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION ("Norwest"; Harris, B of A and Norwest each referred to herein as a "Bank" and collectively as "Banks"), and Norwest as agent for the Banks (in such capacity, the "Agent"). RECITALS: WHEREAS, the Borrower has requested the Banks (i) to establish a revolving line of credit for the benefit of the Borrower in the amount of $25,000,000.00, and (ii) to make a non-revolving term loan to the Borrower in the amount of $30,000,000.00; WHEREAS, the Banks are willing to grant said requests, subject to the provisions of this Credit Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein, the parties agree as follows: SECTION 1 DEFINITIONS In addition to those terms defined in the above Recitals, as used herein: 1.1 "Advance" shall mean an advance of funds under the Credit. 1.2 "Agreement" shall mean this Credit Agreement and all amendments and supplements hereto which may from time to time become effective hereafter. 1.3 "Bank Group" shall mean the Borrower and the Subsidiary Banks. 1.4 "Base Rate" shall mean the "base" or "prime" rate of interest established by Norwest as in effect and announced from time to time. 1.5 "Base Rate Borrowing" shall mean those Advances, and those portions of the Term Loan, bearing interest at all times at a variable rate determined by reference to the Base Rate. 1.6 "Borrowed Money" shall mean funds obtained by incurring contractual indebtedness, but shall not include money borrowed from any Bank. 1.7 "Business Day" shall mean (i) for all purposes other than those described in the following clause (ii), any day on which the Agent is open for transacting substantially all of its commercial business, and (ii) with respect to all notices and determinations in connection with, and payments of principal of and interest on, Eurodollar Borrowings, any Business Day described in preceding clause (i) on which trading by and between banks in United States Dollar deposits in the London Interbank Eurodollar market is transacted. 1.8 "Closing Date" shall mean the date on which this Agreement is fully executed and delivered to the Agent. 1.9 "Core Capital" shall mean the sum of the consolidated total equity of the Bank Group plus capital and trust preferred securities. 1.10 "Credit" shall mean a revolving line of credit established by the Banks for the benefit of the Borrower in the aggregate amount of $25,000,000.00. 1.11 "Credit Expiration Date" shall mean July 13, 1998. 1.12 "Credit Percentages" shall mean, relative to any Bank, the percentages identified as such set forth opposite the signature block for such Bank on the last page of this Agreement. 1.13 "Current Notes" shall mean the promissory notes of the Borrower substantially in the form of attached Exhibits A-1, A-2 and A-3, evidencing Advances under the Credit. 1.14 "Eurodollar Borrowing" shall mean those Advances, and those portions of the Term Loan, bearing interest at all times during the relevant Interest Period, at a fixed rate determined by reference to the Eurodollar Rate. 1.15 "Eurodollar Rate" shall mean, with respect to any Interest Period for any Eurodollar Borrowing, the rate per annum (rounded up to the nearest one-sixteenth of one percent) equal to the offered quotation to the Agent in the London Interbank Eurodollar market for United States Dollar deposits for delivery on the first day of such Interest Period, for the number of days in such Interest Period, and in an amount comparable to the principal amount of the related Eurodollar Borrowing to be outstanding during such Interest Period, determined as of approximately 12:00 Noon, Minneapolis time, two Business Days before the beginning of such Interest Period. 1.16 "Events of Default" shall mean any and all events of default described in Section 8 hereof. 1.17 "Existing Harris Note" shall mean that certain Promissory Note dated May 11, 1995 made by the Borrower in the face amount of $10,000,000.00 payable to Harris. 1.18 "Existing Norwest Term Note" shall mean that certain Promissory Note dated January 2, 1997 made by the Borrower in the face amount of $23,000,000.00 payable to Norwest. 1.19 "Federal Funds Borrowing" shall mean those Advances, and those portions of the Term Loan, bearing interest at all times at a variable rate determined by reference to the Federal Funds Rate. 1.20 "Federal Funds Rate" shall mean the overnight market rate quoted to the Agent at approximately 12:00 Noon, Minneapolis time, each Business Day by dealers in the Federal -2- Funds market for the offering of dollars to the Agent for deposit, as such rate may increase or decrease from time to time. 1.21 "GAAP" shall mean Generally Accepted Accounting Principles applied on a basis consistent with those reflected in the financial statements referred to in Section 5.8 hereof. 1.22 "Interest Payment Date" shall mean (i) as to any Eurodollar Borrowing in respect of which an Interest Period of one, two or three months has been selected, the last day of such Interest Period, and (ii) as to any Eurodollar Borrowing in respect of which an Interest Period of six months has been selected, the last day of the first three month period falling within such Interest Period and the last day of such Interest Period. 1.23 "Interest Period" means, with respect to any Eurodollar Borrowing, (a) initially, the period commencing on, as the case may be, the date on which such Eurodollar Borrowing is made or the date on which such Eurodollar Borrowing results from the conversion of a Base Rate Borrowing or a Federal Funds Borrowing, and ending one, two, three or six months thereafter, as selected in a notice of borrowing, continuance or conversion as provided in Sections 2.1, 2.3, 2.4 or 3.3 hereof, and (b) thereafter, each period commencing on the last day of the immediately preceding Interest Period and ending one, two, three or six months thereafter, as selected by irrevocable notice to the Agent (which notice must be received by the Agent before 12:00 Noon, Minneapolis time, three Business Days before the last day of the then current Interest Period with respect to such Eurodollar Borrowing); provided however, that (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day, (ii) the Borrower may not select an Interest Period that would otherwise extend beyond the Credit Expiration Date (with respect to the Credit), or the Term Loan Maturity Date (with respect to the Term Loan), (iii) if no notice is given with respect to selection on an Interest Period as provided above, the affected Eurodollar Borrowing shall be converted to a Base Rate Borrowing on the last day of the Interest Period then in effect, and (iv) any Interest Period that begins on the last Business Day of a calendar month (or on a date for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. 1.24 "Key Bank/Wyoming" shall mean Key Bank National Association (Wyoming). 1.25 "Majority Banks" shall mean any group of Banks which, in the aggregate, has commitments of 66.67% or more of the aggregate amount of the Credit and the Term Loan. 1.26 "Old Harris Loan Agreement" shall mean that certain letter loan agreement dated May 11, 1995 (as amended) made between the Borrower and Harris. 1.27 "Old Norwest Loan Agreement" shall mean that certain letter loan agreement dated May 11, 1995 (as amended) made between the Borrower and Norwest. 1.28 "Permitted Liens" shall mean (i) liens in favor of Norwest as agent for the Banks on a pro rata basis, (ii) liens existing as of the Closing Date and disclosed to the Banks in writing, (iii) liens for taxes not delinquent or which the Borrower is contesting in good faith in a manner -3- that prevents enforcement of the matters being contested and for which adequate reserves have been provided, and (iv) purchase money liens securing indebtedness otherwise permitted under this Agreement, but only extending to the goods so acquired. 1.29 "Reserve Adjusted Eurodollar Rate" shall mean, for any Interest Period, a rate per annum (rounded upward, if necessary, to the next higher 1/16 of 1%) equal to the rate obtained by dividing (i) the Eurodollar Rate for such Interest Period by (ii) a percentage equal to 1 minus the Reserve Requirement in effect from time to time during such Interest Period. 1.30 "Reserve Requirement" shall mean, relative to the Interest Period applicable to any Eurodollar Borrowing, a percentage (expressed as a decimal) equal to the aggregate maximum reserve requirement (including all basic, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements during such Interest Period) on the first day of such Interest Period, as specified under F.R.S. Board Regulation D or any other F.R.S. Board regulation then in effect which prescribes reserve requirements applicable to non-personal time deposits (as currently defined in such Regulation D), applicable to the class of banks of which the Banks are members, on deposits of the type used as a reference in determining the Reserve Adjusted Eurodollar Rate and having a maturity approximately equal to such Interest Period. 1.31 "Subsidiary Banks" shall mean each bank (including without limitation, Key Bank/Wyoming) for which 51% or more of its voting stock is controlled directly, or indirectly via a subsidiary, by the Borrower. 1.32 "Tangible Equity Capital" shall mean the sum of perpetual preferred stock, common stock, surplus and undivided profits, capital reserves, and net unrealized holding gains (and losses) on "available-for-sale" securities, as disclosed in the Subsidiary Banks' Call Reports. 1.33 "Term Loan" shall mean a non-revolving term loan made by the Banks to the Borrower in an aggregate amount not exceeding $30,000,000.00. 1.34 "Term Loan Maturity Date" shall mean July 31, 2005. 1.35 "Term Loan Percentages" shall mean, relative to any Bank, the percentages identified as such set forth opposite the signature block for such Bank on the last page of this Agreement. 1.36 "Term Note" shall mean a promissory note of the Borrower substantially in the form of attached Exhibit B, evidencing the Term Loan. 1.37 "Tier I Core Capital" shall mean the core capital elements set forth by the Federal Reserve Board in 12 CFR Parts 208 and 225. 1.38 "Tier 2 Supplementary Capital" shall mean the allowance for loan and lease losses, as disclosed in the Subsidiary Banks' Call Reports. 1.39 "Total Liabilities" shall mean the aggregate amount of the Borrower's total liabilities, less capital and trust preferred securities to the extent included as total liabilities. -4- 1.40 "Tranche A" shall have the meaning ascribed to it in Section 3.3 hereof. 1.41 "Tranche B" shall have the meaning ascribed to it in Section 3.3 hereof. SECTION 2 THE CREDIT 2.1 Subject to the other provisions of this Agreement, each Bank shall make Advances to the Borrower under the Credit from time to time from the effective date hereof until the Credit Expiration Date in aggregate principal amounts not exceeding such Bank's Credit Percentage of TWENTY-FIVE MILLION AND NO/100 DOLLARS ($25,000,000.00), at any one time outstanding. Each Advance will be requested to the Agent in writing by an authorized officer of the Borrower. The proceeds of the initial Advance shall be used for the exclusive purpose of paying off all indebtedness evidenced by the Existing Harris Note. Each request (other than the request for the initial Advance) shall be accompanied by a Notice of Borrowing, substantially in the form of attached Exhibit C, stating (among other things) that the proceeds of the requested Advance will be used only to pay commercial paper notes at maturity. Each Advance shall be made on a Business Day, and shall be comprised of either a Base Rate Borrowing, a Federal Funds Borrowing, or (provided there exists no Event of Default) a Eurodollar Borrowing, as requested by the Borrower. Any Advance for which the Borrower fails to specify at the time of the related request either a Base Rate Borrowing, a Federal Funds Borrowing or a Eurodollar Borrowing shall be a Base Rate Borrowing. Requests for Advances must be received by the Agent no later than 12:00 Noon, Minneapolis time, on the day of an Advance comprised of a Base Rate Borrowing or a Federal Funds Borrowing, and no later than 12:00 Noon, Minneapolis time, on the third Business Day immediately preceding an Advance comprised of a Eurodollar Borrowing. The person making the request may ask the Agent to quote an indication of the Eurodollar Rate which would be applicable to the Advance for an Interest Period specified by such person. If the person does not immediately accept the quoted Eurodollar Rate, the related Advance shall be a Base Rate Borrowing. If the quoted Eurodollar Rate is immediately accepted, the requested Advance shall be a Eurodollar Borrowing; provided, however, that each Advance comprised of a Eurodollar Borrowing shall be in the amount of $5,000,000.00, or a greater amount in increments of $1,000,000.00. Each request for an advance shall be deemed a representation and warranty by the Borrower that the representations and warranties set forth in Section 5 hereof are true as of the date of such request. Each Advance will be evidenced by a notation on each Bank's records, which shall be conclusive evidence of such Advance, and by the related Current Note. Within the limits of the Credit and subject to the terms and conditions hereof, the Borrower may borrow, prepay pursuant to Section 2.11 hereof and reborrow pursuant to this Section 2.1. 2.2 The Agent shall notify each Bank of each request for an Advance by telephone or fax no later than 1:00 p.m., Minneapolis time on the day on which the Agent received the request. Subject to the notice requirements of Section 2.1 hereof and to the further provisions of this Section 2.2, the Agent will make the Advance to the Borrower no later than 4:30 p.m., Minneapolis time on the Business Day requested by the Borrower. On or before 3:30 p.m., Minneapolis time, on such Business Day, each Bank shall deposit with the Agent same-day funds in an amount equal to such Bank's Percentage of the related Advance. Such deposit will be made to an account which the Agent shall specify from time to time by notice to the Banks. To the extent funds are received from the Banks in accordance with this Section 2.2, the Agent shall -5- make such funds available to the Borrower by wire transfer to the account(s) the Borrower shall have designated to the Agent at or before the time of the related request. 2.3 Eurodollar Borrowings may be continued as such upon the expiration of an Interest Period with respect thereto by compliance with the notice provisions set forth in Sections 1.23 and 2.1 hereof; provided, however, that Eurodollar Borrowings may not be continued as such when any Event of Default exists, but (subject to the Bank's rights under Section 8 hereof) shall be automatically converted to Base Rate Borrowings on the last day of the existing Interest Period. If the Borrower shall fail to notify the Bank of its desire to continue a Eurodollar Borrowing as described in the first sentence of this Section 2.3, such borrowing shall be automatically converted to a Base Rate Borrowing on the last day of the existing Interest Period. 2.4 For so long as there exists no Event of Default, and subject to the dollar restrictions specified in the eighth sentence of Section 2.1 hereof, the Borrower may elect to convert any Base Rate Borrowing or Federal Funds Borrowing to a Eurodollar Borrowing by compliance with the notice provisions set forth in Sections 1.23 and 2.1 hereof. The Borrower may elect to convert any Eurodollar Borrowing to a Base Rate Borrowing or Federal Funds Borrowing on the last day of the related Interest Period by compliance with the notice provisions set forth in Sections 1.23 and 2.1 hereof. 2.5 Subject to the provisions of Section 2.7 hereof, interest on that portion of the outstanding principal of the Current Note comprised of Base Rate Borrowings shall be calculated at an annual rate equal to the Base Rate in effect from time to time, and shall change as and when the Base Rate changes. Subject to the provisions of Section 2.7 hereof, interest on that portion of the outstanding principal of the Current Note comprised of Federal Funds Borrowings shall be calculated at annual rate equal to one and three-quarters percent (1.75%) in excess of the Federal Funds Rate in effect from time to time, and shall change as and when the Federal Funds Rate changes. Interest shall be calculated on the basis of the actual number of days elapsed in a year of 365 days. 2.6 Subject to the provisions of Section 2.7 hereof, interest on the unpaid principal of Eurodollar Borrowings shall be calculated for each Interest Period at a fixed annual rate equal to the sum of the Reserve Adjusted Eurodollar Rate determined for such Interest Period plus one and three-quarters percent (1.75%). Interest shall be calculated on the basis of the actual number of days elapsed in a year of 360 days. 2.7 Notwithstanding the provisions of Sections 2.5 and 2.6 hereof, for so long as there exists any Event of Default, interest on the Current Notes shall accrue at an annual rate of two percent (2.0%) in excess of the rate which would otherwise apply to the Current Notes. 2.8 Interest on the unpaid principal of Base Rate Borrowings and Federal Funds Borrowings shall be payable monthly, commencing July 31, 1997, and continuing on the last day of each succeeding month, and on the Credit Expiration Date. 2.9 Interest on the unpaid principal of each Eurodollar Borrowing shall be payable in arrears on the related Interest Payment Date. 2.10 The principal of the Current Notes shall be repayable on the Credit Expiration Date. -6- 2.11 The Borrower may at any time prepay Base Rate Borrowings and Federal Funds Borrowings in whole or from time to time in part without premium or penalty. The Borrower may prepay any Eurodollar Borrowing only in its entirety and only on the last day of the relevant Interest Period. 2.12 If the Agent or any Bank determines (which determination shall be conclusive and binding upon the Borrower) that by reason of circumstances affecting the Interbank Eurodollar market, adequate and reasonable means do not exist for asserting the Eurodollar Rate for any Interest Period with respect to (i) a proposed Eurodollar Borrowing or (ii) the continuation of Eurodollar Borrowings beyond the expiration of the then-current Interest Period with respect thereto, the Agent shall forthwith give immediate notice of such determination to the Borrower at least one Business Day before, as the case may be, the requested borrowing date for such Eurodollar Borrowings or the last day of such Interest Period. If such notice is given, (i) any requested Eurodollar Borrowing shall be made as Base Rate Borrowing, and (ii) any outstanding Eurodollar Borrowings shall be converted, on the last day of the then-current Interest Period with respect thereto, to Base Rate Borrowings. Until such notice has been withdrawn by the Agent, no further Eurodollar Borrowings shall be made, nor shall the Borrower have the right to convert Base Rate Borrowings or Federal Funds Borrowings into Eurodollar Borrowings. 2.13 Notwithstanding any other provision hereof, if any law, regulation, treaty or directive or any change therein or in the interpretation or application thereof by any governmental authority, agency or instrumentality or any court makes it unlawful for any Bank to make or maintain Eurodollar Borrowings as contemplated by this Agreement, such Bank and the Agent shall give notice (by telephone confirmed in writing) thereof to the Borrower, and (i) such Bank's commitment to make Eurodollar Borrowings shall forthwith be canceled, (ii) each then-outstanding Eurodollar Borrowing (if any) shall automatically be converted to a Base Rate Borrowing on the last day of the then-current Interest Period for such Eurodollar Borrowing or within such earlier period as required by law, and (iii) such Bank shall thereafter make any requested Eurodollar Borrowing available as a Base Rate Borrowing. The Borrower hereby agrees promptly to pay such Bank, upon demand, any additional amount necessary to compensate such Bank for any costs incurred by such Bank in making any conversion of Eurodollar Borrowings in accordance with this Section 2.13, including (but not limited to) any interest or fees payable by such Bank to lenders of funds obtained by it in order to make or maintain such Eurodollar Borrowings (the Bank's notice of such costs, as certified to the Borrower, to be conclusive absent manifest error). 2.14 The Borrower shall pay the Agent, quarterly in advance on behalf of the Banks, a facility fee of one-quarter of one percent (0.25%) of the amount of the Credit, based on actual number of days elapsed in a year of 365 days. SECTION 3 THE TERM LOAN 3.1 Subject to the other provisions of this Agreement, the Banks, through the Agent, shall make the Term Loan to the Borrower in an aggregate amount not exceeding $30,000,000.00, which shall be available in a single draw on or before August 15, 1997. The Borrower hereby acknowledges that, if said single draw is in an amount less than $30,000,000.00, the Banks have no commitment to fund at a later date the unfunded portion of -7- the Term Loan. The amount of the Term Loan shall not exceed the sum of (i) all outstanding indebtedness evidenced by the Existing Norwest Term Note (which shall be paid off with a portion of the proceeds of the Term Loan), plus (ii) the Borrower's purchase price for the acquisition of 100% of the capital stock in Key Bank/Wyoming. The Term Loan shall be non-revolving, and evidenced by the Term Note. The Borrower shall give the Agent not less then two days prior written notice of the day on which the Borrower desires the funding of the Term Loan. 3.2 The Agent shall promptly notify each Bank of the Borrower's request for the funding of the Term Loan, and the amount of the Term Loan. Subject to the further provisions of this Section 3.2, the Agent will fund the Term Loan no later than 4:30 p.m., Minneapolis time, on the Business Day requested by the Borrower. On or before 3:30 p.m., Minneapolis time, on such Business Day, each Bank shall deposit with the Agent same-day funds constituting such Bank's Term Loan Percentage of the Term Loan. Such deposit will be made to an account which the Agent shall specify by notice to the Banks. To the extent funds are received from the Banks in accordance with this Section 3.2, the Agent shall make such funds available to the Borrower by wire transfer to the account(s) the Borrower shall have designated to the Agent at or before the time of the related request. 3.3 The Term Loan shall be comprised of Tranche A, in the amount of $6,000,000.00, and Tranche B, in the amount of $24,000,000.00. The Term Loan shall be comprised of Base Rate Borrowings, Federal Funds Borrowings, and/or Eurodollar Borrowings; provided, however, that Eurodollar Borrowings shall be in the amount of $5,000,000.00, or a greater amount in increments of $1,000,000.00; provided, further, that no Eurodollar borrowing may be in an amount, or for an Interest Period, which would cause the Borrower to make a prepayment of such Eurodollar Borrowing prior to the last day of such Interest Period in order to comply with the principal repayment schedule set forth in Section 3.7 hereof. Subject to the provisions of Section 3.4 hereof, interest on that portion of the unpaid principal of the Term Note comprised of a Base Rate Borrowing shall be calculated at an annual rate equal to the Base Rate in effect from time to time, and shall change as and when the Base Rate changes; interest on that portion of the unpaid principal of the Term Note comprised of a Federal Funds Borrowing shall be calculated at an annual rate equal to two percent (2.0%) in excess of the Federal Funds Rate in effect from time to time, and shall change as and when the Federal Funds Rate changes; and, interest on that portion of the unpaid principal of the Term Note comprised of a Eurodollar Borrowing shall be calculated for each Interest Period at a fixed annual rate equal to the sum of the Reserve Adjusted Eurodollar Rate determined for such Interest Period plus two percent (2.0%). Reference is hereby made to Sections 1.23, 2.1, 2.3 and 2.4 for statements of the terms relating to notice requirements for the creation, continuance or conversion of Base Rate Borrowings, Federal Funds Borrowings and Eurodollar Borrowings. Interest on the Term Note shall be calculated on basis of the actual number of days elapsed in a year of 360 days. 3.4 Notwithstanding the provisions of Section 3.3 hereof, for so long as there exists any Events of Default, interest on the Term Note shall accrue at an annual rate of two percent (2.0%) in excess of the rate which would otherwise apply to the Term Note. 3.5 Interest on the unpaid principal of Base Rate Borrowings and Federal Funds Borrowings shall be payable quarterly, commencing September 30, 1997, and continuing on the last day succeeding calendar quarter, and on the Term Loan Maturity Date. -8- 3.6 Interest on the unpaid principal of each Eurodollar shall be payable in arrears on the related Interest Payment Date. 3.7 The principal of the Term Note shall be repayable as follows: A. The principal of Tranche A shall be repayable as follows: Six (6) semi-annual installments, each in the amount of $1,000,000.00, commencing January 31, 1998 and continuing on the 31st day of each consecutive July and January thereafter through and including July 31, 2000, at which time all then-remaining outstanding principal of Tranche A shall be due and payable. B. The principal of Tranche B shall be repayable as follows: Six (6) semi-annual installments, each in the amount of $875,000.00, commencing January 31, 1998 and continuing on the 31st day of each consecutive July and January thereafter through and including July 31, 2000; plus, nine (9) semi-annual installments each in the amount of $1,875,000.00, commencing January 31, 2005; plus, one (2) final installment in an amount equal to all then-remaining unpaid principal of Tranche B shall be due and payable on the Term Loan Maturity Date. 3.8 The Borrower may at any time prepay Base Rate Borrowings and Federal Funds Borrowings in whole or from time to time in part without premium or penalty. Reference is hereby made to Section 2.11 for statements of the terms pursuant to which Eurodollar Borrowings may be prepaid. Prepayments shall be applied to scheduled installments in chronological order of their maturities. SECTION 4 CONDITIONS PRECEDENT 4.1 The Borrower shall deliver the following to the Agent, in form and content acceptable to the Agent, on or before the Closing Date: A. A copy, certified as of the most recent date practicable by the Secretary of State of Delaware, of the Borrower's Certificate of Incorporation and all amendments thereto, together with a certificate (as of the Closing Date) of an officer of the Borrower to the effect that such Certificate of Incorporation has not been amended since the date of certification by the Secretary of State; B. A certified (as of the Closing Date) copy of the Borrower's By-laws; -9- C. A Certificate, as of the most recent date practicable, of the Secretaries of State of Delaware and North Dakota as to the good standing of the Borrower; D. A certified (as of the Closing Date) copy of resolutions of the Borrower's board of directors authorizing the execution, delivery and performance of this Agreement, the Current Notes, the Term Note, and each other document to be delivered pursuant hereto; E. A certificate (as of the Closing Date) of an officer of the Borrower as to the incumbency and signatures of the officers of the Borrower signing this Agreement, the Current Notes, the Term Note, and each other document to be delivered pursuant hereto; F. The Current Notes, duly executed by the Borrower; G. The Term Note, duly executed by the Borrower; H. A Certificate, duly executed by an officer of Harris, indicating the aggregate amount of principal indebtedness of the Existing Harris Note, and accrued but unpaid interest thereon, which will be paid in full with the proceeds of the initial Advance under the Credit; and, I. A Certificate, duly executed by an officer of Norwest, indicating the aggregate amount of principal indebtedness of the Existing Norwest Term Note, and accrued but unpaid interest thereon, which will be paid in full with a portion of the proceeds of the Term Loan; J. All instruments and documents comprising subordinated debt issued by the Borrower and remaining unpaid as of the Closing Date; and, K. Photocopies, certified as true and complete by the corporate secretary of the Borrower, of the definitive purchase agreement (and all other documentation and approvals to be executed or issued pursuant to the terms of such definitive agreement) relating to Borrower's acquisition of 100% of the outstanding shares of capital stock in Key Bank/Wyoming. 4.2 The Banks shall not be obligated to fund any requested Advance, or to fund the Term Loan, unless: A. The representations and warranties contained in Section 5 hereof are true and accurate on and as of such date; and, B. No Event of Default, and no event which might become an Event of Default after the lapse of time or the giving of notice and the lapse of time, has occurred and is continuing or will exist upon the date of such funding. -10- SECTION 5 REPRESENTATIONS AND WARRANTIES To induce the Banks to enter into this Agreement, the Borrower represents and warrants to the Banks as follows: 5.1 The Borrower is a corporation, duly organized, existing and in good standing under the laws of the State of Delaware. 5.2 The Borrower is authorized to transact business in the states of Delaware and North Dakota and in any other state where Borrower has been advised by its legal counsel to register as a foreign corporation. 5.3 Each Subsidiary Bank is authorized to transact business in the respective state where its banking office is located. 5.4 The execution, delivery and performance of this Agreement, the Current Notes, and the Term Note by the Borrower are within its corporate powers, have been duly authorized, and are not in contravention of law, or the terms of the Borrower's Certificate of Incorporation or By-laws, or of any undertaking to which the Borrower is a party or by which it is bound. 5.5 The property of the Borrower is not subject to any lien except liens disclosed in writing to the Banks prior to the Closing Date. 5.6 No litigation or governmental proceeding is pending or, to the knowledge of the officers of the Borrower, threatened against the Borrower which could have a material adverse effect on the financial condition or business of the Borrower. 5.7 All authorizations of governmental agencies, bodies or authorities which are necessary to permit the transactions contemplated by this letter agreement have been obtained and are in full force and effect, and no further approval, consent, order or authorization of or designation, registration, declaration or filing with any governmental authority is required in connection with consummation of the transactions contemplated by this letter agreement. 5.8 As of the date of this Agreement, there exists no event of default under the Old Harris Loan Agreement or the Old Norwest Loan Agreement, nor does there exist any event which, with the giving of notice or the passage of time (or both), could become such an event of default. 5.9 All financial statements delivered to the Banks by or on behalf of Borrower, including any schedules and notes pertaining thereto, have been prepared in accordance with GAAP consistently applied, and fully and fairly present the financial condition of the Borrower at the dates thereof and the results of operations for the periods covered thereby, and there have been no material adverse changes in the consolidated financial condition or business of the Borrower from March 31, 1997 to the date hereof. 5.10 The Borrower's use of the proceeds of the Advances and the Term Loan will not result in a violation of Regulation U issued by the Board of Governors of the Federal Reserve System. -11- SECTION 6 AFFIRMATIVE COVENANTS The Borrower covenants and agrees that, for so long as the Credit remains in existence or any indebtedness remains outstanding under the Current Notes or the Term Note, unless the Majority Banks (via the Agent) shall otherwise consent in writing, it will: 6.1 Pay when due (and cause each other member of the Bank Group to pay when due) all taxes assessed against it or its respective property, except to the extent and for so long as contested in good faith in a manner that prevents enforcement of the matters being contested for which adequate reserves have been provided. 6.2 Maintain (and cause each other member of the Bank Group to maintain) its respective corporate existence and comply in all material respects with all laws and regulations applicable thereto. 6.3 Furnish directly to the Banks: A. As soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, the annual financial statements of the Borrower, with the unqualified opinion of certified public accountants acceptable to the Agent, all such statements to be prepared on a basis consistent with the accounting practices reflected in any previously submitted financial statement. All such financial statements shall be prepared on a consolidated and consolidating basis for the Borrower and each other member of the Bank Group. B. As soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, the Annual Report of Domestic Bank Holding Companies (FR Y-6) required by the Federal Reserve Bank. C. As soon as available, and in any event within 60 days after the end of each fiscal quarter of the Borrower, the complete Consolidated Report for Multi-Bank Holding Companies (FR Y-9C) required to be filed by the Borrower with the Federal Reserve Bank in the Federal Reserve District where the Borrower is located. D. As soon as available, and in any event within 60 days after the end of each fiscal quarter of the Borrower, the complete Parent Company Only Financial Statement for Multi-Bank Holding Companies (FR Y-9LP) required by the Federal Reserve Bank. E. As soon as available, and in any event within 45 days after the end of each quarter of each fiscal year of the Borrower, a Borrower's Compliance Certificate (attached hereto as Exhibit D) of the Secretary or Treasurer of the Borrower (i) certifying that to the best of his knowledge, no Event of Default or event which with the giving of notice or lapse of time, or both, would constitute an Event of Default has occurred and is continuing or, if an Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and (ii) with computations -12- demonstrating compliance with the covenants contained in Sections 7.1 through 7.6 hereof. F. As soon as available, and in any event within 45 days after the end of each fiscal quarter of each Subsidiary Bank, the complete Consolidated Report of Condition and Report of Income (FFIEC 034)(the "Call Reports") prepared by the Subsidiary Banks at the end of such fiscal quarter in compliance with the requirements of any federal or state regulatory agency which has authority to examine such Subsidiary Banks, all prepared in accordance with the requirements imposed by the applicable regulatory authorities and applied on a basis consistent with the accounting practices reflected in any previous call reports and similar statements. G. Within 45 days after the end of each fiscal quarter of the Subsidiary Banks, a summary for the Bank Group as a whole, of the Watch List or Problem Loan Reports internally generated by the Borrower. H. Immediately after obtaining knowledge thereof, notice in writing of any litigation wherein any person asserts any claim against any member of the Bank Group in excess of $500,000.00, and notice in writing of any proceedings before any governmental or regulatory agency involving any member of the Bank Group which, if decided adversely for any member of the Bank Group, would have a material adverse affect upon the business or operations of any member of the Bank Group (including without limitation, the issuance or proposed issuance of any Memorandum of Understanding, Cease and Desist Order, or other regulatory action, agreement or understanding with respect to any member of the Bank Group by any federal or state regulatory agency having jurisdiction or control over any member of the Bank Group). I. Prompt notice in writing of any negotiations to sell more than 5% of the capital stock or assets of any member of the Bank Group, together with copies of any buy/sell agreement. J. A copy of the Annual Board of Directors Examination Report published by any member of the Bank Group, if so requested by the Agent or the Banks. K. As soon as available, but without duplication of any other requirements set forth in this Section 6.3, such other information respecting the financial condition and results of operation of any member of the Bank Group (i) as required by law to be furnished to any regulatory authority having jurisdiction over any member of the Bank Group (including without limitation 10Q and 10K reports), and (ii) as the Agent or any Bank may from time to time reasonably request; provided, however, that the provisions of this Section 6.3(K) shall not apply to any information or reports which are prohibited from disclosure pursuant to applicable law or regulation. -13- L. Prompt notice in writing of any changes of the Borrower's executive management personnel. M. Promptly upon knowledge thereof, notice to the Agent in writing of the occurrence of any event which has or might, after the lapse of time or the giving of notice and the lapse of time, become an Event of Default. 6.4 Maintain (and cause each other member of the Bank Group to maintain) its equipment, real estate and other properties in good condition and repair (normal wear and tear excepted), and pay and discharge or cause to be paid and discharged when due, the cost of repairs to or maintenance of the same, and will pay or cause to be paid all rental or mortgage payments due on such real estate. 6.5 Cause its properties (and the properties of each other member of the Bank Group) of an insurable nature to be adequately insured by reputable and solvent insurance companies against loss or damages customarily insured against by persons operating similar properties, and similarly situated, and carry such other insurance (including blanket bond coverage, errors and omissions coverage, and business interruption insurance) as usually carried by persons engaged in the same or similar businesses and similarly situated. 6.6 Keep true, complete and accurate books, records and accounts in accordance with GAAP. 6.7 Cause each Subsidiary Bank to be and remain categorized as "well capitalized," as defined by the regulatory agencies having jurisdiction over the Subsidiary Banks. SECTION 7 NEGATIVE COVENANTS Without the written consent of the Majority Banks (via the Agent), for so long as the Credit remains in existence or any indebtedness remains outstanding under the Current Notes or the Term Note, the Borrower will not: 7.1 Permit the consolidated Tier 1 Core Capital of the Bank Group to be less than the greater of (i) 5.25% of the difference of consolidated total assets minus consolidated intangible assets and all goodwill, or (ii) the minimum required by any regulatory agency having jurisdiction over the Bank Group so that they are considered by such agency to be well capitalized. 7.2 Permit the consolidated Tier 1 Core Capital of the Bank Group less consolidated intangible assets and all goodwill to be less than the greater of (i) $200,000,000.00, or (ii) the minimum amount required by any regulatory agency having jurisdiction over the Bank Group so that they are considered by such agency to be well capitalized. 7.3 Permit the consolidated amount of the Bank Group's non-performing assets to be greater than the sum of 15% of the Bank Group's consolidated Tier 1 Core Capital plus the Bank Group's consolidated Tier 2 Supplementary Capital at any time. -14- 7.4 Permit the Bank Group's consolidated net income as a percentage of its consolidated total assets to be less than 1.0% as of the end of each fiscal quarter, based upon a moving four-quarter average, including the current fiscal quarter reported plus the three immediately preceding fiscal quarters. 7.5 Permit the difference between the consolidated book value of the Subsidiary Banks' securities portfolio, minus the consolidated market value of those securities classified in the "held-to-maturity" category, when expressed as an unrealized securities loss, to be more than 15% of the Subsidiary Banks' consolidated Tangible Equity Capital as of the end of any fiscal quarter. 7.6 Permit its ratio of Total Liabilities to Core Capital to be greater than 40% as of the end of any fiscal quarter. 7.7 Grant or suffer a lien upon any of its personal property assets (including without limitation stock in any Subsidiary Bank), other than Permitted Liens. 7.8 Enter into any transaction of merger or consolidation, or transfer, sell, assign, lease or otherwise dispose of (other than in the ordinary course of business) all or a substantial part of its properties or assets, or any of its notes or accounts receivable, or any stock or any assets or properties necessary or desirable for the proper conduct of its business, or change the nature of its business, or wind up, liquidate or dissolve, or agree to do any of the foregoing. 7.9 Purchase any stock or other securities of, or make any loans or advances of credit to, or make any investments or acquire any controlling interest whatsoever in, any other corporation, bank or non-bank institution other than the Subsidiary Banks existing as such as of the Closing Date, except in the ordinary course of business where such purchase, loan, advance, investment or acquisition is specifically authorized by any federal or state regulatory agency having jurisdiction or control over the Borrower or the Subsidiary Banks, provided that the Agent and the Banks will not unreasonably withhold consent so long as the proforma effect of such action does not create a violation of this Agreement. 7.10 Repurchase or retire any stock of the Subsidiary Banks, or pay a dividend with respect to any class of its stock, if the proforma effect of such repurchase, retirement or dividend payment would be a violation of this Agreement. 7.11 Issue any debt or equity instruments of any type or class other than common stock and debt expressly subordinated (on written terms acceptable to the Banks) to indebtedness owned to the Banks. 7.12 Make any modification to any instrument creating or evidencing subordinated debt, or make any prepayment of subordinated debt. 7.13 Assume, guarantee, endorse or otherwise become directly or indirectly liable in connection with the obligations of any person or entity, except for the endorsement of negotiable instruments in the ordinary course of business, guaranties of lease obligations of the Borrower's subsidiaries in the ordinary course of business, and existing guaranties in favor of Community First Service Corporation, Community First Properties, Inc., -15- Community Insurance, Inc., or any other subsidiary of which the Borrower owns, directly or indirectly, at least 80% of the common stock. 7.14 Incur any indebtedness other than (i) subordinated indebtedness referred to in Section 7.11 hereof, (ii) unsecured indebtedness owed to Norwest as of the Closing Date, and (iii) other indebtedness acceptable to the Majority Banks. SECTION 8 EVENTS OF DEFAULT 8.1 Upon the occurrence of any of the following Events of Default A. Default in any payment of interest or of principal on any Current Note or the Term Note or the when due, and continuance thereof for 10 calendar days; B. The failure of the Borrower to pay any fee when due in accordance with the provisions of this Agreement, and continuance of such failure for 10 calendar days; C. Default in the observance or performance of any one or more of the covenants set forth in Section 6.7 or in Section 7 hereof; D. Default in the observance or performance of any other agreement of the Borrower set forth herein (i.e., other than those addressed in Sections 8.1(A), 8.1(B) or 8.1(C) hereof), and continuance thereof for 30 calendar days; E. Default in any payment of interest or of principal on any other promissory note (i.e., other than the Current Notes and the Term Note) made by the Borrower and held by any of the Banks, and continuance thereof for 10 calendar days; F. Default by the Borrower in the payment of any other indebtedness for Borrowed Money in an amount exceeding $500,000.00 or in the observance or performance of any term, covenant or agreement of the Borrower in any agreement relating to any such indebtedness of the Borrower, the effect of which default is to permit the holder of such indebtedness to declare the same due prior to the date fixed for its payment under the terms thereof; G. Any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes, the aggregate amount of which (after reduction by the amount covered by insurance) exceeds $500,000.00, shall be entered or filed against the Borrower or any Subsidiary Bank or against any of its property and which remains unvacated, unbonded, unstayed or unsatisfied for a period of 30 calendar days; H. Any representation or warranty made by the Borrower herein, or in any statement or certificate furnished by the Borrower hereunder, is untrue in any material respect; or, -16- I. The issuance or proposed issuance, against any member of the Bank Group, of any cease and desist order, memorandum of understanding or capital maintenance agreement by any federal or state regulatory agency having jurisdiction or control over such member; provided, however, that this Section 8.1(I) shall not apply to supervisory actions outstanding against any institution as of the date of acquisition of such institution by the Borrower; then, or at any time thereafter, unless such Event of Default is remedied, the Majority Banks (via the Agent) may, by notice in writing to the Borrower, terminate the Credit and declare the Current Notes and the Term Note to be due and payable, or any or all of the foregoing, whereupon the Credit shall terminate forthwith and the Current Notes and the Term Note shall immediately become due and payable, or any or all of the foregoing, as the case may be. 8.2 Upon the occurrence of any of the following Events of Default: Any member of the Bank Group becomes insolvent or bankrupt, or makes an appointment for the benefit of creditors or consents to the appointment of a custodian, trustee or receiver for itself or for the greater part of its properties; or a custodian, trustee or receiver is appointed for any member of the Bank Group or for the greater part of its properties without its consent, and is not discharged within 60 calendar days; or bankruptcy, reorganization or liquidation proceedings are instituted by or against any member of the Bank Group and, if instituted against it, are consented to by it or remain undismissed for 60 calendar days; then the Credit shall automatically terminate and the Current Notes and the Term Note shall automatically become immediately due and payable, without notice or demand. 8.3 In additional to its other obligations as set forth in this Agreement, if the indebtedness evidenced by the Current Notes or the Term Note is accelerated pursuant to Sections 8.1 or 8.2 hereof, the Borrower shall immediately pay the Banks a premium in respect of Eurodollar Borrowings outstanding as of such date. The premium on each such Eurodollar Borrowing shall be calculated as follows: The amount of interest that would have accrued on the Eurodollar Borrowing (from the date of acceleration to the last day of the relevant Interest Period) computed at an annual rate equal to (i) the rate then in effect with respect to the Eurodollar Borrowing, MINUS (ii) the yield (including both interest and discount) on a hypothetical United States Treasury Security that could be purchased on the date of acceleration and maturing on (or about) the last day of the relevant Interest Period, PROVIDED that no premium shall be payable (and no credit or rebate shall be given) if the yield described in clause (ii) above exceeds the rate described in clause (i). SECTION 9 THE AGENT 9.1 Each Bank hereby appoints Norwest as its Agent under and for the purpose of this Agreement, the Current Notes, the Term Note, and each other related document. Each Bank authorizes the Agent to act on behalf of such Bank under this Agreement, the Current Notes, the -17- Term Note, and each other related document and, in the absence of other written instructions from the Majority Banks received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section 9 or as otherwise advised by counsel that such compliance would be unlawful), to exercise such powers hereunder and thereunder as are specially delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Notwithstanding any other provision in this Agreement, the Agent shall not, without the prior written consent of EACH Bank, (i) increase the amount of the Credit, the Credit Percentages, the amount of the Term Loan, or the Term Loan Percentages, (ii) modify any interest rate or fee applicable to the Current Notes or the Term Note, (iii) modify the Credit Expiration Date, the Term Loan Maturity Date, the last day of any Interest Period, or the date on which any payment in respect of the Current Notes or the Term Note is due, (iv) forgive all or any portion of any payment of principal or interest due under the Current Notes or the Term Note, or (v) modify any provision of this sentence. All other provisions set forth in this Agreement, other than those specified in the immediately preceding sentence, may be modified only with the approval of the Majority Banks. The Agent is hereby expressly authorized by the Banks without hereby limiting any implied authority, (i) to receive on behalf of the Banks all payments of principal of the interest on the Advances and the Term Loan, and all other amounts due to the Banks hereunder, and promptly to distribute to each Bank its proper share of each payment so received, and (ii) to give notice on behalf of each of the Banks to the Borrower of any Event of Default specified in this Agreement of which the Agent has actual knowledge acquired in connection with its agency hereunder. Each Bank hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agent, in its capacity as Agent, PRO RATA according to such Bank's Credit Percentage and Term Loan Percentage, from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, the Agent in any way relating to or arising out of this Agreement, the Current Notes, the Term Note, and any other related document, including reasonable attorney's fees, and as to which the Agent is not reimbursed by the Borrower; provided, however, that no Bank shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or willful misconduct. The Agent shall not be required to take any action hereunder, under the Current Notes, the Term Note, or under any other related document, or to prosecute or defend any suit in respect of this Agreement, the Current Notes, the Term Note, or any other related document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of the Agent shall be or become, in the Agent's determination, inadequate, the Agent may call for additional indemnification from the Banks and cease to do the acts indemnified against hereunder until such additional indemnity is given. 9.2 Unless the Agent shall have been notified by telephone, confirmed in writing, by any Bank by 3:00 p.m., Minneapolis time, on the day of the making of any Advance (or the funding of the Term Loan) that such Bank will not make available the amount which would constitute its Credit Percentage of such Advance (or its Term Loan Percentage of the Term Loan) on the date specified therefor, the Agent may assume that such Bank has made such amount available to the Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Bank shall not have made such amount available to the Agent, such Bank and Borrower severally agree to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Agent made -18- such amount available to the Borrower to the date such amount is repaid to the Agent, at the interest rate applicable at the time of such Advance. 9.3 Neither the Agent nor any of its directors, officers, employees or agents shall be liable to any Bank for any action taken or omitted to be taken by the Agent under this Agreement or any other related document, or in connection herewith or therewith, except for its own willful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other related document, nor for the creation, perfection or priority of any liens purported to be created by any related documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under any other related document. Any such inquiry which may be made by the Agent shall not obligate it to make any further inquiry or to take any action. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper person. 9.4 The Agent may resign as such at any time upon at least 30 days' prior notice to the Borrower and all Banks. If the Agent at any time shall resign, the Majority Banks may appoint another Bank as a successor Agent which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment, within 30 days after the retiring Agents' giving notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be one of the Banks or a commercial banking institution organized under the laws of the United States (or any state thereof) or a U.S. branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from any retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligation under this Agreement. After any retiring Agent's resignation hereunder as the Agent, the provisions of this Section 9 shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement. 9.5 Norwest shall have the same rights and powers with respect to (i) loans made by it or any of its affiliates, and (ii) promissory notes held by it or any of its affiliates as any other Bank and may prosecute the same as if it were not the Agent. Norwest and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any affiliate of the Borrower as if Norwest were not the Agent hereunder. 9.6 Each Bank acknowledges that it has, independently of the Agent and each other Bank, and based on such Bank's review of the financial information of the Borrower, this Agreement, the other related documents (the terms and provisions of which being satisfactory to such Bank) and such other documents, information and investigations as such Bank has deemed appropriate, made its own credit decision to enter into this Agreement. Each Bank also acknowledges that it will, independently of the Agent and each other Bank, and based on such other documents, information and investigations as it shall deem appropriate at any time, -19- continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other related document. 9.7 Except as permitted under the terms and conditions of this Section 9.7 or, with respect to participations, under Section 9.8 hereof, no Bank may sell, assign or transfer its rights or obligations under this Agreement or its interest in any Current Note or the Term Note. Any Bank, at any time upon at least five (5) Business Days' prior written notice to the Agent and the Borrower, may assign such Bank's Current Note or its interest in the Term Note, or a portion thereof (so long as any such portion is not less than $2,500,000.00 and is in equal percentages of such assigning Bank's interest in the Credit and the Term Loan), to a domestic bank (an "Applicant") on any date (the "Adjustment Date") selected by such Bank, but only so long as the Borrowers and the Agent shall have provided their prior written approval of such proposed Applicant, which prior written approval will not be unreasonably withheld. Notwithstanding the foregoing, (i) assignments may be made by a Bank to another Bank already a party to this Agreement in an amount not less than $1,000,000.00, and (ii) no such consent of the Borrower shall be required to sale of an interest to an affiliate of a Bank or, in any event, if an Event of Default shall exist. Upon receipt of such approval and to confirm the status of each additional Bank as a party to this Agreement and to evidence the assignment in accordance herewith: A. The Agent, the Borrower, the assigning Bank and such Applicant shall, on or before the Adjustment Date, execute and deliver to the Agent an Assignment Certificate in substantially the form of Exhibit E (an "Assignment Certificate"); B. The affected Borrower will execute and deliver to the Agent, for delivery by the Agent in accordance with the terms of the Assignment Certificate, (i) a new Current Note payable to the order of the Applicant in an amount corresponding to the applicable commitment acquired by such Applicant, (ii) an amendment to the Term Note to reflect the assignment of the interest in the Term Loan, and (iii) a new Current Note payable to the order of the assigning Bank in an amount corresponding to the retained Credit Percentage. Such new notes shall be in an aggregate principal amount equal to the aggregate principal amount of the notes to be replaced by such new notes, shall be dated the effective date of such assignment and shall otherwise be in the form of the notes to be replaced thereby. Such new notes shall be issued in substitution for, but not in satisfaction or payment of, the notes being replaced thereby and such new notes shall be treated as notes for purposes of this Agreement; and, C. The assigning Bank shall pay to the applicable Agent an administrative fee of $2,500.00. Upon the execution and delivery of such Assignment Certificate and such new Current Notes and amendment to the Term Note, and effective as of the effective date thereof, (i) this Agreement shall be deemed to be amended to the extent, and only to the extent, necessary to reflect the addition of such additional Bank and the resulting adjustment of the Credit Percentages and Term Loan Percentages arising therefrom, (ii) the assigning Bank shall be relieved of all obligations hereunder to the extent of the reduction of the assigning Bank's Credit Percentages and Term Loan Percentage, and (iii) the Applicant shall become a party hereto and shall be entitled to all rights, benefits and privileges accorded to a Bank herein and in each other document or instrument executed pursuant hereto and subject to all obligations of a Bank -20- hereunder, including, without limitation, the right to approve or disapprove actions which, in accordance with the terms hereof, require the approval of the Majority Banks or all Banks. Promptly after the execution of any Assignment Certificate, a copy thereof shall be delivered by the Agent to each Bank and to the Borrowers. In order to facilitate the addition of additional Banks hereto, the Borrower and the Banks shall cooperate fully with the Agent in connection therewith and shall provide all reasonable assistance requested by the Agent relating thereto, including, without limitation, the furnishing of such written materials and financial information regarding the Borrower as the Agent may reasonably request, the execution of such documents as the Agent may reasonably request with respect thereto, and the participation by officers of the Borrower, and the Banks in a meeting or teleconference call with any Applicant upon the request of the Agent. 9.8 In addition to the rights granted in Section 9.7 hereof, each Bank may grant participations in all or a portion of its Current Note or its interest in the Term Note to any domestic or foreign commercial bank (having a branch office in the United States), insurance company, financial institution or an affiliate of such Bank. No holder of any such participation, however, shall be entitled to require any Bank to take or omit to take any action hereunder except those actions described in Section 9.1 hereof requiring consent of all Banks. The Banks shall not, as among the Borrowers, the Agent and the Banks, be relived of any of their respective obligations hereunder as a result of any such grant of a participation. The Borrowers hereby acknowledge and agree that any participation described in this Section 9.8 may rely upon, and possess all rights under, any opinions, certificates, or other instruments or documents delivered under or in connection with any Loan Document. Except as set forth in this Section 9.8, no Bank may grant any participation in the Credit or the Term Loan. 9.9 Each Bank hereby agrees with each other Bank that if such Bank shall receive and retain any payment, whether by set-off or application of deposit balances or otherwise ("Set-off"), in respect of any Advance or the Term Loan, in excess of its ratable-share of payments based on its Credit Percentage and its Term Loan Percentage, then such Bank shall purchase for cash at face value, but without recourse, ratably from each of the other Banks such amount of the Advances or Term Loan, or participations therein, held by each such other Banks (or interest therein) as shall be necessary to cause such Bank to share such excess payment ratably with all the other Banks; provided, however, that if any such purchase is made by any Bank, and if such excess payment or part thereof is thereafter recovered from such purchasing Bank, the related purchases from the other Banks shall be rescinded ratably and the purchase price restored as to the portion of such excess payment so recovered, but without interest. SECTION 10 MISCELLANEOUS 10.1 The provisions of this Agreement shall be in addition to those of any guaranty, pledge or security agreement, note or other evidence of liability held by the Banks, all of which shall be construed as complementary to each other. Nothing herein contained shall prevent the Banks from enforcing any or all of the rights and remedies available to them at law, in equity or by agreement. -21- 10.2 From time to time, the Borrower will execute and deliver (or cause to be executed and delivered) to the Agent such additional documents and will provide such additional information as the Banks may reasonably require to carry out the terms of this Agreement and be informed of the status and affairs of the Borrower and the other members of the Bank Group. 10.3 The Borrower will pay all expenses, including the reasonable fees and expenses of legal counsel for each of the Banks, including without limitation the allocated costs of in-house counsel, incurred in connection with the administration, amendment, modification or enforcement of this Agreement, the Current Notes, the Term Note, and the other documents described herein. 10.4 Any notices or consents required or permitted by this Agreement shall be in writing and shall be deemed delivered if delivered in person or if sent by United States mail, postage prepaid, or telegraph or telex, as follows, unless such address is changed by written notice hereunder: A. If to the Borrower: Community First Bankshares, Inc. P.O. Box 6022 Fargo, North Dakota 58108-6022 Attention: Mark A. Anderson, Executive Vice President B. If to the Agent: Norwest Bank Minnesota, National Association Norwest Center Sixth Street & Marquette Avenue Minneapolis, Minnesota 55479-0015 Attention: Justin D. Stets, Vice President C. If to the Banks: The address set forth below the signature line for each Bank. 10.5 The Banks shall have the right at all times to enforce the provisions of this Agreement, the Current Notes, the Term Note, and the other documents described herein in strict accordance with the terms hereof and thereof, notwithstanding any conduct or custom on the part of the Banks in refraining from so doing at any time or times. The failure of the Banks at any time or times to enforce its rights under such provisions, strictly in accordance with the same, shall not be construed as having created a custom in any way or manner contrary to specific provisions of this Agreement or as having in any way or manner modified or waived the same. All rights and remedies of the Bank are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy. -22- 10.6 The Borrower hereby acknowledges and agrees that, upon the full payment of the Existing Harris Note, as contemplated by Section 2.1 hereof, and upon the full payment of the Existing Norwest Term Note, as contemplated by Section 3.1 hereof, the Old Harris Loan Agreement and the Old Norwest Loan Agreement, and the respective credit facilities described therein, shall be deemed terminated. 10.7 This Agreement shall inure to the benefit of, and shall be binding upon, the respective successors and permitted assigns of the parties hereto. The Borrower has no right to assign any of its rights or obligations hereunder without the prior written consent of each of the Banks. This Agreement, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties, and may be amended only by a writing signed on behalf of each party. This Agreement supersedes and replaces the Old Harris Loan Agreement and the Old Northwest Loan Agreement. 10.8 If any provision of this Agreement shall be held invalid under any applicable laws, such invalidity shall not affect any other provision of this Agreement that can be given effect without the invalid provision, and, to this end, the provisions hereof are severable. 10.9 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but which taken together shall constitute one and the same instrument. 10.10 The substantive laws of the State of Minnesota shall govern the construction of this Agreement and the rights and remedies of the parties hereto. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. NORWEST BANK MINNESOTA, COMMUNITY FIRST NATIONAL ASSOCIATION, Agent BANKSHARES, INC. By: By: /s/ Mark Anderson ------------------------------- -------------------------------- Justin D. Stets, Vice President Mark A. Anderson, Executive Vice President, Chief Financial Officer, and Secretary By: /s/ Donald R. Mengedoth -------------------------------- Donald R. Mengedoth President and Chief Executive Officer -23- HARRIS TRUST AND SAVINGS BANK Credit Percentage 33.33% Term Loan Percentage - Tranche A 0% By: Term Loan Percentage - Tranche B 50% ------------------------------- David J. Konrad, Vice President Financial Institutions 111 West Monroe Street P.O. Box 755 Chicago, Illinois 60609-0755 Attention: David J. Konrad, Vice President Telephone: (312) 461-7112 Fax: (312) 765-8353 NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION Credit Percentage 33.33% Term Loan Percentage - Tranche A 0% By: Term Loan Percentage - Tranche B 50% ------------------------------- Justin D. Stets, Vice President Sixth and Marquette Minneapolis, Minnesota 55479-0015 Attention: Justin D. Stets, Vice President Telephone: (612) 667-4766 Fax: (612) 667-3510 -24- BANK OF AMERICA NATIONAL TRUST Credit Percentage 33.33% AND SAVINGS ASSOCIATION Term Loan Percentage - Tranche A 100% Term Loan Percentage - Tranche B 0% By: ------------------------------- Emilia M. Barton, Vice President 555 South Flower Street 9th Floor, Mail Code 38900 Los Angeles, California 90071 Attention: Emilia M. Barton, Vice President Telephone: (213) 228-6237 Fax: (213) 228-6474 -25- EX-10.13 7 EXHIBIT 10.13 COMMUNITY FIRST BANKSHARES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN THIS INSTRUMENT, establishing the Community First Bankshares, Inc. Supplemental Executive Retirement Plan, is made and entered into by Community First Bankshares, Inc., a Delaware corporation, as shall be effective as of August 1, 1995. 1. PURPOSE OF PLAN. The purpose of this Plan is to provide Participants with supplemental retirement benefits as set forth herein. 2. DEFINITIONS. 2.1 BOARD. "Board" is the Board of Directors of Community First Bankshares, Inc. 2.2 CFB. "CFB" is Community First Bankshares, Inc., a Delaware corporation, and affiliates of CFB which are under common control with CFB under the provisions of Section 414 of the Code. 2.3 CODE. The "Code" is the Internal Revenue Code of 1986, as amended. 2.4 COVERED COMPENSATION. "Covered Compensation" is the base pay of a Participant for a calendar year. For a Board member, "Covered Compensation" is Directors' fees. 2.5 DEFERRED COMPENSATION. "Deferred Compensation" is the Participant's Covered Compensation or Incentive Pay which the Participant has elected to have treated as Deferred Compensation under Article 3 of this Plan, in addition to CFB contributions to the Plan. 2.6 ESOP. "ESOP" is the Community First Bankshares, Inc. Employee Stock Ownership Plan and Trust. 2.7 401(k) RETIREMENT PLAN. "401(k) Retirement Plan" is the Community First Bankshares, Inc. 401(k) Retirement Plan and Trust. 2.8 INCENTIVE PAY. "Incentive Pay" is the award or bonus payable to a Participant under the CFB incentive plan or otherwise, as determined annually by the Board. 2.9 PARTICIPANT. "Participant" is any executive or management level employee of CFB who is an officer and who is a highly compensated employee, as defined in Internal Revenue Code Section 414(s) or any Board member. Participants shall be selected by the Board. Each such employee shall continue to be eligible to contribute to this Plan until such employee ceases to be an employee or Board member as described above; provided, however, that the employee shall continue to be a Participant in this Plan until his or her benefits are fully paid. The Board, from time to time, may provide by resolution for additional positions that will qualify for participation in this Plan. 2.10 PLAN. "Plan" is the Community First Bankshares, Inc. Supplemental Executive Retirement Plan. 2.11 PLAN ADMINISTRATOR. "Plan Administrator" is the Board, and the Vice President of Finance and Vice President of Human Resources of CFB are authorized to perform general administrative functions under the Plan on behalf of the Plan Administrator. 3. SUPPLEMENTAL BENEFITS. 3.1 COVERED COMPENSATION. Each Participant may elect to contribute up to 25% of the Participant's Covered Compensation earned subsequent to the date of such election as Deferred Compensation to the Plan. Each Participant may also elect to contribute any or all of the following amounts to the Plan as Deferred Compensation: (a) the amount by which such Participant's elective and matching contributions are reduced under the 401(k) Retirement, in order to cause such Plan to comply with the limitations set forth in Code Sections 401(k)(3) and/or 401(m)(2); (b) the amount by which such Participant's elective contributions are limited under the 401(k) Retirement by the restriction of Covered Compensation under such Plan to $150,000 (or such figure as adjusted) under Code Section 401(a)(17); (c) the amount by which such Participant's elective contributions are limited under the 401(k) Retirement Plan by restrictions on Covered Compensation under such Plan resulting from anti-discrimination standards under Code Sections 401(a)(5)(B) and 414(s); and (d) the amount by which such Participant elective contributions to the 401(k) Retirement Plan exceed the limitation in Code Section 402(g). -2- 3.2 INCENTIVE PAY. In addition to an election under Section 3.1, each Participant may elect to contribute up to 100% of the Participant's Incentive Pay awarded subsequent to the date of such election as Deferred Compensation to the Plan. 3.3 ELECTION. Any election of Deferred Compensation pursuant to Sections 3.1 or 3.2 shall be in writing, shall be made at least six (6) months prior to the beginning of the succeeding calendar year and shall be applicable to Covered Compensation and Incentive Pay earned for such calendar year. Such election shall remain in effect for and shall be irrevocable during the calendar year. A new election may be made for each subsequent calendar year at least six (6) months prior to the beginning of each such calendar year. In the absence of a timely election, the Participant's written election for the preceding calendar year shall apply to the succeeding calendar year. For the initial calendar year of this Plan, or for employees who become Participants during a calendar year, an election of Deferred Compensation may be made within thirty (30) days after the effective date of this Plan or the effective date of the employee's designation as a Participant, respectively. 3.4 CFB CONTRIBUTION. CFB may, but shall not be obligated to, contribute to the Plan an amount equal to that portion of each Participant's Covered Compensation and, if applicable, Incentive Pay, contributed to this Plan that (a) CFB would otherwise match under the provisions of the 401(k) Retirement Plan but for the legal limitations identified in Section 3.1 of this Plan; or (b) CFB would allocate to the Participant's account in the ESOP but for legal limitations identified in Section 3.1(b) of this Plan. The purpose of this provision is to provide Participants with substantially identical benefits to those that would be provided to them under the terms of the 401(k) Retirement Plan and/or the ESOP except for limitations imposed by the Code. The contributions, if any, made by CFB under this Section shall be administered in accordance with the terms of this Plan. 3.5 ACCOUNTING. On the date that an amount of Deferred Compensation under Section 3.1, 3.2 or 3.4 would otherwise be paid to the Participant, the 401(k) Retirement Plan or the ESOP, the amount of such Deferred Compensation shall be credited to an account on the books of CFB. No Participant shall derive any rights or benefits in or to any assets of CFB solely from the establishment or maintenance of such accounts on the books of CFB. 3.6 VESTING. Each Participant shall have a fully vested and nonforfeitable interest in his or her amounts of Deferred Compensation contributed to the Plan. The Participant's vested interest in CFB contributions pursuant to Section 3.4(a) shall be determined in accordance with -3- the relevant vesting provisions of the 401(k) Retirement Plan. The Participant's vested interest in CFB contributions pursuant to Section 3.4(b) shall be determined in accordance with the vesting provisions of the ESOP. 4. INVESTMENT OF DEFERRALS. The initial amounts of Deferred Compensation shall be invested by the Plan Administrator or the trustee of the grantor trust established under Section 7 in a manner commensurate with the following sentence. Following approval of the Plan by the shareholders of CFB, all amounts contributed to the Plan as Deferred Compensation or CFB contributions shall be invested in CFB common stock by the Plan Administrator, or by the trustee of the grantor trust established under Section 7, as soon as practicable following receipt by the Plan or grantor trust, including amounts contributed to the Plan prior to such approval. Account adjustments shall be determined and reported to Participants by CFB at least annually, and CFB's determination shall be final. 5. DISTRIBUTIONS FROM ACCOUNTS. 5.1 DISTRIBUTION TIMING. The Participant shall determine the time of distribution of the vested amount of his or her Deferred Compensation in the election form. 5.2 DISTRIBUTION METHOD. The Participant shall elect to have the vested amount of his or her Deferred Compensation distributed in CFB common stock and/or cash in one of the forms below in the election form: (a) a single lump sum; or (b) distribution in equal annual installments over a period of years established by the Plan Administrator. 5.3 CHANGE IN ELECTION. Elections made under Sections 5.1 and 5.2 may be changed by the Participant, provided that no election shall be changed subsequent to the commencement of distributions from the Plan, and any election change shall be made at least six (6) months prior to the calendar year in which a distribution is to be made or commence, and before the distribution becomes fully ascertainable in amount. A change in distributing timing or method shall be subject to approval by the Plan Administrator. 5.4 DISTRIBUTION TO BENEFICIARY. If the Participant is deceased, the distribution shall be payable to the beneficiary of the Participant at the time and in the form payable to the Participant hereunder. However, the Plan Administrator, in its discretion, may accelerate the payment of benefits under this Plan to the Participant's beneficiary. 6. FIDUCIARY DUTIES. The Board shall have full power to construe, interpret and administer this Plan, including to make any determination required under this Plan and to make such rules and regulations as it deems advisable for the operation of this Plan. A majority of the -4- Board shall constitute a quorum. No member of the Board shall participate in any action to determine his or her individual rights or benefits under this Plan that does not apply equally to all Participants in the Plan. Actions of the Board shall be by a majority of persons constituting a quorum and eligible to vote on an issue. Meetings may be held in person or by telephone. Action by the Board may be taken in writing without a meeting provided such action is executed by all disinterested members of the Board. To the extent it is feasible to do so, determinations, rules and regulations of the Board under this Plan shall be consistent with similar determinations, rules and regulations of the 401(k) Retirement Plan. All determinations of the Board shall be final. 7. FUNDING. Nothing in this Plan shall be construed as permitting the Participant, beneficiary or estate to claim any security for the fulfilling of the obligations of CFB hereunder, and the Participant, beneficiary and estate shall look only to the general assets of CFB for the satisfaction of CFB's obligations. If CFB should invest in property to fund its obligations under this Plan, either through the creation of a grantor trust or otherwise, CFB shall be the sole owner of such property, and the Participant, beneficiary and estate shall have no rights in said property. 8. DESIGNATION OF BENEFICIARY. Each Participant shall file with the Administrator, on form prescribed by CFB, a written designation of the person or persons to receive the benefits under this Plan. This right shall include the right to name and change primary and contingent beneficiaries, but any designation of beneficiaries shall be effective only when filed by the Participant in writing with the Administrator during the Participant's lifetime. In the absence of such written designation or if the beneficiary so named predeceased the Participant, the Participant's beneficiary shall be the same person(s) designated as such under the terms of the 401(k) Retirement Plan. 9. CLAIMS PROCEDURE. 9.1 CLAIMS PROCEDURE AND REVIEW. A Participant or beneficiary (the "claimant") may make a claim for Plan benefits within the time and in the manner described herein. Such claim shall be made within 60 days after the claim arises by filing a written request with the Vice President of Human Resources of CFB, on behalf of the Plan Administrator. The claim shall be determined by the Plan Administrator within a reasonable time after the receipt of the written claim. Notice of the Plan Administrator's decision shall be communicated to the claimant in writing. If the claim is denied, the notice shall include the specific reasons for the denial (including reference to pertinent Plan provisions), a description of any additional material or information necessary for the Plan Administrator to reconsider the claim, the reasons for any of such additional material or information, and an explanation of the review procedure. 9.2 APPEAL. The claimant or his or her duly authorized representative may, within 90 days after receiving such written notice, request the president of CFB to review the Plan Administrator's decision. The president shall afford the claimant a hearing and the opportunity to review all pertinent documents and submit issues and comments orally and in writing and shall -5- render a review decision in writing within 120 days after receipt of request for review. The review proceeding shall be conducted in accordance with the rules and regulations adopted from time to time by the president. 10. MISCELLANEOUS. 10.1 LIABILITY. No officer of CFB shall be personally liable by virtue of any contract, agreement or other instrument made or executed by him or on his behalf as an officer, nor for any mistake or judgment made by himself or any other officer, nor for any negligence, omission or wrongdoing of any other officer or of anyone employed by CFB, nor for any loss, unless resulting from his own gross negligence or willful misconduct. In addition, CFB does not assure or guarantee the tax consequences of benefits provided hereunder or other matters beyond its control. 10.2 TITLE TO ASSETS. No Participant or former Participant shall have any legal or equitable right or interest in any of the funds set aside by CFB or in any assets in which CFB may invest, from time to time, to fund this Plan. 10.3 AMENDMENTS. CFB reserves the right to amend or modify, in whole or in part, any or all of the provisions of this Plan at any time by a written instrument; provided, however, that no amendment or modification shall be made which will deprive any Participant or any Participant's beneficiary of any vested benefits to which he or she is entitled under the Plan. 10.4 TERMINATION. Continuation of the Plan is not assumed as a contractual obligation of CFB and the right is reserved by CFB to at any time reduce, suspend or discontinue the Plan. However, no such reduction, suspension or discontinuance shall deprive any Participant or beneficiary of any benefits that become vested under the Plan. 10.5 ASSIGNMENT AND LEVY. The Plan is for the benefit and protection of Participants and their beneficiaries and the rights, privileges and benefits herein conferred shall not, to the extent permitted by law, be subject to alienation, assignment, pledge, levy, attachment, garnishment or other legal process or in any manner anticipated, encumbered, committed, withdrawn or surrendered, and neither shall the same be subject or liable in any way for debts, contracts, or agreements or other claims of creditors of such Participants or their beneficiaries whether such claims are now contracted or which may hereafter be contracted or incurred. 10.6 PARTICIPANT'S RIGHTS. The establishment of this Plan shall not create any legal or equitable right against CFB unless such right is specifically provided for in this Plan. Furthermore, nothing in this Plan shall be construed as giving a Participant the right to be retained in the employment of CFB, and a Participant shall remain subject to discharge at any time to the same extent as if this Plan had not been adopted. -6- 10.7 INCOMPETENCY. Every person receiving or claiming benefits under this Plan shall be conclusively presumed to be mentally competent until the date on which the Administrator receives a written notice in a form and manner acceptable to the Plan Administrator that such person is incompetent and that a guardian, conservator or other person legally vested with the care of his estate has been appointed. In such event, the Plan Administrator may direct payments of benefits to such guardian, conservator or other person legally vested with the care of his estate and any such payments so made shall be a complete discharge of the Plan Administrator to the extent so made. 10.8 NOTICES. Notices required by this Plan to be given to CFB or a Participant shall be in writing and shall be considered to have been duly given or served if personally delivered, or sent by first class, certified or registered mail. 10.9 SEVERABILITY. The invalidity or partial invalidity of any portion of this Plan shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. 10.10 RELEASE. Any payment to or for the benefit of any Participant or his beneficiaries in accordance with the provisions hereof shall, to the extent thereof, be in full satisfaction of all claims hereunder against CFB. 10.11 GOVERNING LAW. Construction and administration of this Plan shall be governed by the laws of the State of North Dakota, except to the extent preempted by federal law. COMMUNITY FIRST BANKSHARES, INC. By ----------------------------------- Its ---------------------------------- -7- EX-13.1 8 EXHIBIT 13.1 EXHIBIT 13.1
TABLE OF CONTENTS BEST OF BOTH WORLDS 1 LETTER TO SHAREHOLDERS 3 REGIONAL REVIEW 4 FINANCIAL REVIEW 14 AFFILIATED BANKS 47 BOARD OF DIRECTORS 54 SENIOR OFFICERS 55 CORPORATE INFORMATION 56
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31 (In thousands, except per share data) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- EARNINGS - ---------------------------------------------------------------------------------------------------- Total interest income.................... $ 278,597 $ 229,426 $ 192,868 $ 143,237 $ 121,146 Total interest expense................... $ 117,253 95,234 82,891 53,468 47,271 Net interest income...................... 161,344 134,192 109,977 89,769 73,875 Net income............................... 46,552 32,510 29,953 22,729 18,614 PER COMMON AND COMMON EQUIVALENT SHARE - ---------------------------------------------------------------------------------------------------- Basic earnings per share................. $ 2.52 $ 1.87 $ 1.85 $ 1.50 $ 1.35 Diluted earnings per share............... 2.44 1.79 1.75 1.43 1.30 Net book value........................... 16.70 12.92 12.01 9.69 9.10 Dividends paid........................... .70 .58 .48 .44 .40 AT YEAR-END - ---------------------------------------------------------------------------------------------------- Total assets............................. $4,855,526 $3,116,398 $2,769,976 $2,130,619 $1,883,794 Total loans.............................. 2,637,057 2,064,108 1,767,193 1,330,146 1,037,666 Allowance for loan losses................ 36,194 26,215 22,712 17,333 14,332 Total deposits........................... 3,619,334 2,537,440 2,359,716 1,794,565 1,627,989 Common equity............................ 339,294 221,583 181,004 134,701 125,071 KEY PERFORMANCE RATIOS - ---------------------------------------------------------------------------------------------------- Return on average common equity.......... 18.13% 15.69% 18.19% 16.77% 16.64% Return on average assets................. 1.31% 1.13% 1.24% 1.13% 1.10% Net interest margin...................... 5.17% 5.32% 5.06% 4.95% 4.74% Dividend payout ratio.................... 28.69% 32.40% 27.43% 30.77% 30.77% Average common equity to average assets.. 7.21% 6.87% 6.43% 6.43% 6.59% Nonperforming assets to period-end loans and OREO......................... 0.61% 0.70% 0.31% 0.34% 0.62% Allowance for loan losses to period-end loans.................................. 1.37% 1.27% 1.29% 1.30% 1.38% Allowance for loan losses to nonperforming loans.................... 286.19% 200.68% 608.09% 537.12% 295.99% Net charge-offs to aveage loans.......... 0.24% 0.22% 0.17% 0.00% 0.08% Tier I capital........................... 10.65% 8.88% 8.51% 10.64% 10.16% Total risk-based capital................. 14.24% 11.10% 11.18% 13.46% 13.44% Leverage ratio........................... 7.25% 6.62% 6.10% 7.12% 6.12% - -----------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. BASIS OF PRESENTATION The following represents management's discussion and analysis of Community First Bankshares, Inc.'s (the "Company") financial condition as of December 31, 1997 and 1996, and its results of operations for the years ended December 31, 1997, 1996, and 1995. This discussion should be read in conjunction with the consolidated financial statements and related footnotes and the five year summary of selected financial data. The information has been restated to reflect significant mergers accounted for as a pooling-of-interests as if they had occurred at the beginning of the first period presented. Purchases have been reflected in the Company's results of operations for all periods following the acquisition and are reflected in the Company's financial condition at all dates subsequent to the acquisition. MERGER AND ACQUISITION ACTIVITY The Company has made a number of acquisitions during these periods. Each of these acquisitions has had an effect upon the Company's results of operations and financial condition. On December 18, 1996, the Company issued approximately 5.2 million shares of common stock to acquire Mountain Parks Financial Corporation ("Mountain Parks"), a one-bank holding company headquartered in Denver, Colorado. At acquisition, Mountain Parks had approximately $600 million in assets at seventeen banking offices located in Colorado. On February 22, 1995, the Company issued approximately 2.4 million shares of common stock to acquire Minowa Bancshares, Inc. ("Minowa"), a three-bank holding company headquartered in Decorah, Iowa. At acquisition, Minowa had approximately $224 million in assets at three banks located in Iowa and Minnesota. On July 3, 1995, the Company issued approximately 1.2 million shares to acquire First Community Bankshares, Inc. ("First Community"), a five-bank holding company headquartered in Fort Morgan, Colorado. At acquisition, First Community had total assets of $153 million at its five Colorado banks. All three acquisitions were accounted for using the pooling of interests method. Also during the periods presented, the Company made the following acquisitions of banks (or associated holding companies), each of which was accounted for as a purchase, except the acquisitions in Trinidad, Colorado, Gunnison, Colorado, and Phoenix, Arizona, each of which was accounted for as a pooling of interests. Because the pooling acquisitions were not material to the Company's financial condition or operating results, the Company's financial information has not been restated to reflect these mergers.
Acquisition Location of Bank or Total Assets at Date of Month and Year Name of Acquired Entity Acquisition (In Millions) - -------------------------------------------------------------------------- December 1997 Gunnison, Colorado $ 90 November 1997 Phoenix, Arizona $ 54 July 1997 Cheyenne, Wyoming $ 1,100 October 1996 Trinidad, Colorado $ 70 July 1996 Kiowa, Colorado $ 58 July 1996 Englewood, Colorado $ 19 October 1995 Beach, North Dakota $ 44 September 1995 Aurora, Colorado $ 41 July 1995 Louisville, Colorado $ 36 July 1995 Boulder, Colorado $ 60 May 1995 Alliance, Nebraska $ 293 - --------------------------------------------------------------------------
On July 14, 1997, the Company completed the purchase of KeyBank N.A. (Wyoming), ("KeyBank") from KeyCorp of Cleveland, Ohio. At the time of acquisition, KeyBank had total assets of $1.1 billion in banking offices in 24 Wyoming communities. The purchase price of the transaction, which was accounted for as a purchase, was $135 million and resulted in the recognition of goodwill of approximately $60 million. The purchase price was funded through a combination of proceeds from the issuance of $60 million 8.875% Cumulative Capital Securities by a business subsidiary of the Company in February 1997, partial proceeds from the Company's issuance of $60 million 7.30% Subordinated Notes, and retained earnings of the Company. On January 23, 1998, the Company completed the purchase and assumption of approximately $730 million in assets and liabilities of 37 offices of Banc One Corporation located in Arizona, Colorado, and Utah. The transaction will be accounted for as a purchase of certain assets and assumption of certain liabilities and resulted in the recognition of approximately $44 million of deposit premium. The purchase was funded through a combination of net proceeds from the issuance of 1,000,000 shares of common stock in December 1997 and the proceeds of the issuance of $60 million 8.20% Cumulative Capital Securities by a business trust subsidiary in December 1997. On January 14, 1998, the Company signed a definitive merger agreement with FNB, Inc. ("FNB"), a two-bank holding company headquartered in Greeley, Colorado. At December 31, 1997, FNB had total assets of $118 million at offices in Greeley and Fort Collins, Colorado. To facilitate completion of the transaction, which is expected to be accounted for using the pooling of interests method of accounting, the Company will issue approximately 570,000 shares of common stock to holders of FNB common stock. The transaction is subject to regulatory approval and is expected to close during the second quarter of 1998. On January 9, 1998, the Company signed a definitive merger agreement with Community Bancorp, Inc. ("CBI"), a one-bank, holding company headquartered in Thornton, Colorado. At December 31, 1997, CBI had total assets of $78 million at offices in Thornton and Arvada, Colorado. To facilitate completion of the transaction, which is expected to be accounted for using the pooling of interests method of accounting, the Company will issue approximately 452,000 shares of common stock to holders of CBI common stock. The transaction is subject to regulatory approval and is expected to close during the second quarter of 1998. On November 7, 1997, the Company signed a definitive merger agreement with Pioneer Bank of Longmont ("Longmont"), Longmont, Colorado. At December 31, 1997, Longmont had total assets of $130 million and banking offices in four Colorado communities. To facilitate completion of the transaction, which is expected to be accounted for using the pooling of interests method of accounting, the Company will issue approximately 700,000 shares of common stock to holders of Longmont common stock. The transaction is subject to regulatory approval and is expected to close during the second quarter of 1998. OVERVIEW For the year ended December 31, 1997, the Company reported net income of $46.6 million, an increase of $14.1 million, or 43.4%, from the $32.5 million earned during 1996. Diluted earnings per share were $2.44, compared to $1.79 in 1996 and $1.75 in 1995. Return on average assets was 1.31% for 1997, compared with 1.13% for 1996. Return on average common shareholders' equity for 1997 and 1996 was 18.13% and 15.69%, respectively. Factors contributing to these changes included 15 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. approximately $6.3 million of incremental net income provided by entities acquired during 1997 and 1996. For the year ended December 31, 1996, the Company reported net income of $32.5 million, an increase of $2.5 million, or 8.3% from the $30.0 million earned during 1995. Diluted earnings per share were $1.79, compared to $1.75 in 1995. Return on average assets was 1.13% for 1996, compared with 1.24% for 1995. Return on average common shareholders' equity for 1996 and 1995 was 15.69% and 18.19%, respectively. Factors contributing to these changes included approximately $1.4 million of incremental net income provided by entities acquired during 1996 and 1995. During 1997, the Company made the determination to dispose of its sub-prime lending affiliates, Mountain Parks Financial Services, Inc. ("MPFS") and Equity Lending, inc. ("ELI"). Both MPFS, which purchases auto contracts and ELI, which originates residential, non-conforming mortgages were acquired by the Company in December 1996 through the merger with Mountain Parks Financial Corporation. The Company has accounted for these entities as discontinued operations on the consolidated financial statements. At December 31, 1997, the net balance sheet effect of $72 million from these entities has been included as an Other Asset. The Company recognized income of $967,000 net of tax, from these entities during 1997. Total assets were $4,856 million and $3,116 million at December 31, 1997 and 1996, respectively. The increase of $1,740 million, or 55.8%, during 1997 was principally due to the 1997 acquisitions of the banks in Wyoming, Phoenix, and Gunnison, as well as loan growth in the Company's subsidiary banks. RESULTS OF OPERATIONS NET INTEREST INCOME The principal source of the Company's earnings is net interest income, the difference between total interest income on earning assets such as loans and investments and interest paid on deposits and other interest-bearing liabilities. The net interest margin is net interest income, on a tax-equivalent basis, expressed as a percentage of average earning assets. The margin is affected by volume and mix of earning assets and interest-bearing liabilities, the level of interest free funding sources, interest rate environment, and income tax rates. As discussed later, management actively monitors its interest rate sensitivity and seeks to balance assets and liabilities to minimize the impact of changes in the interest rate environment. The following table presents the Company's average balance sheets, interest earned or paid and the related yields and rates on major categories of the Company's earning assets and interest-bearing liabilities on a tax equivalent basis for the periods indicated:
YEARS ENDED DECEMBER 31 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- INTEREST INTEREST AVERAGE YIELDS AND AVERAGE YIELDS AND (DOLLARS IN THOUSANDS) BALANCE INTEREST RATES BALANCE INTEREST RATES - -------------------------------------------------------------------------------------------------------------------------- ASSETS Loans (1) (2) .................................. $2,264,150 $219,843 9.71% $1,873,073 $185,005 9.88% Investment securities (2) ...................... 942,974 63,362 6.72% 727,822 48,579 6.67% Other earning assets ........................... 16,720 866 5.18% 17,324 960 5.47% ------------------------------------------------------------------------- Total earning assets ....................... 3,223,844 284,071 8.81% 2,618,219 234,544 8.96% Noninterest-earning assets ..................... 337,729 248,560 ------------------------------------------------------------------------- Total assets ............................... $3,561,573 $2,866,779 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing checking ...................... $ 367,683 6,536 1.78% $ 445,501 $ 8,702 1.95% Savings deposits ............................... 731,751 19,870 2.72% 444,333 11,534 2.60% Time deposits .................................. 1,385,924 75,873 5.47% 1,114,617 61,419 5.51% Short-term borrowings .......................... 177,190 9,236 5.21% 168,311 9,247 5.49% Long-term borrowings ........................... 76,595 5,738 7.49% 60,433 4,332 7.17% ------------------------------------------------------------------------- Total interest-bearing liabilities ......... 2,739,143 117,253 4.28% 2,233,195 95,234 4.26% Demand deposits ................................ 463,601 378,325 Noninterest-bearing liabilities ................ 39,786 35,365 Trust Owned Preferred Securities ............... 57,699 -- Preferred shareholders' equity ................. 4,506 22,999 Common shareholders' equity .................... 256,838 196,895 ------------------------------------------------------------------------- ............................................... 822,430 633,584 ------------------------------------------------------------------------- Total liabilities and shareholders' equity ..... $3,561,573 $2,866,779 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net interest income ............................ $166,818 $139,310 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net interest spread ............................ 4.53% 4.70% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net interest margin ............................ 5.17% 5.32% ------------------------------------------------------------------------- ------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31 1995 - ------------------------------------------------------------------------------------ INTEREST AVERAGE YIELDS AND (DOLLARS IN THOUSANDS) BALANCE INTEREST RATES - ------------------------------------------------------------------------------------ ASSETS Loans (1) (2) .................................. $1,545,497 $151,154 9.78% Investment securities (2) ...................... 656,435 43,009 6.55% Other earning assets ........................... 29,369 1,710 5.82% ----------------------------------- Total earning assets ....................... 2,231,301 195,873 8.78% Noninterest-earning assets ..................... 192,912 ----------------------------------- Total assets ............................... $2,424,213 ----------------------------------- ----------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing checking ...................... $ 406,080 $ 8,805 2.17% Savings deposits ............................... 349,522 9,748 2.79% Time deposits .................................. 963,594 53,227 5.52% Short-term borrowings .......................... 111,784 6,184 5.53% Long-term borrowings ........................... 65,379 4,927 7.54% ----------------------------------- Total interest-bearing liabilities ......... 1,896,359 82,891 4.37% Demand deposits ................................ 317,806 Noninterest-bearing liabilities ................ 31,189 Trust Owned Preferred Securities ............... -- Preferred shareholders' equity ................. 23,000 Common shareholders' equity .................... 155,859 ----------------------------------- ............................................... 527,854 ----------------------------------- Total liabilities and shareholders' equity ..... $2,424,213 ----------------------------------- ----------------------------------- Net interest income ............................ $112,982 ----------------------------------- ----------------------------------- Net interest spread ............................ 4.41% ----------------------------------- ----------------------------------- Net interest margin ............................ 5.06% ----------------------------------- ----------------------------------- - ------------------------------------------------------------------------------------
(1) INCLUDES NONACCRUAL LOANS AND LOAN FEES. (2) INTEREST YIELDS ON LOANS AND INVESTMENTS ARE PRESENTED ON A TAX EQUIVALENT BASIS TO REFLECT THE TAX EXEMPT NATURE OF CERTAIN ASSETS. THE INCREMENTAL TAX RATE APPLIED WAS 35% IN 1997, 1996, AND 1995. 16 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:
1997 COMPARED TO 1996 1996 COMPARED TO 1995 --------------------------------------------------------------------- (IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Interest income: Loans (1) (2) .......................................... $38,627 $(3,789) $34,838 $32,038 $ 1,813 $33,851 Investment securities (2) .............................. 14,360 423 14,783 4,677 893 5,570 Other earning assets ................................... (33) (61) (94) (701) (62) (763) -------------------------------------------------------------------- Total interest income ...................................... 52,954 (3,427) 49,527 36,014 2,644 38,658 -------------------------------------------------------------------- Interest expense: Savings deposits and interest-bearing checking ......... 5,941 229 6,170 3,499 (1,816) 1,683 Time deposits .......................................... 14,949 (495) 14,454 8,342 (150) 8,192 Short-term borrowings .................................. 488 (499) (11) 3,127 (64) 3,063 Long-term borrowings ................................... 1,159 247 1,406 (373) (222) (595) -------------------------------------------------------------------- Total interest expense .................................... 22,537 (518) 22,019 14,595 (2,252) 12,343 -------------------------------------------------------------------- Increase (decrease) in net interest income ................. $30,417 $(2,909) $27,508 $21,419 $ 4,896 $26,315 -------------------------------------------------------------------- -------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
(1) INCLUDES LOAN FEES. (2) INTEREST INCOME IS PRESENTED ON A TAX EQUIVALENT BASIS. Net interest income on a tax equivalent basis in 1997 was $166.8 million, a $27.5 million increase from 1996. The increase was primarily due to a 23.1% increase in earning assets partially offset by a 15 basis point reduction in the net interest margin. The increase in earning assets was due to six bank acquisitions completed by the Company between the third quarter of 1996 and December 1997, and loan growth in existing markets. Net interest income on a tax equivalent basis in 1996 was $139.3 million, a $26.3 million increase from 1995. The increase was primarily due to a 17.3% increase in earning assets and a 26 basis point increase in the net interest margin. The increase was primarily influenced by bank acquisitions completed by the Company and loan growth in existing markets. The net interest margin was 5.17%, 5.32%, and 5.06% in 1997, 1996 and 1995, respectively. This decrease in margin was due to a 17 basis point decrease in the yield spread between 1996 and 1997, and a change in the mix of earning assets to lower-yielding loans. Average loans to average earning assets changed from 69.3% in 1995, to 71.5% in 1996, and 70.2% in 1997. PROVISION FOR LOAN LOSSES Annual fluctuations in the provision for loan losses result from management's regular assessment of the adequacy of the allowance for loan losses. The provision for loan losses for 1997 was $5.4 million, a decrease of $1.4 million or 20.6%, from the $6.8 million provision during 1996. The decreased loan loss provision was principally due to the Company's decision to dispose of its sub-prime lending affiliates and subsequently accounting for these entities as discontinued operations. The amount of the loan loss provision to be recorded in future periods will depend on management's assessment of the adequacy of the allowance for loan losses in relation to the entire loan portfolio. The provision for loan losses for 1996 was $6.8 million, an increase of $4.1 million, or 151.9% from the 1995 provision of $2.7 million. NONINTEREST INCOME The Company continues to expand noninterest income associated with the Company's community banking operations. The primary sources of noninterest income consist of service charges on deposit accounts, service fees on checking accounts, insurance commissions and fees for trust services. Management regularly weighs opportunities to increase noninterest income by considering the delivery of financial products and services in its markets. Noninterest income for 1997 was $36.6 million, an increase of $9.2 million, or 33.6%, from the $27.4 million earned in 1996. The increase was principally due to an increase in service charges on deposit accounts in 1997 to $17.0 million from the $12.3 million in 1996, an increase of $4.7 million, or 38.2%. The increase is attributed to $2.7 million in service charges on deposit accounts at banks acquired during 1997 and $494,000 at banks acquired during 1996. Noninterest income for 1996 was $27.4 million, an increase of $4.9 million, or 21.8%, from the $22.5 million earned in 1995. The increase was principally due to an increase in service charges on deposit accounts in 1996 from $10.1 million earned during 1995 to $12.3 million earned in 1996, an increase of $2.2 million, or 21.8%. NONINTEREST EXPENSE Noninterest expenses consist of salaries and benefits, occupancy, equipment and other expenses such as legal and postage necessary for the operation of the Company. Management is committed to improving the quality of service while controlling such costs through improved efficiency and consolidation of certain activities to achieve economies of scale. 17 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) 1997 1996 1995 - -------------------------------------------------------------------------------- Salaries and employee benefits ................. $ 64,868 $ 54,870 $42,796 Net occupancy .................................. 19,139 15,085 10,563 FDIC insurance ................................. 357 669 2,532 Legal and accounting ........................... 1,710 1,989 1,311 Other professional service ..................... 2,378 1,892 2,700 Acquisition expenses ........................... 398 2,928 768 Data processing and loan servicing fees ........ 1,290 1,506 1,607 Permanent impairment of equity method investment ............................ -- 940 -- Minority interest .............................. (55) 222 175 Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II ... 5,108 -- -- Amortization of Intangibles .................... 5,519 3,362 2,551 Other .......................................... 24,478 20,825 17,590 ------------------------------- Total noninterest expense .................. $ 125,190 $104,288 $82,593 ------------------------------- -------------------------------
- -------------------------------------------------------------------------------- Noninterest expense for 1997 was $125.2 million, an increase of $20.9 million, or 20.0%, from the level of $104.3 million during 1996. The increase was principally due to an increase of $10.0 million, or 18.2%, in salaries and employee benefits, of which $5.8 million was due to the 1997 acquisitions and $1.7 million was due to the banks acquired during 1996. Net occupancy expense increased $4.1 million to $19.1 million, $2.1 million due to 1997 and 1996 acquisitions. Acquisition expenses of $398,000 were incurred in 1997 in conjunction with the acquisitions of Republic and Summit. Intangibles expense increased $2.2 million, or 64.2%, due to the additional intangible assets recognized in connection with the Company's acquisitions. Other noninterest expense was $24.5 million, an increase of $3.7 million, or 17.8%, from $20.8 million during 1996. Noninterest expense increased $21.7 million to $104.3 million in 1996. The increase was principally due to an increase in salaries and employee benefits, net occupancy expense, and acquisition and related expenses. The $12.1 million increase in salaries and employee benefits reflects $4.6 million in additional expenses related to acquisitions completed by the Company in 1995 and 1996. The $4.5 million increase in net occupancy is also due primarily to acquisitions completed by the Company. Legal and accounting fees increased $678,000, or 51.7%, from $1,311,000 to $1,989,000 during 1996. The Company incurred acquisition expenses of $2.9 million in 1996 in connection with the mergers with Mountain Parks and Financial Bancorp. These expenses relate to legal, accounting and other professional services expenses incurred to complete the mergers. In addition, the Company incurred noninterest expenses of $1.0 million to facilitate the integration of certain operating activities of Mountain Parks into those of the Company. During 1996, the Company recorded a $940,000 writedown in the value of its investment in an unconsolidated subsidiary, which was divested to satisfy regulators' competitive issues related to the Mountain Parks merger. Amortization of intangibles increased $811,000, or 31.8%, due to intangible assets, such as goodwill, noncompete agreements and insurance agency customer policy expirations recorded in connection with the Company's acquisitions. Other noninterest expense was $20.8 million, an increase of $3.2 million, or 18.2%, from $17.6 million in 1995. Federal Deposit Insurance Corporation ("FDIC") insurance expense decreased $1.9 million as a result of a reduction in the insurance assessment rate paid by most affiliate banks from a rate of $.23 per $100 to $.04 per $100 of qualifying deposits. This was partially offset by increased deposits obtained through 1996 and 1995 bank acquisitions and an increase in average deposits for 1996 to $2,383 million from $2,037 million in 1995, an increase of $346 million, or 17.0%. PROVISION FOR INCOME TAXES The Company records a provision for income taxes currently payable and for taxes payable in the future because of differences in the timing of recognition of certain items for financial statement and income tax purposes. The effective income tax rate differs from the statutory rate primarily due to tax-exempt income from loans, and investments and state income taxes. The effective tax rate was 31.9%, 35.6%, and 36.4% for 1997, 1996, and 1995, respectively. YEAR 2000 ISSUE The Company is evaluating the potential impact of what is commonly referred to as the "Year 2000" issue, concerning the inability of certain information systems to properly recognize and process dates containing the year 2000 and beyond. If not corrected, these systems could fail or create erroneous results. The Company is in the process of determining which of its systems, if any, may present Year 2000 issues, the magnitude of these issues, and the steps that may be necessary to correct them. Therefore, the potential liabilities and costs associated with Year 2000 compliance cannot be estimated at this time. Regardless of the Year 2000 compliance of the Company's systems, there can be no assurance that the Company will not be adversely affected by the failure of others to become Year 2000 compliant. Such risks may include potential losses related to loans made to third parties whose businesses are adversely affected by the Year 2000 issue, the disruption or inaccuracy of data provided by non-Year 2000 compliant third parties and business disruption caused by the failure of service providers, such as security and data processing companies, to become Year 2000 compliant. Because of these uncertainties, there can be no assurance that the Year 2000 issue will not have a material financial impact in any future period. FINANCIAL CONDITION INVESTMENT OF FUNDS LOANS At December 31, 1997, total loans were $2.6 billion, an increase of $573 million, or 27.8%, from the December 31, 1996, level of $2.1 billion. A significant portion of this increase is attributable to in-market loan growth in the Company's existing markets. In addition, the purchase of three banking institutions in 1997 added $536 million in loans. The Company has continued to purchase commercial loan assets to enhance earning asset yield performance. Many of such loan assets have been originated by selected Midwestern regional banks and national leasing and finance companies with whom the Company has ongoing relationships. The Company's portfolio of purchased loan assets was $208 million at December 31, 1997, compared to $202 million at December 31, 1996. These assets are subject to the Company's standard credit guidelines, as well as specific requirements for such assets, and bear the credit risks attendant to commercial loans. It is anticipated that the purchased loan asset volume will increase during 1998. 18 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:
1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- PERCENT PERCENT PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL (DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - ----------------------------------------------------------------------------------------------------------------------------------- Loan category: Real estate ............ $1,158,822 43.94% $ 871,432 42.22% $ 744,477 42.13% $ 544,809 40.96% $ 403,716 38.90% Commercial ............. 708,084 26.85% 624,456 30.25% 527,620 29.86% 397,869 29.91% 316,565 30.51% Consumer and other ..... 499,924 18.96% 346,139 16.77% 270,459 15.30% 225,256 16.93% 170,271 16.41% Agricultural ........... 270,227 10.25% 222,081 10.76% 224,637 12.71% 162,212 12.20% 147,114 14.18% --------------------------------------------------------------------------------------------------------- Total loans ............. 2,637,057 100.00% 2,064,108 100.00% 1,767,193 100.00% 1,330,146 100.00% 1,037,666 100.00% --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Less allowance for loan losses ............ (36,194) (26,215) (22,712) (17,333) (14,332) --------------------------------------------------------------------------------------------------------- Total ................... $2,600,863 $2,037,893 $1,744,481 $1,312,813 $1,023,334 --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
GENERAL. The Company's loan mix remained relatively constant from 1996 to 1997. Real estate loans continued to be the largest category of loans, representing 43.9% of the total loan portfolio. REAL ESTATE LOANS. A significant portion of the Company's real estate loan portfolio consists of residential real estate first mortgages that have been underwritten and documented to meet secondary mortgage requirements. Substantially all of the Company's real estate loans are based in the Company's primary market area. As of December 31, 1997, $464 million, or 40.0%, of the Company's real estate loan portfolio consisted of residential real estate loans, $137 million, or 11.8%, were secured by farmland, $363 million, or 31.4%, represented commercial and other real estate loans and $195 million, or 16.8%, represented construction loans. COMMERCIAL LOANS. Loans in this category include loans to retail, wholesale, manufacturing and service businesses, including agricultural service businesses and the Company's purchased loan asset portfolio. Commercial loans are underwritten based on the financial strength and repayment ability of the borrower, as well as the collateral securing the loans. CONSUMER AND OTHER LOANS. Loans classified as consumer and other loans include automobile, personal loans, consumer lines of credit and overdrafts. The consumer loan portfolio also includes dealer-generated installment contracts for consumer goods, including automobiles and major home appliances. The majority of these indirect loans are installment loans with fixed interest rates. AGRICULTURAL LOANS. Agricultural loans are made principally to farmers and ranchers. The Company provides short-term credit for operating loans and intermediate-term loans for machinery purchases and other improvements. INVESTMENTS Management augments the quality of the loan portfolio by maintaining a high quality investment portfolio oriented toward U.S. Treasury, U.S. Government agency and government guaranteed mortgage-backed securities. The investment portfolio also provides the opportunity to structure maturities and repricing timetables in a flexible manner and to meet applicable requirements for pledging securities, which are principally adjustable rate, and collateralized mortgage obligations, which are primarily floating rate securities, as tools in managing its interest rate exposure and enhancing its net interest margin. 19 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) 1997 1996 1995 - -------------------------------------------------------------------------------- U.S. Treasury ............................... $ -- $ -- $ -- U.S. Government agencies .................... 228 879 3,318 Mortgage-backed securities .................. 67,959 86,506 106,429 Collateralized mortgage obligations ......... -- -- -- State and political securities .............. 48,064 56,694 55,267 Other securities ............................ 64,261 78,269 65,806 ---------- -------- -------- Total ....................................... $ 180,512 $222,348 $230,820 ---------- -------- -------- ---------- -------- -------- - --------------------------------------------------------------------------------
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) 1997 1996 1995 - -------------------------------------------------------------------------------- U.S. Treasury ............................... $ 147,126 $120,193 $154,508 U.S. Government agencies .................... 266,696 85,311 121,588 Mortgage-backed securities .................. 829,943 236,833 143,359 Collateralized mortgage obligations ......... 108,103 43,259 58,053 State and political securities .............. 68,677 15,122 1,443 Other securities ............................ 78,332 6,170 7,571 ---------- -------- -------- Total ....................................... $1,498,877 $506,888 $486,522 ---------- -------- -------- ---------- -------- -------- - --------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES AT DECEMBER 31, 1997, MATURING IN - ----------------------------------------------------------------------------------------------------------------------------------- OVER ONE YEAR OVER 5 YEARS ONE YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS OVER 10 YEARS TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED (DOLLARS IN THOUSANDS) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Government agencies .... $ -- -- $ -- -- $ -- -- $ 228 7.25% $ 228 7.25% Mortgage-backed securities .. 780 8.51% 7,262 7.54% 29,653 6.43% 30,264 6.63% 67,959 6.66% Municipal bonds ............. 3,958 7.13% 8,342 7.54% 18,834 8.13% 16,930 8.20% 48,064 7.97% Other ....................... -- -- 62 10.03% -- -- 64,199 7.99% 64,261 7.99% ------- ----- ------- ------ ------- ----- -------- ----- -------- ----- Total ....................... $ 4,738 7.36% $15,666 7.55% $48,487 7.09% $111,621 7.65% $180,512 7.48% ------- ----- ------- ------ ------- ----- -------- ----- -------- ----- ------- ----- ------- ------ ------- ----- -------- ----- -------- ----- - -----------------------------------------------------------------------------------------------------------------------------------
(1) INTEREST YIELDS ON INVESTMENTS ARE PRESENTED ON A TAX EQUIVALENT BASIS TO REFLECT THE TAX EXEMPT NATURE OF CURRENT ASSETS. YIELDS ARE BASED ON A 35% INCREMENTAL TAX RATE AND A 3.51% COST OF FUNDS.
AVAILABLE-FOR-SALE SECURITIES AT DECEMBER 31, 1997, MATURING IN - ----------------------------------------------------------------------------------------------------------------------------------- OVER ONE YEAR OVER 5 YEARS ONE YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS OVER 10 YEARS TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED (DOLLARS IN THOUSANDS) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury ............... $ 27,956 5.78% $119,170 6.28% $ -- -- $ -- -- $ 147,126 6.19% U.S. Government agencies .... 54,585 5.59% 166,783 6.12% 44,330 6.45% 998 7.27% 266,696 6.07% Mortgage-backed securities .. 4,019 7.30% 8,242 6.88% 33,482 7.41% 784,200 6.81% 829,943 6.84% Collateralized mortgage obligations .............. 97 5.95% 2,905 6.47% 13,041 6.35% 92,060 6.38% 108,103 6.38% Municipal bonds ............. 8,180 7.28% 30,550 7.59% 7,055 8.79% 22,892 7.57% 68,677 7.67% Other ....................... 30,434 6.36% 731 6.63% 43 7.05% 47,124 7.44% 78,332 7.01% ------- ----- ------- ------ ------- ----- -------- ----- -------- ----- Total ....................... $125,271 5.98% $328,381 6.34% $ 97,951 6.93% $947,274 6.82% $1,498,877 6.65% ------- ----- ------- ------ ------- ----- -------- ----- -------- ----- ------- ----- ------- ------ ------- ----- -------- ----- -------- ----- - -----------------------------------------------------------------------------------------------------------------------------------
(1) INTEREST YIELDS ON INVESTMENTS ARE PRESENTED ON A TAX EQUIVALENT BASIS TO REFLECT THE TAX EXEMPT NATURE OF CURRENT ASSETS. YIELDS ARE BASED ON A 35% INCREMENTAL TAX RATE AND A 3.51% COST OF FUNDS. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. The Company's investments, including available-for-sale and held-to-maturity securities, increased $950 million, or 130.3%, to $1,679 million at December 31, 1997, from $729 million at December 31, 1996. This increase was due to the addition of $496 million of securities obtained through 1997 bank acquisitions and offset by maturing securities which were not replaced, in response to loan demand. At December 31, 1997, the Company's investments represented 34.6% of total assets, compared to 23.4% at December 31, 1996. CREDIT EXPERIENCE The Company's lending activities are guided by the general loan policy established by the Board of Directors. The Senior Credit Committee of the Company has established loan approval limits for each region of the Company and each subsidiary bank. The limits established for each bank range from $50,000 to $300,000 per borrower (except for the Fargo bank, which has a $750,000 limit per borrower). However, renewals of any criticized or classified loans have a limit of $25,000. Amounts in excess of the individual bank lending authority are presented to the regional credit officers. The regional credit officers for Arizona, Colorado, Iowa, Minnesota, Nebraska, Wisconsin, Wyoming and the Dakotas have lending authority of $750,000 per nonclassified borrower when a second regional credit officer or the respective regional managing officer concurs. Loans above $1,500,000 per nonclassified borrower and $250,000 per classified borrower are presented to the Senior Credit Committee for approval. Although the Company has a diversified loan portfolio, the economic health of the Company's primary trade area and the ability of many of the bank's borrowers to repay their loans (including real estate and commercial loans, as well as agricultural loans) is dependent to a large extent on the health of the agricultural sector of the economy. The Company has identified and implemented strategies to deal with these factors, including an emphasis on quality local loan growth and the diversification and performance of its earning asset portfolios. NONPERFORMING ASSETS The Company follows regulatory guidelines with respect to classifying loans on a nonaccrual basis. Loans are placed on nonaccrual when they become past due over 90 days or when the collection of interest or principal is considered unlikely. The Company does not return a loan to accrual status until it is brought current with respect to both principal and interest and future principal payments are no longer in doubt. When a loan is placed on nonaccrual status, any previously accrued and uncollected interest is reversed. Interest income of $364,000 on nonaccrual loans would have been recorded during 1997 if the loans had been current in accordance with their original terms. During 1997, the Company recorded interest income of $361,000 related to loans that were on nonaccrual status as of December 31, 1997. The Company considers nonperforming assets to include all nonaccrual loans, restructured loans defined as troubled debt restructurings under SFAS No. 15 and other real estate owned ("OREO"). Nonperforming assets of the Company are summarized in the following table:
DECEMBER 31, (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Loans: Nonaccrual loans ........................................... $ 12,507 $ 12,796 $ 3,252 $ 3,087 $ 3,742 Restructured loans ......................................... 140 267 483 140 1,100 ----------- ---------- ---------- ----------- ---------- Nonperforming loans ........................................ 12,647 13,063 3,735 3,227 4,842 OREO ........................................................... 3,406 1,426 1,701 1,265 1,622 ----------- ---------- ---------- ----------- ---------- Nonperforming assets ....................................... $ 16,053 $ 14,489 $ 5,436 $ 4,492 $ 6,464 ----------- ---------- ---------- ----------- ---------- Loans 90 days or more past due but still accruing .............. $ 3,616 $ 1,956 $ 779 $ 722 $ 761 ----------- ---------- ---------- ----------- ---------- Nonperforming loans as a percentage of total loans ............. 0.48% 0.63% 0.21% 0.24% 0.47% Nonperforming assets as a percentage of total assets ........... 0.33% 0.46% 0.20% 0.21% 0.34% Nonperforming assets as a percentage of total loans and OREO ... 0.61% 0.70% 0.31% 0.34% 0.62% Total loans .................................................... $ 2,637,057 $2,064,108 $1,767,193 $ 1,330,146 $1,037,666 Total assets ................................................... $ 4,855,526 $3,116,398 $2,769,976 $ 2,130,619 $1,883,794 - ---------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets were $16.1 million at December 31, 1997, an increase of $1.6 million, or 11.0%, from $14.5 million at December 31, 1996. Nonperforming loans decreased by $416,000. OREO increased $2.0 million, or 142.9%, from $1.4 million at December 31, 1996 to $3.4 million at December 31, 1997. The ratio of nonperforming assets to total assets at December 31, 1997, was .33%, compared to .46% at December 31, 1996. Nonperforming assets were $14.5 million at December 31, 1996, an increase of $9.1 million, or 168.5% from $5.4 million at December 31, 1995. Nonperforming loans increased by $9.3 million due principally to an increase in nonaccrual loans at the former Mountain Parks Bank of $7.6 million, including $4.6 million in the specialty lending area. At December 31, 1997, the Company has announced its intent to discontinue the operations of this subsidiary. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. ALLOWANCE FOR LOAN LOSSES The current level of the allowance for loan losses is a result of management's assessment of the risks within the portfolio based on the information revealed in credit reporting processes. The Company utilizes a risk-rating system on all loans, including purchased loans, and a monthly credit review and reporting process that results in the calculation of the guidelines reserves based on the risk within the portfolio. This assessment of risk takes into account the composition of the loan portfolio, previous loan experience, current economic conditions and other factors that, in managements' judgment, deserve recognition. Regulators have reviewed the Company's methodology for determining allowance requirements and have made no recommendations for increases in the allowances during the five-year period ended December 31, 1997. The Company has historically maintained a positive variance from the minimum estimated allowance for loan losses based on the analyses that are conducted by bank management and corporate credit personnel. Management has reviewed the allocations in the various classifications of loans and believes the allowance was adequate at all times during the five-year period ended December 31, 1997. The following table sets forth the Company's allowance for loan losses as of the dates indicated:
DECEMBER 31, (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------- Balance at beginning of year ................... $ 26,215 $ 22,712 $ 17,333 $ 14,332 $ 11,196 Allowance of acquired companies ................ 10,065 784 5,230 1,153 1,714 Charge-offs: Real estate ................................ 1,284 1,087 303 109 303 Commercial ................................. 1,462 1,176 1,285 484 617 Consumer and other ......................... 4,385 2,265 1,502 584 461 Agricultural ............................... 726 443 373 38 58 ------------------------------------------------------------------- Total charge-offs .......................... 7,857 4,971 3,463 1,215 1,439 Recoveries: Real estate ................................ 248 269 63 549 162 Commercial ................................. 559 225 245 247 325 Consumer and other ......................... 965 361 536 218 188 Agricultural ............................... 647 78 57 210 37 ------------------------------------------------------------------- Total recoveries ........................... 2,419 933 901 1,224 712 ------------------------------------------------------------------- Net charge-offs ................................ 5,438 4,038 2,562 (9) 727 Provision charged to operations ................ 5,352 6,757 2,711 1,839 2,149 ------------------------------------------------------------------- Balance at end of year ......................... $ 36,194 $ 26,215 $ 22,712 $ 17,333 $ 14,332 ------------------------------------------------------------------- ------------------------------------------------------------------- Allowance as a percentage of total loans ....... 1.37% 1.27% 1.29% 1.30% 1.38% Net charge-offs to average loans outstanding ... 0.24% 0.22% 0.17% -- 0.08% Total loans .................................... $2,637,057 $2,064,108 $1,767,193 $1,330,146 $1,037,666 Average loans .................................. $2,264,150 $1,873,073 $1,545,497 $1,171,925 $ 909,890 - --------------------------------------------------------------------------------------------------------------------------
At December 31, 1997, the allowance for loan losses was $36.2 million, an increase of $10.0 million from the December 31, 1996, level of $26.2 million. The Company's 1997 acquisitions accounted for $10.4 million of the change, with the remaining change due to maintaining an adequate reserve in recognition of the Company's loan growth and the increase in net charge-offs during 1997. At December 31, 1997, the allowance for loan losses as a percentage of total loans was 1.37%, as compared to 1.27% at December 31, 1996. At December 31, 1996, the allowance for loan losses was $26.2 million, an increase of $3.5 million from the December 31, 1995, level of $22.7 million. The Company's 1996 acquisitions accounted for $784,000 of the increase, with the remaining increase due to maintaining an adequate reserve in recognition of the Company's loan growth during 1996. At December 31, 1996, the allowance for loan losses as a percentage of total loans was 1.27%, as compared to 1.29% at December 31, 1995. This decrease was attributed to strong loan growth and improvement in loan portfolio credit quality at the Company's bank subsidiaries. During 1997, net charge-offs were $5.4 million, an increase of $1.4 million from the net charge-offs of $4.0 million in 1996. The principal causes for the increase were the increase of real estate loan net charge-offs of $218,000; the decrease in commercial loan net charge-offs of $48,000; the decrease in agricultural loan net charge-offs of $286,000; and an increase in consumer loan and other loan net charge-offs of $1,516,000. The Company's provision for loan loss was $5.4 million in 1997 and $6.8 million in 1996. During 1996, net charge-offs were $4.0 million, an increase of $1.4 million from the $2.6 million during 1995. The increase included an increase of $938,000 in consumer and other loan net charge-offs and a $578,000 increase in real estate loan net charge offs. The Company's provision for loan loss increased from $2.7 million in 1995 to $6.8 million in 1996. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. The following table sets forth the allocation of the allowance for loan losses to various loan categories, as well as the allocation as a percentage of loans outstanding in each category, as of the dates indicated:
ALLOWANCE AS A PERCENT OF LOANS OUTSTANDING ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, BY CATEGORY AT DECEMBER 31, ---------------------------------------------- ------------------------------------------ (DOLLARS IN THOUSANDS) 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Real estate ................... $ 5,820 $ 4,059 $ 4,208 $ 3,252 $ 2,801 0.50% 0.47% .57% 0.60% 0.69% Commercial .................... 5,603 4,781 4,400 3,605 3,509 0.79% 0.77% .83% 0.91% 1.11% Consumer and other ............ 3,677 1,997 1,690 1,614 1,346 0.74% 0.58% .62% 0.72% 0.79% Agricultural .................. 2,091 2,056 1,615 1,737 1,529 0.77% 0.93% .72% 1.07% 1.04% ----------------------------------------------- --------------------------------------- Total Allocated Allowance ..... 17,191 12,893 11,913 10,208 9,185 0.65% 0.62% 0.67% 0.77% 0.89% Total Unallocated Allowance ... 19,003 13,322 10,799 7,125 5,147 0.72% 0.65% 0.62% 0.53% 0.49% ----------------------------------------------- --------------------------------------- Total Allowance ............... $36,194 $26,215 $22,712 $17,333 $14,332 1.37% 1.27% 1.29% 1.30% 1.38% ----------------------------------------------- --------------------------------------- ----------------------------------------------- --------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
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) 1997 1996 1995 - -------------------------------------------------------------------------------- Noninterest-bearing ....................... $ 597,333 $ 431,078 $ 398,314 Interest-bearing: Savings and checking accounts ........... 1,371,546 964,829 873,025 Time accounts less than $100,000 ........ 1,252,164 907,658 885,857 Time accounts greater than $100,000 ..... 398,291 233,875 202,520 ---------- ---------- ---------- Total deposits ............................ $3,619,334 $2,537,440 $2,359,716 ---------- ---------- ----------
Total deposits at December 31, 1997, were $3,619 million, an increase of $1,082 million, or 42.6%, from $2,537 million at December 31, 1996. The Company's core deposits as a percentage of total deposits were 89.0% and 90.8% as of December 31, 1997 and December 31, 1996, respectively. The increase in total deposits was primarily due to the 1997 bank acquisitions, with aggregate total deposits of $1,063 million as of the respective acquisition dates. At December 31, 1997, $398 million, or 11.0% of total deposits were in time accounts greater than $100,000. The increase of $164 million, or 70.1%, from $234 million at December 31, 1996, was due to $155 million of deposits obtained through the institutions acquired during 1997. Management believes virtually all the deposits in excess of $100,000 are with persons or entities that hold other deposit relationships with the banks. Maturities of deposits in excess of $100,000 at December 31, 1997 were (in thousands): Maturing in less than three months $161,669 Maturing in three to six months 80,544 Maturing in six to twelve months 115,413 Maturing in over twelve months 40,665 -------- Total deposits in excess of $100,000 $398,291 -------- --------
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 $410 million. As of December 31, 1997, $216 million advances were outstanding. The Company also had a $11 million balance outstanding on its $25 million short-term commercial paper arrangement at December 31, 1997. The $26 million increase in short-term borrowings from December 31, 1996 is due to strong loan demand at the Company's bank subsidiaries. The following table sets forth a summary of the short-term borrowings of the Company during 1997, 1996, and 1995, and as of the end of each such period:
AVERAGE MAXIMUM WEIGHTED AVERAGE DAILY OUTSTANDING AVERAGE INTEREST OUTSTANDING AMOUNT AT ANY INTEREST RATE AT (IN THOUSANDS) AT YEAR-END OUTSTANDING MONTH-END RATE YEAR-END - ------------------------------------------------------------------------------------------------------------------------------- 1997 Federal funds purchased and securities sold under agreements to repurchase ........................... $ 43,002 $ 67,144 $ 55,218 5.33% 3.14% Commercial paper ........................................... 11,167 8,812 23,346 5.91% 5.78% FHLB advances .............................................. 216,300 98,774 267,120 5.06% 5.70% Other ...................................................... 3,104 2,460 4,731 5.24% 6.02% ------------------------ Total .................................................. $ 273,573 $ 177,190 $ 273,573 5.21% 5.31% ------------------------ ------------------------ 1996 Federal funds purchased and securities sold under agreements to repurchase ........................... $ 78,369 $ 56,356 $ 83,451 4.75% 5.55% Commercial paper ........................................... 14,062 12,643 14,965 5.72% 5.63% FHLB advances .............................................. 152,000 96,130 182,000 5.91% 6.30% Other ...................................................... 3,203 3,182 4,140 5.58% 5.95% ------------------------ Total .................................................. $ 247,634 $ 168,311 $ 272,895 5.49% 6.01% ------------------------ ------------------------ 1995 Federal funds purchased and securities sold under agreements to repurchase ........................... $ 50,102 $ 67,421 $ 100,627 5.59% 4.69% Commercial paper ........................................... 10,000 6,352 10,000 6.11% 5.91% FHLB advances .............................................. 28,775 36,345 61,975 6.07% 5.88% Other ...................................................... 2,004 1,666 2,917 5.70% 6.05% ------------------------ Total .................................................. $ 90,881 $ 111,784 $ 152,523 5.78% 5.23% ------------------------ ------------------------ - -------------------------------------------------------------------------------------------------------------------------------
LONG TERM DEBT Long-term debt of the Company was $116 million as of December 31, 1997, and $47 million as of December 31, 1996. The increase is due to the Company's June 1997 completion of an unsecured $60 million subordinated debt offering, which carries interest at 7.30% payable semi-annually. The subordinated notes payable mature June 20, 2004. The Company does not have the option of redeeming the notes prior to maturity. Long-term debt also includes $12 million of exchangeable subordinated notes maturing August 15, 2005. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES Company-obligated mandatorily redeemable preferred securities of the Company was $120 million as of December 31, 1997, which consisted of $60 million of 8.20% Cumulative Capital Securities issued December 10, 1997 through CFB Capital II and $60 million of 8.875% Cumulative Capital Securities issued February 5, 1997 through CFB Capital I. The proceeds of both offerings were invested by CFB Capital II and CFB Capital I, respectively in Junior Subordinated Debentures of the Company. The debentures mature not earlier than February 1, 2002 and not later than December 15, 2027. SHAREHOLDERS' EQUITY Total shareholders' equity increased $94.7 million, or 38.7%, to $339.3 million at December 31, 1997, from $244.6 million at December 31, 1996, as a result of the retention of a majority of earnings, the conversion of debentures and the issuance of common stock. During 1997 the equivalent of 3,156,617 shares of common stock were issued, including 1,000,000 shares issued pursuant to the December 1997 shelf registration; 1,439,521 related to the conversion of debentures; 314,834 and 368,019 related to the acquisition of Republic and Summit, respectively, and 34,243 related to sales of common stock to Company sponsored employee benefit plans, resulting in an increase in shareholders' equity of $81.5 million. In 1996, the Company increased the number of authorized common shares from 20,000,000 to 30,000,000. The number of authorized preferred shares remained at 2,000,000. The increases are expected to provide the Company greater ability to utilize common and preferred stock in connection with raising additional capital, expanding its business through acquisitions and other general purposes. On February 28, 1997, the Company issued notice of redemption to the holders of its Depositary Shares, which represent ownership of one-quarter share of 7% Cumulative Convertible Preferred Stock (approxi- 24 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. mately $23 million in stated value). The redemption price is $26.40 (plus accrued and unpaid dividends) for each Depositary Share with a stated value of $25.00 per share. Holders of the Depositary Shares have the right to convert their investment into Common Stock, prior to redemption, at a rate of 1.569 shares of Common Stock for each Depositary Share. Virtually all of such holders elected to convert prior to redemption, which resulted in the issuance of approximately 1,443,000 shares of Common Stock. ASSET/LIABILITY MANAGEMENT LIQUIDITY MANAGEMENT Liquidity management is an effort of management to provide a continuing flow of funds to meet its financial commitments, customer borrowings needs and deposit withdrawal requirements. The liquidity position of the Company and its subsidiary banks is monitored by the Asset/Liability Management Committee of the Company. The largest category of assets representing a ready source of liquidity for the Company is its short-term financial instruments, which include federal funds sold, interest-bearing deposits at other financial institutions, U.S. Treasury securities and other securities maturing within one year. Liquidity is also provided through the regularly scheduled maturities of assets. The investment portfolio contains a number of high quality issues with varying maturities and regular principal payments. Maturities in the loan portfolio also provide a steady flow of funds, and strict adherence to the credit policies of the Company helps ensure the collectibility of these loans. The liquidity position of the Company is also greatly enhanced by its significant base of core deposits. The liquidity ratio is one measure of a bank's ability to meet its current obligations and is defined as the percentage of liquid assets to deposits. Liquid assets include cash and due from banks, unpledged investment securities with maturities of less than one year and federal funds sold. At year-end 1997, 1996 and 1995, the liquidity ratio was 8.78%, 7.77%, and 8.96%, respectively. The level of loans maturing within one year greatly added to the Company's liquidity position in 1997. Including loans maturing within one year, the liquidity ratio was 29.54%, 34.41%, and 40.23%, respectively, for the same periods. The Company has a revolving line of credit with its primary lender, which provides for borrowing up to $38 million. This line would be utilized to finance acquisitions which may be completed in 1998. There was no outstanding balance on this line of credit at December 31, 1997. The Company also maintains available lines of federal funds borrowings, as well as seasonal borrowing privileges, at the Federal Reserve Bank of Minneapolis. The Company's subsidiary banks have the ability to borrow an aggregate of $128 million in federal funds from 10 nonaffiliated financial institutions. Additionally, most of the Company's subsidiary banks have joined the Federal Home Loan Bank ("FHLB") System. As part of membership, the Company's subsidiary banks purchased a modest amount of stock of FHLB and obtained advance lines of credit which represent an aggregate of $410 million in additional funding capacity. INTEREST RATE SENSITIVITY Interest rate sensitivity indicates the exposure of a financial institution's earnings to future fluctuations in interest rates. Management of interest rate sensitivity is accomplished through the composition of loans and investments and by adjusting the maturities on earning assets and interest-bearing liabilities. Rate sensitivity and liquidity are related since both are affected by maturing assets and liabilities. However, interest rate sensitivity also takes into consideration those assets and liabilities with interest rates that are subject to change prior to maturity. The Company's Asset and Liability Management Committee ("ALCO") attempts to structure the Company's balance sheet to provide for an approximately equal amount of rate sensitive assets and rate sensitive liabilities. In addition to facilitating liquidity needs, this strategy assists management in maintaining relative stability in net interest income despite unexpected fluctuations in interest rates. ALCO uses three methods for measuring and managing interest rate risk: Repricing Mismatch Analysis, Balance Sheet Simulation Modeling and Equity Fair Value Modeling. REPRICING MISMATCH ANALYSIS -- Management performs a Repricing Mismatch ("Gap Analysis") analysis which represents a point in time net position of assets, liabilities and off-balance sheet instruments subject to repricing in specified time periods. Guidelines established by ALCO, and approved by the Company's Board of Directors, limit the impact on net interest income to five percent given a 100 basis point change in interest rates over one year. However, Management believes Gap Analysis alone does not accurately measure the magnitude of changes in net interest income since changes in interest rate do not impact all categories of assets, liabilities and off-balance sheet instruments equally or simultaneously. A summary of the Gap Analysis is presented on page 26. BALANCE SHEET SIMULATION MODELING -- Balance Sheet Simulation Modeling allows management to analyze the impact of short-term (less than 12 months) interest rate fluctuations using projected balance sheet information. The balance sheet changes are based on forecasted repayments of loans and securities, growth in loans and deposits, and historical pricing spreads. Management uses the model to simulate the impact of immediate and longer-term shifts in the yield curve. The results of these models are reviewed by ALCO and used to develop the Company's strategies. Guidelines established by ALCO limit the impact on net interest income to five percent given a 100 basis point change in interest rates. As of December 31, 1997, the impact of such a change in interest rates would be approximately .45 percent of net interest income. EQUITY FAIR VALUE MODELING -- Because Balance Sheet Simulation Modeling is dependent on accurate forecasts, its usefulness is limited to periods of one year or less. As a result, the Company uses the Equity Fair Value Modeling to measure long-term interest rate exposure. The method estimates the impact of interest rate changes on the estimated discounted future cash flows of the Company's current assets, liabilities, and off-balance sheet instruments. Guidelines established by ALCO limit the change in fair value to 15 percent given a 100 basis point change in interest rates. As of December 31, 1997, the impact of such a change in interest rates would be approximately 6.53 percent of net interest income. Based on each of these methods of measuring interest rate risk, management believes the Company is slightly asset sensitive as of December 31, 1997. The Company does not engage in the speculative use of derivative financial instruments. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS Community First Bankshares, Inc. The following table sets forth the Company's interest rate sensitivity analysis by contractual repricing or maturity at December 31, 1997:
REPRICING OR MATURING IN - --------------------------------------------------------------------------------------- 1 YEAR OVER 1 OVER 5 (DOLLARS IN THOUSANDS) OR LESS TO 5 YEARS YEARS TOTAL - --------------------------------------------------------------------------------------- Rate sensitive assets: Loans.............................. $1,296,659 $1,069,562 $ 270,836 $2,637,057 Held-to-maturity securities........ 8,038 23,341 149,133 180,512 Available-for-sale securities...... 332,984 438,798 727,095 1,498,877 Other interest-bearing assets...... 13,977 -- -- 13,977 ------------------------------------------------- Total rate sensitive assets....... $1,651,658 $1,531,701 $1,147,064 $4,330,423 ------------------------------------------------- Rate sensitive liabilities: Savings deposits and interest- bearing checking................ $ -- $ -- $1,371,546 $1,371,546 Time deposits...................... 1,352,010 298,445 -- 1,650,455 Short-term borrowings.............. 273,144 429 -- 273,573 Long-term borrowings............... 20,880 25,953 74,852 121,685 ------------------------------------------------- Total rate sensitive liabilities... $1,646,034 $ 324,827 $1,446,398 $3,417,259 ------------------------------------------------- ------------------------------------------------- Rate sensitive gap.................. $ 5,624 $1,206,874 $ (299,334) $ 913,164 Cumulative rate sensitive gap....... $ 5,624 $1,212,498 $ 913,164 $ 913,164 - ----------------------------------------------------------------------------------------
The following sets forth the Company's interest rate sensitivity analysis at December 31, 1997, with respect to the individual categories of loans and provides separate analyses with respect to fixed interest rate loans and floating interest rate loans:
REPRICING OR MATURING IN - ---------------------------------------------------------------------------------- 1 YEAR OVER 1 OVER 5 (DOLLARS IN THOUSANDS) OR LESS TO 5 YEARS YEARS TOTAL - ---------------------------------------------------------------------------------- Loan category: Real estate.................... $ 582,564 $ 425,306 $150,952 $1,158,822 Agricultural................... 217,353 46,663 6,211 270,227 Commercial..................... 430,825 224,032 53,227 708,084 Consumer and other............. 65,918 373,562 60,444 499,924 ----------------------------------------------- Total loans.................... $1,296,660 $1,069,563 $270,834 $2,637,057 ----------------------------------------------- Fixed interest rate loans........ $ 366,772 $ 932,960 $262,140 $1,561,872 Floating interest rate loans..... 929,888 136,603 8,694 1,075,185 ----------------------------------------------- Total loans.................... $1,296,660 $1,069,563 $270,834 $2,637,057 ----------------------------------------------- ----------------------------------------------- - ----------------------------------------------------------------------------------
CAPITAL MANAGEMENT Risk-based guidelines established by regulatory agencies require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of December 31, 1997, the Company is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table.
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, 1997................... 10.65% 14.24% 7.25% $3,266,648 December 31, 1996................... 8.88% 11.10% 6.62% $2,312,632 - ----------------------------------------------------------------------------------------
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 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks ................................................................ $ 222,088 $ 175,732 Federal funds sold and securities purchased under agreements to resell ................. 12,690 3,600 Interest-bearing deposits .............................................................. 1,287 3,598 Available-for-sale securities .......................................................... 1,498,877 506,888 Held-to-maturity securities (Fair Value: 1997 -- $182,335, 1996 -- $223,200) ........... 180,512 222,348 Loans .................................................................................. 2,637,057 2,064,108 Less: Allowance for loan losses .................................................... (36,194) (26,215) --------------------------------- Net loans .............................................................................. 2,600,863 2,037,893 Bank premises and equipment, net ....................................................... 101,820 65,705 Accrued interest receivable ............................................................ 40,105 29,233 Intangibles ............................................................................ 97,307 39,182 Other assets ........................................................................... 99,977 32,219 --------------------------------- Total assets ........................................................................... $ 4,855,526 $ 3,116,398 --------------------------------- --------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing ................................................................ $ 597,333 $ 431,078 Interest-bearing: Savings and NOW accounts ........................................................ 1,371,546 964,829 Time accounts over $100,000 ..................................................... 398,291 233,875 Other time accounts ............................................................. 1,252,164 907,658 --------------------------------- Total deposits ......................................................................... 3,619,334 2,537,440 Federal funds purchased and securities sold under agreements to repurchase ............. 43,002 78,369 Other short-term borrowings ............................................................ 230,571 169,265 Long-term debt ......................................................................... 116,476 46,750 Accrued interest payable ............................................................... 20,842 17,027 Due to brokers ......................................................................... 340,457 -- Other liabilities ...................................................................... 25,550 21,665 --------------------------------- Total liabilities ...................................................................... 4,396,232 2,870,516 Company-obligated mandatorily redeemable preferred securities of CFB Capital I and II .. 120,000 -- Minority interest ...................................................................... -- 1,311 Shareholders' equity: Preferred stock .................................................................... -- 22,988 Common stock, par value $.01 per share: Authorized Shares - 30,000,000 Issued Shares - 20,359,301 ...................................................... 204 172 Capital surplus .................................................................... 157,138 77,029 Retained earnings .................................................................. 177,748 144,239 Unrealized gain on available-for-sale securities, net of tax ....................... 5,587 1,368 Less cost of common stock in treasury - 1997 - 36,255 shares; 1996 - 50,810 shares . (1,383) (1,225) --------------------------------- Total shareholders' equity ............................................................. 339,294 244,571 --------------------------------- Total liabilities and shareholders' equity ............................................. $ 4,855,526 $ 3,116,398 --------------------------------- --------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
See ACCOMPANYING NOTES. 27 CONSOLIDATED STATEMENTS OF INCOME Community First Bankshares, Inc. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans ............................................................................... $ 218,588 $ 183,530 $ 150,948 Investment securities ............................................................... 59,103 44,936 40,210 Interest-bearing deposits ........................................................... 575 163 366 Federal funds sold and resale agreements ............................................ 331 797 1,344 ----------------------------------------- Total interest income ................................................................... 278,597 229,426 192,868 INTEREST EXPENSE: Deposits ............................................................................ 102,632 81,655 71,780 Short-term and other borrowings ..................................................... 8,734 9,247 6,184 Long-term debt ...................................................................... 5,887 4,332 4,927 ----------------------------------------- Total interest expense .................................................................. 117,253 95,234 82,891 ----------------------------------------- Net interest income ..................................................................... 161,344 134,192 109,977 Provision for loan losses ............................................................... 5,352 6,757 2,711 ----------------------------------------- Net interest income after provision for loan losses ..................................... 155,992 127,435 107,266 NONINTEREST INCOME: Service charges on deposit accounts ................................................. 17,023 12,328 10,116 Insurance commissions ............................................................... 5,375 5,213 4,283 Fees from fiduciary activities ...................................................... 3,805 3,332 2,718 Net gains on sales of securities .................................................... 463 93 52 Other ............................................................................... 9,898 6,404 5,319 ----------------------------------------- Total noninterest income ................................................................ 36,564 27,370 22,488 NONINTEREST EXPENSE: Salaries and employee benefits ...................................................... 64,868 54,870 42,796 Net occupancy ....................................................................... 19,139 15,085 10,563 FDIC insurance ...................................................................... 357 669 2,532 Legal and accounting ................................................................ 1,710 1,989 1,311 Other professional service .......................................................... 2,378 1,892 2,700 Acquisition expense ................................................................. 398 2,928 768 Data processing ..................................................................... 1,290 1,506 1,607 Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II . 5,108 -- -- Amortization of intangibles ......................................................... 5,519 3,362 2,551 Permanent impairment of equity method investment .................................... -- 940 -- Other ............................................................................... 24,423 21,047 17,765 ----------------------------------------- Total noninterest expense ............................................................... 125,190 104,288 82,593 ----------------------------------------- Income from continuing operations before income taxes and extraordinary item ............ 67,366 50,517 47,161 Provision for income taxes .............................................................. 21,516 18,007 17,208 ----------------------------------------- Income from continuing operations before extraordinary item ............................. 45,850 32,510 29,953 Discontinued Operations: Income from operations of discontinued operations (Less applicable income taxes of $583) ............................................ 967 -- -- ----------------------------------------- Income before extraordinary item ........................................................ 46,817 32,510 29,953 Extraordinary item: Loss on early extinguishment of debt, net of taxes ...................................... (265) -- -- ----------------------------------------- Net Income .............................................................................. 46,552 32,510 29,953 Preferred stock dividend ................................................................ -- 1,610 1,610 ----------------------------------------- Net income applicable to common equity .................................................. $ 46,552 $ 30,900 $ 28,343 ----------------------------------------- Earnings per common and common equivalent share: Basic income per share from continuing operations before extraordinary item ............. $ 2.48 $ 1.87 $ 1.85 Discontinued operations ................................................................. 0.05 -- -- Extraordinary item ...................................................................... (0.01) -- -- ----------------------------------------- Basic net income ........................................................................ $ 2.52 $ 1.87 $ 1.85 ----------------------------------------- Diluted income per share from continuing operations before extraordinary item ........... $ 2.40 $ 1.79 $ 1.75 Discontinued operations ................................................................. 0.05 -- -- Extraordinary item ...................................................................... (0.01) -- -- ----------------------------------------- Diluted net income ...................................................................... $ 2.44 $ 1.79 $ 1.75 ----------------------------------------- Average common and common equivalent shares outstanding: Basic ............................................................................... 18,474,749 16,509,289 15,361,370 Diluted ............................................................................. 19,069,078 18,142,377 17,167,650 - -----------------------------------------------------------------------------------------------------------------------------------
See ACCOMPANYING NOTES. 28 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Community First Bankshares, Inc. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PREFERRED STOCK COMMON STOCK TREASURY STOCK YEARS ENDED DECEMBER 31, ---------------- --------------- CAPITAL RETAINED UNREALIZED ---------------- 1997,1996,1995 SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS GAIN(LOSS) SHARES AMOUNT TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994.. 230,000 $23,000 14,744,919 $148 $48,915 $92,755 $(5,182) 144,344 $(1,935) $157,701 Net income.................... -- -- -- -- -- 29,953 -- -- -- 29,953 Preferred stock dividends ($7.00 per share)......... -- -- -- -- -- (1,610) -- -- -- (1,610) Common stock dividends ($0.48 per share)......... -- -- -- -- -- (5,279) -- -- -- (5,279) Issuance of common stock...... -- -- 891,863 9 11,568 -- -- -- -- 11,577 Purchases of common stock for treasury, at cost..... -- -- -- -- -- -- -- 4,000 (56) (56) Sales of treasury stock to employee benefit plans.... -- -- -- -- 22 -- -- (18,194) 237 259 Exercise of options, net of stock tendered in payment................... -- -- 20,635 -- 156 (209) -- (51,526) 690 637 Exercise of warrants, net of stock tendered in payment................... -- -- 21,602 -- -- -- -- -- -- -- Conversion of debentures...... -- -- 485,338 5 3,915 -- -- -- -- 3,920 Liquidation of investment in subsidiary to shareholders.............. -- -- -- -- -- (456) -- -- -- (456) Termination of ESOP loan guarantee upon satisfaction of debt...... -- -- -- -- 200 -- -- -- -- 200 Change in unrealized loss on available-for-sale securities, net of income taxes of $4,219........... -- -- -- -- -- -- 7,158 -- -- 7,158 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995.. 230,000 23,000 16,164,357 162 64,776 115,154 1,976 78,624 (1,064) 204,004 Net income.................... -- -- -- -- -- 32,510 -- -- -- 32,510 Preferred stock dividends ($7.00 per share)......... -- -- -- -- -- (1,610) -- -- -- (1,610) Common stock dividends ($0.58 per share)......... -- -- -- -- -- (6,714) -- -- -- (6,714) Issuance of common stock...... -- -- 842,253 8 9,810 5,226 -- -- -- 15,044 Retirement of common stock.... -- -- (19,125) -- (349) -- -- -- -- (349) Purchases of common stock for treasury, at cost..... -- -- -- -- -- -- -- 64,900 (1,535) (1,535) Sales of treasury stock to employee benefit plans.... -- -- -- -- 162 -- -- (22,582) 307 469 Exercise of options, net of stock tendered in payment. -- -- 215,199 2 2,630 (322) -- (69,349) 1,050 3,360 Conversion of convertible preferred Stock........... (125) (12) -- -- -- (5) -- (783) 17 -- Change in unrealized loss on available-for-sale securities, net of income tax benefit of $336....... -- -- -- -- -- -- (608) -- -- (608) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996.. 229,875 22,988 17,202,684 172 77,029 144,239 1,368 50,810 (1,225) 244,571 Net income.................... -- -- -- -- -- 46,552 -- -- -- 46,552 Common stock dividends ($0.70 per share)......... -- -- -- -- -- (12,837) -- -- -- (12,837) Purchases of common stock for treasury, at cost......... -- -- -- -- -- -- -- 78,500 (2,777) (2,777) Sales of common stock to employee benefit plans ... -- -- 34,243 1 1,066 -- -- -- -- 1,067 Issuance of common stock...... -- -- 3,122,374 31 79,043 1,315 -- -- -- 80,389 Exercise of options, net of stock tendered in payment. -- -- -- -- -- (1,521) -- (93,055) 2,619 1,098 Conversion of convertible preferred.................(229,875) (22,988) -- -- -- -- -- -- -- (22,988) Change in unrealized loss on available-for-sale securities, net of income taxes of $2,244........... -- -- -- -- -- -- 4,219 -- -- 4,219 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997.. -- -- 20,359,301 $204 $157,138 $177,748 $5,587 36,255 $(1,383) $339,294 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES.
29 CONSOLIDATED STATEMENTS OF CASH FLOWS Community First Bankshares, Inc. (IN THOUSANDS)
YEARS ENDED DECEMBER 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income .............................................................................. $ 46,552 $ 32,510 $ 29,953 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ........................................................... 5,352 6,757 2,711 Depreciation ........................................................................ 9,205 6,974 5,373 Amortization of intangibles ......................................................... 5,519 3,362 2,551 Net amortization of premiums and discounts on securities ............................ (68) 1,867 1,946 Deferred income tax benefit ......................................................... (3,133) (3,906) (4,009) (Increase) decrease in interest receivable .......................................... (4,047) 422 (2,309) Increase in interest payable ........................................................ 1,066 282 4,746 Other, net .......................................................................... 5,800 (4,236) (6,066) --------------------------------------- Net cash provided by operating activities ............................................... 66,246 44,032 34,896 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions, net of cash acquired ...................................................... 145,351 14,026 35,667 Net increase (decrease) in interest-bearing deposits .................................... 2,311 (158) (462) Purchases of available-for-sale securities .............................................. (736,619) (218,601) (86,629) Maturities of available-for-sale securities ............................................. 366,438 217,771 75,262 Sales of securities, net of gains ....................................................... 74,636 29,720 50,530 Purchases of held-to-maturity securities ................................................ (29,250) (23,344) (75,871) Maturities of held-to-maturity securities ............................................... 27,555 30,986 54,990 Net increase in loans ................................................................... (114,732) (237,802) (139,434) Net increase in bank premises and equipment ............................................. (19,327) (18,194) (10,438) Net (decrease) increase in minority interest ............................................ (1,311) 355 (4,828) --------------------------------------- Net cash used in investing activities ................................................... (284,948) (205,241) (101,213) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts ........... 11,634 51,952 (44,603) Net increase (decrease) in time accounts ................................................ 7,056 (5,807) 141,005 Net increase (decrease) in short-term and other borrowings .............................. 22,366 156,753 (23,088) Proceeds from issuance of long-term debt ................................................ 69,140 -- 56,624 Repayment of long-term debt ............................................................. -- (34,538) (10,000) Net proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of CFB Capital I and II ........................................ 120,000 -- -- Net proceeds from issuance of common stock .............................................. 81,456 15,044 11,577 Conversion of convertible preferred stock ............................................... (22,988) -- -- Purchase of common stock held in treasury ............................................... (2,777) (1,535) (56) Sale of common stock held in treasury ................................................... 1,098 3,829 896 Retirement of common stock .............................................................. -- (349) -- Preferred stock dividends paid .......................................................... -- (1,610) (1,610) Common stock dividends paid ............................................................. (12,837) (6,714) (5,279) --------------------------------------- Net cash provided by financing activities ............................................... 274,148 177,025 125,466 --------------------------------------- Net increase in cash and cash equivalents ............................................... 55,446 15,816 59,149 Cash and cash equivalents at beginning of year .......................................... 179,332 163,516 104,367 --------------------------------------- Cash and cash equivalents at end of year ................................................ $ 234,778 $ 179,332 $ 163,516 --------------------------------------- --------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES.
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. DECEMBER 31, 1997, 1996 AND 1995 1. SIGNIFICANT ACCOUNTING POLICIES Community First Bankshares, Inc. (the "Company") is multi-bank holding company which, at the end of 1997, served 109 communities in Arizona, Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota, Wisconsin, and Wyoming. The Company's community banks provide a full range of banking services, primarily in small and medium-sized communities and the surrounding communities. In addition to its primary emphasis on commercial and consumer banking services, the Company offers trust, insurance and nondeposit investment products and services. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Community First Bankshares, Inc., its wholly-owned data processing, credit origination and insurance agency subsidiaries and its ten majority-owned subsidiary banks. Minority interest which existed at December 31, 1996 and 1995 is reflected in consolidation and is the portion of the subsidiary banks that was not owned by the Company. Minority interest ranged from 0.00% to 1.29% and 0.00% to 2.87% at December 31, 1996 and 1995, respectively. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation. As discussed in Note 2, the Company acquired Mountain Parks Financial Corporation ("Mountain Parks"), on December 18, 1996, Minowa Bancshares, Inc. ("Minowa"), on February 22, 1995, and First Community Bankshares, Inc. ("FCB"), on July 3, 1995. These acquisitions were accounted for using the pooling of interests method. Accordingly, the consolidated financial information has been restated to reflect the results of operations of the four companies on a combined basis for all periods presented. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES Management determines the classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of retained earnings in shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included as an adjustment to interest income from investments. Realized gains and losses and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. LOANS Loans are stated at their principal balance outstanding, less the allowance for loan losses. Interest on loans is recognized on an accrual basis. Loans are placed on nonaccrual when they become past due over 90 days, or earlier, if the collection of interest or principal is considered unlikely. Thereafter, no interest income is recognized unless received in cash and until such time as the borrower demonstrates the ability to pay interest and principal. LOAN FEE INCOME The Company recognizes loan fees and certain direct origination costs as a yield adjustment over the estimated life of the loan, utilizing a method that results in a constant rate of return. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained through charges to expense at an amount that will provide for estimated loan losses. These estimates are based principally on a continual review of the loan portfolio, loan charge-off experience, economic conditions and industry guidelines. Ultimate losses may vary from current estimates, and as adjustments become necessary, the allowance for loan losses is adjusted in the periods in which such losses become known or fail to occur. Actual loan charge-offs and subsequent recoveries are deducted from and added to the allowance, respectively. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is provided on the straight-line method over the estimated lives of the assets and includes amortization of assets recorded under capital leases. Estimated lives range from three to twenty and twenty-five to forty years for equipment and premises, respectively. Accelerated depreciation methods are used for income tax reporting purposes. INTANGIBLE ASSETS Goodwill, the excess cost over net assets acquired, of banking subsidiaries is amortized over a period of fifteen years. At December 31, 1997, goodwill totaled $87,348,000, net of accumulated amortization of $10,749,000. Other intangible assets, principally deposit base intangibles, unexpired premium lists and noncompetition agreements, totaled $9,959,000, net of accumulated amortization of $4,127,000, and are amortized over their estimated useful lives ranging from three to twenty-five years. INCOME TAXES The Company provides for income taxes based on income reported for financial statement purposes, rather than amounts currently payable under statutory tax laws. Deferred taxes are recorded to reflect the tax consequences on future years' differences between the tax bases of assets and liabilities and the financial reporting of amounts at each year-end. EARNINGS PER SHARE Basic earnings per common share is calculated by dividing net income applicable to common equity by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is based on net income before considering the preferred stock dividends declared and interest expense, net of tax, paid on convertible exchangeable redeemable subordinated 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. debentures (the "Debentures"). Interest expense on the Debentures, net of tax, was $86,000 for the year ended December 31, 1995. There was no similar expense for the years ended December 31, 1997 and 1996. The weighted average number of shares of common stock outstanding is increased by the assumed conversion of convertible preferred stock outstanding and the Debentures outstanding from the beginning of the period or date of issuance, if later, and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants during each period. Such adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per share. CASH AND CASH EQUIVALENTS Cash and cash equivalents is defined as cash and due from banks, federal funds sold and securities purchased under agreements to resell. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. See Footnotes 4 and 15. 2. BUSINESS COMBINATIONS AND DIVESTITURES On December 1, 1997, the Company issued approximately 314,800 shares of common stock to acquire First National Summit Bankshares, Inc. ("Summit"), a one-bank holding company headquartered in Gunnison, Colorado. At acquisition, Summit had approximately $90 million in assets and $82 million in deposits at banking offices located in Crested Butte, Fruitvale, Grand Junction, Gunnison, and Mt. Crested Butte, Colorado. The Company used the pooling of interests method to account for the transaction. This merger was not material to the Company's financial condition or operating results. Accordingly, the Company's consolidated financial information has not been restated to reflect this merger. The operating results are included in the Company's consolidated financial statement from the date of merger. On November 24, 1997, the Company issued approximately 368,000 shares of common stock to acquire Republic National Bancorp, Inc. ("Republic"), a holding company with one bank in Phoenix, Arizona. At acquisition, Republic had approximately $54 million in assets and $49 million in deposits. The Company used the pooling of interests method to account for the transaction. This merger was not material to the Company's consolidated financial information or operating results. Accordingly, the Company's consolidated financial information has not been restated to reflect this merger. The operating results are included in the Company's consolidated financial statements from the date of the merger. On July 14, 1997, the Company completed the acquisition of KeyBank National Association, Cheyenne, Wyoming ("KeyBank Wyoming") with 28 banking offices located in 24 communities throughout the state of Wyoming. The transaction, which was accounted for as a purchase, resulted in the addition of approximately $1.1 billion in assets and $900 million in deposits and the recognition of goodwill of approximately $60 million. The operating results of KeyBank Wyoming, subsequent to the date of acquisition, are included in the Company's consolidated financial statements as of and for the period ended December 31, 1997. The following unaudited pro forma consolidated financial information for the year ended December 31, 1997, reflects the results of operations as if the acquisition of KeyBank Wyoming had occurred on January 1, 1997. In addition to combining the historical results of operations of the two companies, the pro forma operating results include adjustments for the estimated effect of purchase accounting on the Company's results, principally amortization of intangibles, adjustments to reflect the estimated impact on income and expense related to the assets and liabilities retained by KeyCorp and assumes the following were completed at the beginning of the period presented: (i) the $60 million offering of 8-7/8% Cumulative Capital Securities of CFB Capital I completed in February 1997; (ii) the redemption on March 31, 1997 of the Company's 7.75% Subordinated Notes due 2000 in the principal amount of $23 million; and (iii) the conversion during March 1997 of substantially all of the Company's 7% Cumulative Convertible Preferred Stock.
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1997 - -------------------------------------------------------------------------------- Net interest income .................................................. $179,014 Income from continuing operations .................................... 48,365 Income before extraordinary item ..................................... 49,332 Net income ........................................................... 49,067 Earnings per common share............................................. Basic ............................................................ $ 2.62 Diluted .......................................................... $ 2.57
The proforma information may not be indication of the results that actually would have occurred if the combination had been in effect on the date indicated or that may be obtained in the future. On November 7, 1997, the Company signed a definitive merger agreement with Pioneer Bank of Longmont ("Longmont"), Longmont, Colorado, with offices in Berthoud, Longmont, Lyons, and Niwot, Colorado. Upon completion of the transaction, the Company will issue approximately 700,000 shares of common stock to the holders of Longmont common stock. Longmont had total assets of approximately $130 million as of December 31, 1997. The completion of the transaction is subject to regulatory approvals, approval by the shareholders of Longmont and other conditions. The transaction, is expected to be completed during the second quarter of 1998 and is expected to be accounted for by using the pooling of interests method of accounting. On April 30, 1997, the Company sold its 24.36% minority interest in Vail Banks, inc., the parent company of WestStar Bank, Vail, Colorado for approximately $3 million. The sale was completed in response to regulatory requirements with regard to competitive factors resulting from the Company's December 1996 acquisition of Mountain Parks. On April 4, 1997, the Company, through its Colorado subsidiary, completed the sale of its offices in Granby and Grand Lake, Colorado in response to regulatory requirements with regard to competitive factors resulting from the Company's merger with Mountain Parks. The transaction included approximately $24 million in deposits and resulted in the recognition of a gain of approximately $2.8 million. On December 18, 1996, the Company issued 5,176,672 shares of common stock to complete its merger with Mountain Parks, a one bank holding company with seventeen offices in Colorado. The merger was 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. accounted for using the pooling of interests method. Operating results of the Company and Mountain Parks for the years ended December 31, 1995 and the nine months ended September 30, 1996, prior to restatement were:
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: Basic ............................. $ 1.74 $ 1.42 $ 1.55 Diluted ........................... $ 1.61 $ 1.40 $ 1.47 YEAR ENDED DECEMBER 31, 1995: Net interest income .................... $88,148 $21,829 $109,977 Net income ............................. 22,819 7,134 29,953 Net income applicable to common equity ........................ 21,209 7,134 28,343 Earnings per common and common equivalent share: Basic ............................. $ 1.86 $ 2.29 $ 1.85 Diluted ........................... $ 1.77 $ 2.17 $ 1.75 - --------------------------------------------------------------------------------
(NO MATERIAL ADJUSTMENTS WERE REQUIRED TO RESTATE COMBINED RESULTS OF OPERATIONS.) During 1996, the Company completed the acquisition of several smaller financial institutions in its existing markets. These acquisitions, except as described below, were accounted for using the purchase method and were not material to the financial condition or operating results of the Company. On October 1, 1996, the Company acquired Financial Bancorp, Inc. ("Financial"), a holding company with one bank in Trinidad, Colorado. In the transaction, which was accounted for using the pooling of interests method, the Company issued 538,803 shares of common stock in exchange for 100% of Financial common stock. This merger was not material to the Company's financial condition or operating results. Accordingly, the Company's consolidated financial information has not been restated to reflect this merger. The operating results of Financial are included in the Company's consolidated financial statements subsequent to the date of the merger. On July 31, 1996, the Company acquired High Plains Bancorp, Inc. ("High Plains"), with offices in Kiowa, Elizabeth, and Parker, Colorado. The company paid approximately $7,100,000 for 100% of High Plains common stock. The transaction resulted in the recognition of goodwill of approximately $3,448,000. On July 3, 1996, the Company acquired Charter Bancorporation ("Charter"), Englewood, Colorado. The Company paid approximately $4,600,000 for 100% of Charter common stock. The transaction resulted in the recognition of goodwill of approximately $2,723,000. The equivalent of approximately 232,050 shares of common stock were issued in the transaction. The operating results of all of the companies acquired in purchase transactions subsequent to the dates of acquisition are included in the Company's consolidated financial statements for the years ended December 31, 1997, 1996 and 1995. During 1997, the Company made the determination to dispose of its sub-prime lending affiliates, Mountain Parks Financial Services, Inc. ("MPFS") and Equity Lending, inc. ("ELI"). Both MPFS, which purchases auto contracts and ELI, which originates residential, non-conforming mortgages were acquired by the Company in December 1996 through the merger with Mountain Parks Financial Corporation. The Company has accounted for these entities as discontinued operations on the consolidated financial statements. At December 31, 1997, the net balance sheet effect of $72 million from these entities has been included as an Other Asset. The Company recognized income of $967,000 net of tax, from these entities during 1997. 3. SUBSEQUENT EVENTS (UNAUDITED) On February 3, 1998, the Company announced that its Board of Directors approved a two-for-one split of the Company's common stock, to be in the form of a 100 percent stock dividend. The action is subject to shareholder approval of an increase in the Company's authorized common stock at the April 28, 1998 annual shareholders meeting. The stock dividend is expected to be distributed May 15, 1998 to shareholders of record on May 1, 1998. On January 23, 1998, the Company completed the purchase and assumption of approximately $730 million in assets and liabilities of 37 offices of Banc One Corporation located in Arizona, Colorado, and Utah. The 25 Arizona and four Utah offices were merged into the Company's Arizona affiliate. The eight Colorado offices were merged into one of the Company's Colorado affiliates. The transaction was accounted for as a purchase of certain assets and assumption of certain liabilities and resulted in the recognition of a deposit based intangible of approximately $44 million. On January 14, 1998, the Company signed a definitive agreement to acquire FNB, Inc., ("FNB") Greeley, Colorado, the bank holding company that owns First National Bank of Greeley and Poudre Valley Bank in Fort Collins, Colorado, through the issuance of Company common stock to holders of FNB common stock. The transaction which is expected to be completed during the second quarter of 1998 will be accounted for using the pooling of interests method of accounting. FNB had assets of $118 million and deposits of $105 million as of December 31, 1997. On January 9, 1998, the Company signed a definitive agreement to acquire Community Bancorp, Inc. ("CBI"), the parent company of Community First National Bank, Thornton, Colorado, through the issuance of Company common stock to holders of CBI common stock. The transaction is expected to be completed during the second quarter of 1998 and will be accounted for using the pooling of interests method of accounting. CBI had assets of $78 million and deposits of $72 million as of December 31, 1997. 4. ACCOUNTING CHANGES Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. indicate that the carrying amount of an asset is not recoverable. The Company's adoption of SFAS No. 121 did not have a material impact on the Company's financial position. During December 1996, the Company recorded a $940,000 writedown in the value of its investment in an unconsolidated subsidiary, which is being divested to satisfy regulators' competitive issues related to the merger with Mountain Parks. The amount of impairment is based on the estimated net proceeds from the sale of the investment, expected to be completed in early 1997. SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a new fair value-based accounting method for stock-based compensation plans. As permitted by SFAS No. 123, management has elected to measure compensation costs as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Note 14 includes the required pro forma disclosures reflecting the impact on net income and earnings per share as if the Company had recorded compensation expense based on the fair value method described in SFAS 123. SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," addresses whether the transfer of financial assets should be accounted for as a sale and removed from the balance sheet, or as a financing recognized as a borrowing. SFAS No. 125 uses a "financial components" approach to determine the accounting results of the transfers of financial assets and focuses on control to determine whether assets have been sold. If the entity has surrendered control over the transferred assets, the transaction is considered a sale. Control is considered surrendered only if the seller has no legal right to the assets, even in bankruptcy; the buyer has the right to pledge or exchange the assets; and the seller does not maintain effective control over the assets through an agreement to repurchase or redeem them. SFAS No. 125 was effective on a prospective basis for all transactions occurring after December 31, 1996. The Company regularly uses participations of loans to manage its asset/liability mix. The accounting for such transactions is included in SFAS No. 125. However, the adoption of SFAS No. 125 did not have a material effect on the Company's operations or financial position. SFAS No.128 -- Earnings Per Share -- In February 1997, the FASB issued Statements of Financial Accounting Standard ("SFAS"), No. 128, Earnings Per Share. Under this Statement, primary and fully diluted earnings per share is replaced with basic and diluted earnings per share. For basic EPS, the dilutive effect of stock options is excluded from the calculation. Diluted EPS is calculated similarly to the previously reported fully diluted earnings per share. SFAS 128 became effective for the Company's 1997 year-end financial statements. All prior period earnings per share data presented have been restated to conform to the provisions of this statement. The Company's adoption of SFAS 128 did not have a material impact on the Company's reported earnings per share. SFAS No. 130 -- Reporting Comprehensive Income -- In June 1997, the FASB issued Statement 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed as prominently as other financial statements. The Statement requires the classification of items of other comprehensive income separately from retained earnings and capital surplus in the equity section of the statement of financial position. SFAS 130 is effective January 1, 1998, with all prior periods presented restated to conform to the provisions of this statement. 5. SECURITIES The following is a summary of available-for-sale securities and held-to-maturity securities at December 31, 1997 (in thousands):
AVAILABLE-FOR-SALE SECURITIES - -------------------------------------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------------- United States Treasury ................. $ 146,228 $1,048 $ 150 $ 147,126 United States Government agencies ...... 266,082 963 349 266,696 Mortgage-backed securities ............. 823,712 6,660 429 829,943 Collateralized mortgage obligations .... 107,799 403 99 108,103 State and political securities ......... 67,919 858 100 68,677 Other securities ....................... 78,409 34 111 78,332 -------------------------------------------------------------- Total .................................. $1,490,149 $9,966 $1,238 $1,498,877 -------------------------------------------------------------- -------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES - ---------------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------- United States Government agencies ... $ 228 $ -- $ -- $ 228 Mortgage-backed securities .......... 67,959 453 428 67,984 State and political securities ...... 48,064 1,816 9 49,871 Other securities .................... 64,261 -- 9 64,252 ------------------------------------------- Total ............................... $180,512 $2,269 $446 $182,335 ------------------------------------------- ------------------------------------------- - ----------------------------------------------------------------------------------
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 ---------------------------------------------- ---------------------------------------------- - -------------------------------------------------------------------------------------------
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, 1997, 1996 and 1995, were $75,100,000, $29,812,000, and $50,596,000, respectively. Gross gains of $550,000, $195,000, and $633,000 and gross losses of $86,000, $103,000, and $567,000 were realized on those sales during 1997, 1996 and 1995, respectively. The tax effect on the net gains during 1997, 1996 and 1995 was approximately $162,000, $32,000, and $22,000, respectively. There were no sales of held-to-maturity securities during 1997, 1996 or 1995. The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED ESTIMATED AVAILABLE-FOR-SALE (IN THOUSANDS) COST FAIR VALUE - -------------------------------------------------------------------------------- Due in one year or less ............................... $ 121,120 $ 121,155 Due after one year through five years ................. 315,822 317,234 Due after five years through ten years ................ 51,058 51,429 Due after ten years ................................... 70,638 71,013 ----------------------- 558,638 560,831 Mortgage-backed securities ............................ 823,712 829,943 Collateralized mortgage obligations ................... 107,799 108,103 ----------------------- Total ................................................. $1,490,149 $1,498,877 ----------------------- ----------------------- - --------------------------------------------------------------------------------
AMORTIZED ESTIMATED HELD-TO-MATURITY (IN THOUSANDS) COST FAIR VALUE - -------------------------------------------------------------------------------- Due in one year or less ............................... $ 3,958 $ 3,981 Due after one year through five years ................. 8,404 8,496 Due after five years through ten years ................ 18,834 19,698 Due after ten years ................................... 81,357 82,176 ----------------------- 112,553 114,351 Mortgage-backed securities ............................ 67,959 67,984 ----------------------- Total ................................................. $180,512 $182,335 ----------------------- ----------------------- - --------------------------------------------------------------------------------
At December 31, 1997, available-for-sale securities included $340,457,000 in commitments to purchase specific investment securities at a future date. Available-for-sale and held-to-maturity securities carried at $773,218,000 and $452,478,000 at December 31, 1997 and 1996, respectively, were pledged to secure borrowings, public and trust deposits and for other purposes required by law. Securities sold under agreement to repurchase were collateralized by available-for-sale and held-to-maturity securities with an aggregate carrying value of $61,749,000 and $38,856,000 at December 31, 1997 and 1996, respectively. In October 1995, the FASB approved a one-time opportunity for companies to reevaluate the classifications of their investment portfolio and transfer securities from their held-to-maturity account to available-for-sale without consequences to the classification of securities not transferred. The Company utilized this opportunity to transfer $187 million of securities, based on amortized cost from held-to-maturity to available-for-sale. The unrealized losses on these securities at the time of transfer was $758,000. 6. LOANS The composition of the loan portfolio at December 31 was as follows (in thousands):
1997 1996 - ------------------------------------------------------------------------------- Real estate $ 1,158,822 $ 871,432 Commercial 708,084 624,456 Consumer and other 499,924 346,139 Agriculture 270,227 222,081 ------------------------------ 2,637,057 2,064,108 Less allowance for loan losses (36,194) (26,215) ------------------------------ Net Loans $ 2,600,863 $ 2,037,893 ------------------------------ ------------------------------ - -------------------------------------------------------------------------------
At December 31, 1997, real estate loans totaling $358,000,000 were pledged to secure borrowings. 7. ALLOWANCE FOR LOAN LOSSES ACTIVITY IN THE ALLOWANCE WAS AS FOLLOWS (IN THOUSANDS):
1997 1996 1995 - ------------------------------------------------------------------------------- Balance at beginning of year ................ $ 26,215 $ 22,712 $ 17,333 Allowance of acquired companies(1) .......... 10,065 784 5,230 Provision charged to operating expense ...... 5,352 6,757 2,711 Loans charged off ........................... (7,857) (4,971) (3,463) Recoveries of loans charged off ............. 2,419 933 901 -------------------------------- Balance at end of year ...................... $ 36,194 $ 26,215 $ 22,712 -------------------------------- -------------------------------- - -------------------------------------------------------------------------------
(1) INCLUDES ONLY ACQUISITIONS OF COMPANIES ACCOUNTED FOR AS PURCHASES. Nonaccrual loans totaled $12,507,000, $12,796,000, and $3,252,000 at December 31, 1997, 1996 and 1995, respectively. The Company includes all loans considered impaired under SFAS No. 114 in nonaccrual loans. The amount of impaired loans was not material at December 31, 1997. Interest income of $364,000 on nonaccrual loans would have been recorded during 1997 if the loans had been current in accordance with their original terms. During 1997, the Company recorded interest income of $361,000 related to loans that were on nonaccrual status as of December 31, 1997. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS Due to the nature of its business and the financing needs of its customers, the Company is involved with a large number of financial instruments, the majority for which an active market does not exist. Accordingly, the Company has used various valuation techniques to estimate the fair value of its financial instruments. These techniques are significantly affected by the assumptions used, including the discount rate, the estimated timing and amount of cash flows and the aggregation methods used to value similar instruments. In this regard, the resulting fair value estimates cannot 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. be substantiated by comparison to independent markets and, in a majority of cases, could not be realized by the immediate sale or settlement of the instrument. Also, the estimates reflect a point in time valuation that could change significantly based on changes in outside economic factors, such as the general level of interest rates. The required disclosures exclude the estimated values of nonfinancial instrument cash flows and are not intended to provide or estimate a market value of the Company. The following assumptions were used by the Company in estimating the fair value of the specific financial instruments. CASH AND CASH EQUIVALENTS The carrying amounts reported in the statement of financial condition approximate fair values for these items that have no interest rate or credit risk. FEDERAL FUNDS PURCHASED AND SHORT-TERM BORROWED FUNDS The carrying amount approximates fair value due to the short maturity of the instruments and floating interest rates which are tied to market conditions. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES Fair values for these items are based on available market quotes. If market quotes are not available, fair values are based on market quotes of comparable securities. INTEREST-BEARING DEPOSITS The fair value of interest-bearing deposits is estimated using a discounted cash flow analysis using current market rates of interest-bearing deposits with similar maturities to discount the future cash flows. LOANS The loan portfolio consists of both variable and fixed rate loans. The carrying amounts of variable rate loans, a majority of which reprice within the next three months and for which there has been no significant change in credit risk, are assumed to approximate fair values. The fair values for fixed rate loans are estimated using discounted cash flow analyses. The discount rates applied are based on the current interest rates for loans with similar terms to borrowers of similar credit quality. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts and certain money market deposits is defined by SFAS No. 107 to be equal to the amount payable on demand at the date of the financial statements. Fair values for fixed rate certificates of deposits are estimated using a discounted cash flow analysis that used the interest rates currently being offered on certificates of deposit to discount the aggregated expected monthly maturities. SHORT-TERM BORROWINGS Federal funds purchased, borrowings under repurchase agreements and other short-term borrowings are at variable rates or have short-term maturities and their fair value is assumed to approximate their carrying amount. LONG-TERM DEBT The fair value of long-term debt is estimated using a discounted cash flow analysis using current market rates of debt with similar maturities to discount the future cash flows. LOAN COMMITMENTS AND LETTERS OF CREDIT The majority of the Company's commitments have variable rates and do not expose the Company to interest rate risk. The Company's commitments for fixed rate loans are evaluated and it is estimated the probability of additional loans being issued under these commitments is not significant and there is not a fair value liability. The estimated fair values of the Company's financial instruments at December 31 are shown in the table below (in thousands):
1997 1996 - ------------------------------------------------------------------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------ Financial assets: Cash and due from banks ....... $ 222,088 $ 222,088 $ 175,732 $ 175,732 Federal funds sold and resale agreements ............ 12,690 12,690 3,600 3,600 Interest-bearing deposits ..... 1,287 1,287 3,598 3,605 Available-for-sale securities . 1,498,877 1,498,877 506,888 506,888 Held-to-maturity securities ... 180,512 182,335 222,348 223,200 Loans ......................... 2,637,057 2,632,042 2,064,108 2,054,714 Allowance for loan losses ..... (36,194) (36,194) (26,215) (26,215) -------------------------------------------------- Net loans ..................... 2,600,863 2,595,848 2,037,893 2,028,499 Financial liabilities: Deposits: Noninterest-bearing .......... $ 597,333 $ 597,333 $ 431,078 $ 431,078 Interest-bearing: Savings and NOW ............ 1,371,546 1,371,546 964,829 964,829 Time accounts over 100,000.. $ 398,291 398,523 233,875 234,248 Other time accounts ........ 1,252,164 1,252,191 907,658 907,723 -------------------------------------------------- Total deposits ................ 3,619,334 3,619,593 2,537,440 2,537,878 Federal funds purchased and repurchase agreements ........ 43,002 43,002 78,369 78,369 Other short-term borrowings ... 230,571 230,571 169,265 169,265 Long-term debt ................ 116,476 116,924 46,750 48,003 - ------------------------------------------------------------------------------------
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE- SHEET RISK AND CONCENTRATIONS OF CREDIT RISK In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk. These transactions enable customers to meet their financing needs and enable the Company to manage its interest rate risk. These financial instruments include commitments to extend credit and letters of credit. The contract or notional amounts of these financial instruments at December 31, 1997 and 1996, were as follows (in thousands):
1997 1996 - -------------------------------------------------------------------------------- Commitments to extend credit ........................... $ 449,961 $ 389,604 Standby letters of credit .............................. 16,627 14,683 Commercial letters of credit ........................... 1,816 990 - --------------------------------------------------------------------------------
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. Commitments to extend credit are legally binding and have fixed expiration dates or other termination clauses. The Company's exposure to credit loss on commitments to extend credit, in the event of nonperformance by the counterparty, is represented by the contractual amounts of the commitments. The Company monitors its credit risk for commitments to extend credit by applying the same credit policies in making commitments as it does for loans and by obtaining collateral to secure commitments based on management's credit assessment of the counterparty. Collateral held varies, but may include marketable securities, receivables, inventory, agricultural commodities, equipment and real estate. Because many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent the Company's future liquidity requirements. In addition, the Company also offers various consumer credit line products to its customers that are cancelable upon notification by the Company, which are included above in commitments to extend credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Commercial letters of credit are issued by the Company on behalf of customers to ensure payments of amounts owed or collection of amounts receivable in connection with trade transactions. The Company's exposure to credit loss in the event of nonperformance by the counterparty is the contractual amount of the letter of credit and represents the same exposure as that involved in extending loans. The amount of collateral obtained to support letters of credit is based on a credit assessment of the counterparty. Collateral held may include marketable securities, receivables, inventory, agricultural commodities, equipment and real estate. Because the conditions under which the Company is required to fund letters of credit may not materialize, the liquidity requirements of letters of credit are expected to be less than the total outstanding commitments. The Company's bank subsidiaries grant real estate, agricultural, commercial, consumer and other loans and commitments and letters of credit to customers throughout Arizona, Colorado, Iowa, Minnesota, Nebraska, North Dakota, South Dakota, Wisconsin and Wyoming. Although the Company has a diversified loan portfolio, the ability of a significant portion of its debtors to honor their contracts is dependent upon the agricultural economic sector. The maximum exposure to accounting loss that could occur, if the borrowers fail to perform according to the loan agreements and the underlying collateral proved to be of no value, is the total loan portfolio balances and commitments and letters of credit. 10. BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31 consisted of the following (in thousands):
1997 1996 - -------------------------------------------------------------------------------- Land .................................................... $ 15,259 $ 10,031 Buildings ............................................... 93,882 59,359 Furniture, fixtures and equipment ....................... 70,264 44,139 Leased property under capital lease obligations ......... 10,403 5,932 --------------------- 189,808 119,461 Less accumulated depreciation ........................... 87,988 53,756 --------------------- $101,820 $ 65,705 --------------------- - --------------------------------------------------------------------------------
11. SHORT-TERM BORROWINGS As of December 31, 1997, the Company's subsidiary banks had $216,300,000 in Federal Home Loan Bank ("FHLB") borrowings, which are collateralized by various investment securities and real estate loans. The interest rates on FHLB borrowings are variable rates based on short-term market conditions and the term of the advance, ranging from 5.05% to 6.90% at December 31, 1997. The Company's subsidiaries had additional short-term borrowings of $3,104,000 outstanding at December 31, 1997. The Company has a short-term line of credit bearing interest at the Federal Funds rate plus 2% that provides for borrowing up to $8,000,000 through December 31, 1997, with a commitment fee of 0.2% on the unused amount. As of December 31, 1997, the Company had no balance outstanding under this line of credit. The Company has entered into an agreement that allows for its designated agent to underwrite up to $25,000,000 in commercial paper and has obtained lines of credit to support these borrowings. As of December 31, 1997, there was a $11,167,000 commercial paper balance outstanding with a blended rate of 5.78%. The terms of the lines of credit include certain covenants with which the Company must comply. At December 31, 1997, the Company was in compliance with all covenants pertaining to the lines of credit. 12. LONG-TERM DEBT Long-term debt consisted of the following at December 31 (in thousands):
1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Parent Company: Subordinated notes payable, interest at 7.30%, payable semi-annually, maturing June 30, 2004, unsecured......................................................................... $ 60,000 $23,000 Exchangeable subordinated notes payable, interest at 9.00% payable quarterly, maturing August 15, 2005, unsecured................................................................... 11,500 11,500 Term note payable to bank, interest at bank's base rate (8.50% and 8.25% at December 31, 1997 and 1996, respectively), payable quarterly, principal payments of $100,000 due annually through October 1, 1999, unsecured.............. 400 400 Term note payable to bank, interest at Federal Funds rate plus 2% (7.31% at December 31, 1996), payable quarterly, principal payments equal to 6.25% of the amortized balance, semi-annually through July 1, 2003...................... -- 4,106 Subsidiaries: Federal Home Loan Bank advances, interest rates ranging from 5.32% to 8.33%, payable quarterly, with maturities ranging from June 16, 1999 to March 10, 2010.............................................................................. 41,600 4,829 Term Note payable to bank, interest at 5.19% payable monthly, principal payments ranging from $35,600 to $54,600, per schedule due monthly through March 31, 2003.................................................... 2,800 2,850 Other notes payable................................................................. 176 65 ----------------------------- $116,476 $46,750 ----------------------------- - -----------------------------------------------------------------------------------------------------------------------
The 7.30% subordinated notes payable are not redeemable, in whole or in part, by the Company. These notes, of which 100% of the balance qualifies as Tier 2 capital under the Federal Reserve Board guidelines, are 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. direct obligations of the Company and are subordinated to all other indebtedness of the Company. The terms of the subordinated notes payable include certain covenants with which the Company must comply. At December 31, 1997, the Company was in compliance with all covenants pertaining to the subordinated notes payable. In July 1995, the Company issued the exchangeable subordinated notes ("Exchangeable Notes") to retire acquisition related debt, support the Company's growth strategy and for general corporate purposes. One hundred percent of the balance of Exchangeable Notes qualify as Tier 2 Capital under Federal Reserve Board guidelines. On any interest payment date beginning August 15, 1996, the Company may require the holder to exchange all, but not part, of the Exchangeable Notes for shares of the Company's cumulative perpetual preferred stock (the "Exchange Stock"), at the rate of one share of Exchange Stock for each $25 in principal amount of Exchangeable Notes. The Exchange Stock would accrue cumulative dividends, payable quarterly, at a rate equal to the interest rate on the Exchangeable Notes. The Exchangeable Notes are, and the Exchange Stock would be, redeemable in whole or in part at any time after August 15, 1998 at the option of the Company at the declining redemption amounts set forth below plus accrued interest or dividends:
IF REDEEMED DURING THE 12-MONTH PERCENTAGE OF PERIOD BEGINNING AUGUST 15 PRINCIPAL AMOUNT - ----------------------------------------------------------------------------- 1998 .............................................................. 103.0% 1999 .............................................................. 101.5% 2000 and thereafter ............................................... 100.0% - -----------------------------------------------------------------------------
Maturities of long-term debt outstanding, primarily of the parent company, at December 31, 1997, were (in thousands): 1998 .....................................................$ 453 1999 ..................................................... 20,883 2000 ..................................................... 524 2001 ..................................................... 569 2002 ..................................................... 21,784 Thereafter ............................................... 72,263 ---------- $ 116,476 ---------- ----------
During March 1997, the Company redeemed its $23 million in aggregate principal amount of 7.75% Subordinated Notes (the "7.75% Notes"). The 7.75% Notes were redeemed at par plus accrued interest and resulted in an extraordinary loss of $265,000, net of taxes, on the early extinguishment of debt. 13. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES On December 10, 1997, the Company issued $60 million of 8.20% Cumulative Capital Securities, through CFB Capital II, a business trust subsidiary organized in December 1997. The proceeds of the offering were invested by CFB Capital II in Junior Subordinated Debentures of the Company. The Company used the net proceeds in part to capitalize its bank subsidiaries in Colorado and Arizona, which acquired branches of Bank One, in their respective states. The debentures will mature not earlier than December 15, 2002, and not later than December 15, 2027. On February 5, 1997, the Company issued $60 million of 8.875% Cumulative Capital Securities, through CFB Capital I, a business trust subsidiary organized in January 1997. The proceeds of the offering were invested by CFB Capital I in Junior Subordinated Debentures of the Company. The Company used a portion of the net proceeds to redeem $23 million in aggregate principal amount of 7.75% Subordinated Notes. The remainder of the proceeds of the offering were used for general corporate purposes, including in part, the purchase of KeyBank Wyoming. The debentures will mature not earlier than February 1, 2002 and not later than February 1, 2027. At December 31, 1997, $111 million of the combined $120 million in Capital Securities qualified as Tier 1 capital under capital guidelines of the Federal Reserve. The remaining $9 million qualified as Tier 2 capital. 14. SHAREHOLDERS' EQUITY COMMON STOCK On December 31, 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission for the purpose of issuing up to 3,000,000 shares of its common stock. The shares may be offered in acquisition transactions in exchange for shares of capital stock, partnership interests or other assets representing an interest, direct or indirect, in other companies or entities, or in exchange for assets used in or related to the business of such entities. On December 15, 1997, the Company completed the issuance of 1,000,000 million shares of common stock. The issuance of these shares occurred at a selling price of $49.50 per share with an underwriting discount of $1.73 per share paid by the Company. The Company used the proceeds, in combination with the $60 million Capital Securities issue to capitalize its bank subsidiaries in Colorado and Arizona which acquired branches of Bank One. On October 9, 1997, the Company filed a shelf registration with the Securities and Exchange Commission for the offering, from time to time, of up to $150 million in any combination of common stock, preferred stock or debt securities. Proceeds from the sale of Securities offered under this shelf registration will be used to finance acquisitions by the Company and for general corporate purposes. In 1995, the Company extended the common stock repurchase program established in 1992, which provided for the systematic acquisition of up to 600,000 shares of the Company's common stock. In addition, the Company adopted a new common stock repurchase program providing for a systematic repurchase of up to 600,000 additional shares. The shares acquired are used primarily for the issuance of common stock upon exercise of stock options, issuance of common stock under compensation plans, which might include contributions directly to employees or to an employee stock ownership plan, for preferred stock conversion, and issuance of common stock for purposes that do not include business combinations. PREFERRED STOCK SHAREHOLDERS' RIGHTS PLAN The Company adopted a shareholders' rights plan in January 1995 that attached one right to each share of common stock outstanding on January 19, 1995. Each right entitles the holder to purchase one one-hundredth of a share of a new series of junior participating preferred stock of the Company, which has an initial exercise price of $63. The rights become exercisable only upon the acquisition of 15% or more of the Company's voting stock, or an announcement of a tender offer or exchange offer to acquire an interest of 15% or more by a person or group, without the prior consent of the Company. If exercised, or if the 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. Company is acquired, each right entitles the holder to purchase, at the exercise price, common stock with a market value equal to two times the exercise price. The rights, which may be redeemed by the Company in certain circumstances, expire January 5, 2005. CAPITAL REQUIREMENTS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of December 31, 1997, the Company is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.
AT DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------ BANK SUBSIDIARIES: Community First National Bank, Fergus Falls .............. 9.93% 11.10% 7.75% $ 624,017 Community First National Bank, Fargo ..................... 10.03% 11.28% 7.46% 388,051 Community First State Bank, Vermillion ................... 10.73% 11.90% 7.83% 211,897 Community First State Bank, Decorah ...................... 11.63% 12.89% 7.82% 108,761 Community First State Bank, Alliance ..................... 10.40% 11.65% 8.48% 257,024 Community First State Bank, Spooner ...................... 11.16% 12.32% 8.26% 71,856 Colorado Community First National Bank, Fort Morgan ...... 10.20% 11.39% 7.28% 804,028 Colorado Community First National Bank, Gunnison ......... 11.18% 12.43% 7.20% 59,051 Community First National Bank, Cheyenne .................. 13.75% 14.79% 7.52% 606,471 Community First National Bank, Phoenix ................... 9.37% 10.62% 7.95% 45,712 Community First Bankshares, Inc. ......................... 10.65% 14.24% 7.25% $3,266,648 - -----------------------------------------------------------------------------------------------------------------------
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 - ---------------------------------------------------------------------------------------------------------------------------- BANK SUBSIDIARIES: Community First National Bank, Worthington(1) ............... 9.21% 10.31% 6.87% $ 255,997 Community First National Bank, Little Falls(1) .............. 9.74% 10.96% 7.32% 178,583 Community First National Bank, Fergus Falls ................. 9.22% 10.42% 6.82% 133,913 Community First National Bank, Fargo ........................ 9.76% 10.94% 7.39% 287,776 Community First National Bank, Dickinson(2) ................. 9.21% 10.40% 6.86% 109,775 Community First State Bank, Vermillion ...................... 9.54% 10.72% 6.98% 96,061 Community First State Bank, Redfield(3) ..................... 10.77% 11.87% 7.56% 120,170 Community First State Bank, Decorah ......................... 12.07% 13.32% 7.45% 101,980 Community First State Bank, Alliance ........................ 9.53% 10.73% 7.84% 259,254 Community First State Bank, Spooner ......................... 10.48% 11.56% 7.64% 70,406 Colorado Community First National Bank, Fort Morgan ......... 11.08% 12.27% 7.76% 118,233 Colorado Community First State Bank, Steamboat Springs(4) ... 9.64% 10.81% 7.10% 86,821 Colorado Community First National Bank, Trinidad(4) ......... 20.83% 21.76% 10.45% 36,368 Colorado Community First State Bank of Denver(4) ............ 10.35% 11.33% 7.62% 438,967 Community First Bankshares, Inc. ............................ 8.88% 11.10% 6.62% $2,312,632 - ----------------------------------------------------------------------------------------------------------------------------
(1) MERGED INTO COMMUNITY FIRST NATIONAL BANK, FERGUS FALLS IN JANUARY 1997. (2) MERGED INTO COMMUNITY FIRST NATIONAL BANK, FARGO IN JANUARY 1997. (3) MERGED INTO COMMUNITY FIRST STATE BANK, VERMILLION IN FEBRUARY 1997. (4) MERGED INTO COLORADO COMMUNITY FIRST NATIONAL BANK, FORT MORGAN IN APRIL 1997. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. 15. EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN -- During 1996, the Company approved the 1996 Stock Option Plan under which an additional 2,000,000 shares of the Company's common stock were reserved for granting of future stock options. Similar to the 1987 Stock Option Plan, the Company may grant key employees incentive or nonqualified options to purchase common stock of the Company at fair market value on the date of the grant, as determined by the Company. The options vest ratably over a three-year period and are exercisable over a five-year term starting one year after the date of grant. Stock options outstanding under the plans are as follows:
1997 1996 - ------------------------------------------------------------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE OPTIONS PRICE PER OPTIONS PRICE PER OUTSTANDING SHARE OUTSTANDING SHARE - ------------------------------------------------------------------------------------ Beginning of Year ................... 563,655 $16.02 499,777 $13.66 Options Granted ................... 227,000 29.25 165,388 21.42 Options Exercised ................. (103,676) 13.74 (75,905) 11.68 Options Forfeited ................. (14,533) 18.21 (25,605) 18.31 --------------------------------------------- End of Year ......................... 672,446 $20.71 563,655 $16.02 --------------------------------------------- --------------------------------------------- Exercisable at end of year .......... 337,771 $16.45 281,463 $14.10 Weighted average fair value of options granted .......... $6.40 $3.94 - ------------------------------------------------------------------------------------
The range of exercise prices and the weighted average remaining contractual life of the options outstanding at December 31, 1997 were as follows:
OPTIONS WEIGHTED WEIGHTED OUTSTANDING AT AVERAGE AVERAGE RANGE OF EXERCISE DECEMBER 31 EXERCISE PRICE REMAINING PRICES PER SHARE 1997 PER SHARE CONTRACTUAL LIFE - ----------------------------------------------------------------------------------- $28.50 to $48.34 ..................... 217,500 $ 29.41 4.1 years $21.25 to $23.38 ..................... 148,557 21.41 3.1 years $12.50 to $14.75 ..................... 306,389 14.20 1.3 years - -----------------------------------------------------------------------------------
At December 31, 1997, a total of 2,473,084 shares of authorized common stock was reserved for exercise of options granted under the 1996 and 1987 Stock Option Plans. As described in Note 4, the Company has elected to measure compensation costs as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, does not recognize compensation expense. SFAS No. 123 requires the Company to disclose pro forma information reflecting net income and earnings per share had the Company elected to record compensation expense based on the fair market value method described in SFAS 123. The fair value of the options was estimated at the grant date using a Black-Sholes option pricing model. Option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following weighted-average assumptions were used in the valuation model: risk-free interest rates of 6.15 percent and 5.15 percent in 1997 and 1996, respectively; dividend yield of 1.30 percent and 2.50 percent in 1997 and 1996, respectively; stock price volatility factors of .175 and .20 in 1997 and 1996, respectively; and expected life of options of four years in both 1997 and 1996. The pro forma disclosures include options granted in 1997 and 1996 and are not likely to be representative of the pro forma disclosures for future years. The estimated fair value of the options is amortized to expense over the options' vesting period.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 - ----------------------------------------------------------------------------- Pro forma net income ............................ $46,018 $30,662 Pro forma net income (diluted) .................. $46,018 $32,272 Pro forma earnings per share: Basic ....................................... $ 2.49 $ 1.86 Diluted ..................................... $ 2.41 $ 1.78 - -----------------------------------------------------------------------------
EMPLOYEE STOCK OWNERSHIP PLAN -- The Company has an employee stock ownership plan ("ESOP") that is a defined contribution plan covering all employees who are 21 years of age with more than one year of service. Contributions are calculated using a formula based on the Company's return on average assets on a yearly basis. The contribution expense was $1,407,000, $859,000 and $444,000 in 1997, 1996 and 1995, respectively. PROFIT-SHARING PLAN -- The Company offers a contributory profit-sharing and thrift plan that qualifies under section 401(k) of the Internal Revenue Code. The plan covers all employees who are 21 years of age with more than one year of service. The plan provides for an employer-matching contribution of 50% based on each participant's eligible contribution for each plan year, subject to a limitation of the lesser of 6% of the participant's annual compensation or the maximum amount prescribed by the Internal Revenue Code. The Company's contribution was $1,094,000, $727,000, and $712,000 in 1997, 1996 and 1995, respectively. 16. RESTRICTIONS ON CASH AND DUE FROM BANKS Bank subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. Balances of $40,539,000 and $12,518,000 at December 31, 1997 and 1996, respectively, exceeded required amounts. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. 17. INCOME TAXES The components of the provision for income taxes were (in thousands):
1997 1996 1995 - -------------------------------------------------------------------------------- Federal: Current ........................... $ 22,043 $ 18,455 $ 18,008 Deferred .......................... (2,540) (3,444) (3,546) -------- -------- -------- 19,503 15,011 14,462 State: Current ........................... 2,606 3,458 3,209 Deferred .......................... (593) (462) (463) -------- -------- -------- 2,013 2,996 2,746 -------- -------- -------- Provision for income taxes ............ $ 21,516 $ 18,007 $ 17,208 -------- -------- -------- -------- -------- -------- - --------------------------------------------------------------------------------
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):
1997 1996 1995 - ------------------------------------------------------------------------------- Tax at statutory rate (35%) .................. $ 23,578 $ 17,681 $ 16,506 State income tax, net of federal tax benefit . 1,308 1,805 1,812 Minority interest ............................ -- -- 61 Tax-exempt interest .......................... (2,297) (1,736) (2,376) Amortization of goodwill ..................... 923 822 531 Other ........................................ (1,996) (565) 674 -------- -------- -------- Provision for income taxes ................... $ 21,516 $ 18,007 $ 17,208 -------- -------- -------- -------- -------- -------- - -------------------------------------------------------------------------------
Deferred income tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1997 and 1996, are as follows (in thousands):
1997 1996 - --------------------------------------------------------------------------------- Deferred tax assets: Loan loss reserves ............................... $ 7,929 $ 8,737 Contingency reserve .............................. 246 748 Deferred compensation ............................ 835 863 Deferred loan fees ............................... 316 316 Other ............................................ 735 566 ------- ------ 10,061 11,230 Deferred tax liabilities: Unrealized gains ................................. 3,141 897 Depreciation ..................................... 245 87 Purchase accounting .............................. 349 151 Other ............................................ 13 297 ------- ------- 3,748 1,432 ------- ------- Net deferred tax assets .............................. $ 6,313 $ 9,798 ------- ------- ------- ------- - --------------------------------------------------------------------------------
The realization of the Company's deferred tax assets is dependent upon the Company's ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized. 18. COMMITMENTS AND CONTINGENT LIABILITIES Total rent expense was $5,336,000, $1,318,000, and $1,789,000 in 1997, 1996 and 1995, respectively. Future minimum payments, by year and in the aggregate, under noncancelable leases with initial or remaining terms of one year or more, consisted of the following at December 31, 1997:
(IN THOUSANDS) OPERATING CAPITAL - -------------------------------------------------------------------- 1998 ......................................... $1,471 $2,043 1999 ......................................... 1,563 1,851 2000 ......................................... 1,652 1,529 2001 ......................................... 1,327 730 2002 ......................................... 3,390 137 ------ ------ $9,403 $6,290 Executory costs (taxes) ...................... (234) ------ Net minimum lease payments ................... 6,056 Less: Amount representing interest ............. (847) ------- Present value of net minimum lease payments $5,209 ------- ------- - --------------------------------------------------------------------
As a result of certain legal proceedings related to the May 1995 purchase of Alliance, the Company retained a portion of the purchase price in the form of a contingency reserve. Upon resolution of various proceedings, associated balances may be remitted to the former Abbott Bank Group shareholders. At December 31, 1997, the reserve balance was $838,000. All remaining issues subject to the reserve are expected to be resolved during 1998. It is management's expectation that resolution of the remaining issues will not exceed the current reserve balance. In the normal course of business, there are various outstanding legal proceedings, claims, commitments and contingent liabilities. In the opinion of management, the Company and its subsidiaries will not be materially affected by the outcome of such matters. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Community First Bankshares, Inc. 19. COMMUNITY FIRST BANKSHARES, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION - -------------------------------------------------------------------------------- DECEMBER 31 (IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Cash and due from subsidiary banks ..................... $ 4,944 $ 6,548 Interest-bearing deposits .............................. 505 -- Available-for-sale securities .......................... 63,795 -- Investment in subsidiaries ............................. 452,731 275,100 Furniture and equipment ................................ 6,210 1,657 Receivable from subsidiaries ........................... 10,509 2,336 Other assets ........................................... 15,582 17,389 ---------------------- Total assets ........................................... $554,276 $303,030 ---------------------- ---------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings .................................. $ 11,167 $ 14,164 Long-term debt ......................................... 195,611 39,006 Other liabilities ...................................... 8,204 5,289 Shareholders' equity ................................... 339,294 244,571 ---------------------- Total liabilities and shareholders' equity ............. $554,276 $303,030 ---------------------- ---------------------- - --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 - -------------------------------------------------------------------------------- Income: Dividends from subsidiaries ................ $ 35,727 $29,536 $ 34,453 Service fees from subsidiaries ............. 3,505 2,948 3,147 Interest income ............................ 1,558 106 607 Other ...................................... 641 467 (304) ------------------------------ Total income ................................... 41,431 33,057 37,903 Expense: Interest expense ........................... 10,479 4,403 3,961 Other expense .............................. 17,135 17,323 11,862 ------------------------------ Total expense .................................. 27,614 21,726 15,823 ------------------------------ Income before income tax benefit, equity in undistributed income of subsidiaries and extraordinary item ..................... 13,817 11,331 22,080 Income tax benefit ............................. 9,348 6,799 4,423 ------------------------------ Income before undistributed income of subsidiaries and extraordinary item ........ 23,165 18,130 26,503 Equity in undistributed income of subsidiaries ............................... 23,652 14,380 3,450 ------------------------------ Income before cumulative effect of extraordinary item ......................... 46,817 32,510 29,953 Extraordinary item, net of tax ................. (265) -- -- ------------------------------ Net Income ..................................... $ 46,552 $32,510 $ 29,953 ------------------------------ ------------------------------ Net income applicable to common equity ......... $ 46,552 $30,900 $ 28,343 ------------------------------ ------------------------------ - --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS - ----------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 - ----------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income .................................... $ 46,552 $ 32,510 $ 29,953 Adjustments to reconcile net income to net cash used in operating activities: Equity in income of subsidiaries ......... (59,322) (43,916) (37,903) Depreciation ............................. 694 488 474 Increase (decrease) in interest payable .. 1,448 (32) 64 Other, net ............................... 3,274 (7,650) 1,213 -------------------------------------- Net cash used in operating activities ......... (7,354) (18,600) (6,199) CASH FLOWS FROM INVESTING ACTIVITIES Dividends received from subsidiaries .......... 35,727 29,536 34,453 Net increase in interest-bearing deposits ..... (505) -- -- Purchases of stock in subsidiaries ............ (149,845) (14,743) (71,581) Net loans to subsidiaries ..................... (8,145) (1,585) 10,197 Purchases of available-for-sale securities .... (63,795) -- (4,393) Sales of available-for-sale securities, net of gains ................................. -- -- 9,543 Net increase in furniture and equipment ....... (5,247) (997) (578) -------------------------------------- Net cash (used in) provided by investing activities ................................... (191,810) 12,211 (22,359) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in short-term borrowings ......... (2,997) 4,062 7,145 Proceeds from issuance of long-term debt ...... 236,466 18,162 44,006 Repayment of long-term debt ................... (79,861) (24,058) (27,302) Net proceeds from issuance of common stock ................................. 81,456 15,044 11,577 Net proceeds from conversion of convertible perferred stock .................. (22,988) -- -- Purchase of common stock held in treasury ..... (2,777) (1,535) (56) Sale of common stock held in treasury ......... 1,098 3,829 896 Retirement of common stock .................... -- (349) -- Preferred stock dividends paid ................ -- (1,610) (1,610) Common stock dividends paid ................... (12,837) (6,714) (5,279) -------------------------------------- Net cash provided by financing activities ..... 197,560 6,831 29,376 Net increase in cash and cash equivalents ..... (1,604) 442 818 Cash and cash equivalents at beginning of year ............................ 6,548 6,106 5,288 -------------------------------------- Cash and cash equivalents at end of year ...... $ 4,944 $ 6,548 $ 6,106 -------------------------------------- -------------------------------------- - ----------------------------------------------------------------------------------------
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, 1997 and 1996, $44,653,000 and $27,066,000, respectively, of individual subsidiary banks' capital was available for credit extension to the parent company. At December 31, 1997 and 1996, bank subsidiaries had no credit extended to the Company. Payment of dividends to the Company by its subsidiary banks is subject to various limitations by bank regulatory agencies. Undistributed earnings of the bank subsidiaries available for distribution as dividends under these limitations were $45,662,000 and $26,691,000 as of December 31, 1997 and 1996, respectively. 20. RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Company and its subsidiaries, including their immediate families, companies in which they are principal owners and trusts in which they are involved, are loan customers of the bank subsidiaries. The aggregate dollar amounts of these loans were $14,814,000 and $12,700,000 at December 31, 1997 and 1996, respectively. During 1997, 1996 and 1995, $4,729,000, $5,779,000, and $6,115,000 of new loans were made and repayments totaled $2,615,000, $8,479,000, and $23,878,000, respectively. 21. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------ Noncash transfers of held-to-maturity securities to available-for-sale securities........ $ 92,738 $22,659 $187,320 Unrealized (loss) gain on available-for-sale securities...................... 6,461 (993) 11,545 Income taxes paid.................................... 22,784 23,485 20,745 Interest paid........................................ 113,438 94,185 76,154 Commitments to purchase investment securities......................................... 340,457 -- -- - ------------------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S LETTER The Board of Directors and Shareholders Community First Bankshares, Inc. We have audited the accompanying consolidated statements of financial condition of Community First Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Mountain Parks Financial Corporation, which statements reflect total assets constituting 16% of the related consolidated financial statement totals and net income constituting 24% of the related consolidated financial statement totals for the year ended December 31, 1995. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Mountain Parks Financial Corporation, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1995, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community First Bankshares, Inc., and subsidiaries at December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Minneapolis, Minnesota January 22, 1998 43 CONSOLIDATED STATEMENT OF CONDITION -- FIVE YEAR SUMMARY Community First Bankshares, Inc. (IN THOUSANDS)
DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks ........................ $ 222,088 $ 175,732 $ 137,551 $ 96,232 $ 85,468 Federal funds sold and securities purchased under agreement to resell .................. 12,690 3,600 25,965 8,135 35,685 Interest-bearing deposits ...................... 1,287 3,598 3,213 6,377 10,272 Available-for-sale securities .................. 1,498,877 506,888 486,522 231,364 326,041 Held-to-maturity securities: U.S. Treasury .............................. -- -- -- 72,519 44,162 U.S. Government agencies ................... 228 879 3,318 44,957 34,654 Mortgage-backed securities ................. 67,959 86,506 106,429 185,753 177,381 Collateralized mortgage obligations ........ -- -- -- 22,811 25,151 State and political securities ............. 48,064 56,694 55,267 43,672 34,990 Other ...................................... 64,261 78,269 65,806 12,163 11,343 ----------------------------------------------------------------------- Total securities ........................ 1,679,389 729,236 717,342 613,239 653,722 Loans .......................................... 2,637,057 2,064,108 1,767,193 1,330,146 1,037,666 Less: allowance for loan losses ............ (36,194) (26,215) (22,712) (17,333) (14,332) ----------------------------------------------------------------------- Net loans .................................. 2,600,863 2,037,893 1,744,481 1,312,813 1,023,334 Other assets ................................... 339,209 166,339 141,424 93,823 75,313 ----------------------------------------------------------------------- Total assets ............................... $ 4,855,526 $ 3,116,398 $ 2,769,976 $ 2,130,619 $ 1,883,794 ----------------------------------------------------------------------- ----------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing ........................ $ 597,333 $ 431,078 $ 398,314 $ 315,667 $ 273,382 Interest-bearing ........................... 3,022,001 2,106,362 1,961,402 1,478,898 1,354,607 ----------------------------------------------------------------------- Total deposits .......................... 3,619,334 2,537,440 2,359,716 1,794,565 1,627,989 Short-term borrowings .......................... 273,573 247,634 90,881 113,469 62,194 Long-term debt ................................. 116,476 46,750 81,288 38,092 48,354 Other liabilities .............................. 386,849 40,003 34,087 26,792 20,186 ----------------------------------------------------------------------- Total liabilities .......................... 4,396,232 2,871,827 2,565,972 1,972,918 1,758,723 Company-obligated mandatorily redeemable preferred securities of CFB Capital I and II 120,000 -- -- -- -- Shareholders' equity ........................... 339,294 244,571 204,004 157,701 125,071 ----------------------------------------------------------------------- Total liabilities and shareholders' equity . $ 4,855,526 $ 3,116,398 $ 2,769,976 $ 2,130,619 $ 1,883,794 ----------------------------------------------------------------------- ----------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
44 CONSOLIDATED STATEMENT OF INCOME -- FIVE YEAR SUMMARY Community First Bankshares, Inc. (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans ...................................... $ 218,588 $ 183,530 $ 150,948 $ 104,012 $ 81,931 Investment securities ...................... 59,103 44,936 40,210 38,032 37,479 Other ...................................... 906 960 1,710 1,193 1,736 ----------------------------------------------------------------------- Total interest income ................... 278,597 229,426 192,868 143,237 121,146 INTEREST EXPENSE: Deposits ................................... 102,632 81,655 71,780 46,560 42,873 Short-term and other borrowings ............ 8,734 9,247 6,184 4,029 1,994 Long-term debt ............................. 5,887 4,332 4,927 2,879 2,404 ----------------------------------------------------------------------- Total interest expense .................. 117,253 95,234 82,891 53,468 47,271 ----------------------------------------------------------------------- Net interest income ............................ 161,344 134,192 109,977 89,769 73,875 Provision for loan losses ...................... 5,352 6,757 2,711 1,839 2,149 ----------------------------------------------------------------------- Net interest income after provision for loan losses 155,992 127,435 107,266 87,930 71,726 NONINTEREST INCOME: Service charges on deposit accounts ........ 17,023 12,328 10,116 8,467 7,571 Insurance commissions ...................... 5,375 5,213 4,283 3,777 3,442 Fees from fiduciary activities ............. 3,805 3,332 2,718 2,157 2,103 Net gains on sales of securities ........... 463 93 52 99 1,910 Other ...................................... 9,898 6,404 5,319 4,492 3,132 ----------------------------------------------------------------------- Total noninterest income ................ 36,564 27,370 22,488 18,992 18,158 NONINTEREST EXPENSE: Salaries and employee benefits ............. 64,868 54,870 42,796 35,083 29,931 Net occupancy .............................. 19,139 15,085 10,563 9,353 8,413 FDIC insurance ............................. 357 669 2,532 3,720 3,193 Professional service fees .................. 4,088 3,881 4,011 3,457 3,776 Amortization of intangibles ................ 5,519 3,362 2,551 1,876 1,340 Data processing and loan servicing fees .... 1,290 1,506 1,607 856 722 Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II .................................. 5,108 -- -- -- -- Other ...................................... 24,821 24,915 18,533 15,896 13,479 ----------------------------------------------------------------------- Total noninterest expense ............... 125,190 104,288 82,593 70,241 60,854 ----------------------------------------------------------------------- Income from continuing operations before income taxes, cumulative effect of accounting change, and extraordinary item .......... 67,366 50,517 47,161 36,681 29,030 Provision for income taxes ..................... 21,516 18,007 17,208 13,952 10,775 ----------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting change, and extraordinary item ................... 45,850 32,510 29,953 22,729 18,255 Cumulative effect of accounting change ......... -- -- -- -- 359 Discontinued operations ........................ 967 -- -- -- -- Extraordinary item ............................. (265) -- -- -- -- ----------------------------------------------------------------------- Net income ..................................... 46,552 32,510 29,953 22,729 18,614 Preferred dividend ............................. -- 1,610 1,610 1,091 -- ----------------------------------------------------------------------- Net income applicable to common equity ......... $ 46,552 $ 30,900 $ 28,343 $ 21,638 $ 18,614 ----------------------------------------------------------------------- ----------------------------------------------------------------------- Earnings per common and common equivalent share: Basic ...................................... $ 2.52 $ 1.87 $ 1.85 $ 1.50 $ 1.35 Diluted .................................... $ 2.44 $ 1.79 $ 1.75 $ 1.43 $ 1.30 Average common shares outstanding: Basic ...................................... 18,474,749 16,509,289 15,361,370 14,378,903 13,838,334 Diluted .................................... 19,069,078 18,142,377 17,167,650 16,127,250 14,389,256 ----------- - --------------------------------------------------------------------------------------------------------------------------
45 QUARTERLY REPORTS OF OPERATIONS Community First Bankshares, Inc. (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996 (in thousands, except per share and per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 Interest income .................................................... $ 58,309 $ 60,172 $ 77,409 $ 82,707 Interest expense ................................................... 23,914 24,514 33,498 35,327 -------------------------------------------------------- Net interest income ................................................ 34,395 35,658 43,911 47,380 Provision for loan losses .......................................... 1,230 2,486 1,710 (74) -------------------------------------------------------- Net interest income after provision for loan losses ................ 33,165 33,172 42,201 47,454 Net gains on sales of securities ................................... (3) 64 62 340 Noninterest income ................................................. 7,041 10,259 9,646 9,155 Noninterest expense ................................................ 24,949 27,831 34,448 37,962 -------------------------------------------------------- Income before income taxes and extraordinary item .................. 15,254 15,664 17,461 18,987 Provision for income taxes ......................................... 5,138 5,140 5,391 5,847 -------------------------------------------------------- Income from continuing operations before extraordinary item ........ 10,116 10,524 12,070 13,140 -------------------------------------------------------- Discontinued Operations: Income from operations of discontinued operations (Less applicable income taxes of $424) ......................... 681 611 229 (554) -------------------------------------------------------- Income before extraordinary item ................................... 10,797 11,135 12,299 12,586 Extraordinary item: Loss on extinguishment of debt, net of taxes ................... (265) -- -- -- -------------------------------------------------------- Net Income ......................................................... 10,532 11,135 12,299 12,586 -------------------------------------------------------- Net income applicable to common equity ............................. 10,532 11,135 12,299 12,586 -------------------------------------------------------- Earnings per common and common equivalent share: Basic income from continuing operations before extraordinary items . $ 0.58 $ 0.57 $ 0.65 $ 0.69 Discontinued operations ............................................ 0.04 0.03 0.01 (0.03) Extraordinary item ................................................. (0.02) 0.00 0.00 0.00 -------------------------------------------------------- Basic net income ................................................... $ 0.60 $ 0.60 $ 0.66 $ 0.66 -------------------------------------------------------- Diluted income from continuing operations before extraordinary items 0.53 0.55 0.64 0.68 Discontinued operations ............................................ 0.04 0.03 0.01 (0.03) Extra ordinary item ................................................ (0.01) 0.00 0.00 0.00 -------------------------------------------------------- Diluted net income ................................................. $ 0.56 $ 0.58 $ 0.65 $ 0.65 Average common and common equivalent shares: Basic .......................................................... 17,493,078 18,670,606 18,642,672 19,073,429 Diluted ........................................................ 18,863,908 18,945,576 18,992,606 19,470,488 -------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- 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: Basic ......................................... $ .50 $ .55 $ .50 $ .33 Diluted ....................................... $ .48 $ .52 $ .47 $ .32 Average common shares: Basic ......................................... 16,197,840 16,212,028 16,428,464 16,981,123 Diluted ....................................... 17,876,890 17,913,355 18,138,629 18,638,838 - ---------------------------------------------------------------------------------------------------------------
46 CORPORATE INFORMATION MARKET PRICE RANGE OF COMMON SHARES THE COMPANY'S COMMON STOCK TRADES ON THE NASDAQ STOCK MARKET UNDER THE SYMBOL CFBX. THE FOLLOWING TABLE SETS FORTH THE HIGH AND LOW SALES PRICES FOR THE COMPANY'S COMMON STOCK DURING THE PERIODS INDICATED:
1997 1996 High Low High Low - ------------------------------------------------ First Quarter... 32 1/4 27 3/8 22 3/4 20 Second Quarter.. 38 3/8 29 24 1/4 22 1/4 Third Quarter... 49 1/8 36 3/4 23 7/8 22 1/2 Fourth Quarter.. 55 1/8 45 1/2 28 3/4 23 1/8 - ------------------------------------------------
SHAREHOLDERS AS OF FEBRUARY 11, 1998, THE COMPANY HAD 1,314 SHAREHOLDERS OF RECORD AND AN ESTIMATED 7,000 ADDITIONAL BENEFICIAL HOLDERS WHOSE STOCK WAS HELD IN STREET NAME BY BROKERAGE HOUSES. DIVIDEND POLICY THE BOARD OF DIRECTORS HAS ADOPTED A POLICY OF DECLARING REGULAR QUARTERLY DIVIDENDS. A DIVIDEND OF 14 CENTS PER SHARE WAS PAID FOR EACH OF THE FIRST THREE QUARTERS IN 1996 AND INCREASED TO 16 CENTS PER SHARE FOR THE FOURTH QUARTER OF 1996. A DIVIDEND OF 16 CENTS PER SHARE WAS PAID FOR THE FIRST TWO QUARTERS IN 1997 AND INCREASED TO 19 CENTS PER SHARE FOR EACH OF THE THIRD AND FOURTH QUARTERS OF 1997. 56 EX-21.1 9 EXHIBIT 21.1 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, SD 100.000% Community First National Bank Decorah, IA 100.000% Community First National Bank Alliance, NE 100.000% Community First National Bank Spooner, WI 100.000% Colorado Community First National Bank Ft. Morgan, CO 100.000% Community First National Bank Cheyenne, WY 100.000% Community First National Bank Phoenix, AZ 100.000% Colorado Community First National Bank Gunnison, CO 100.000% NONBANK SUBSIDIARIES: Community First Financial, Inc. Fargo, ND 100.000% Community First Service Corporation Fargo, ND 100.000% Community Insurance, Inc. Fargo, ND 100.000% Community First Properties, Inc. Fargo, ND 100.000% CFB Capital I Fargo, ND 100.000% CFB Capital II Fargo, ND 100.000% SUBSIDIARIES OF SUBSIDIARIES (100% OWNED): Community First Insurance Agencies, Inc. Fargo, ND (Subsidiary of Community First State Bank [Vermillion, SD]) CFIN, Inc. Las Vegas, NV (Subsidiary of Community First National Bank [Spooner]) Equity Lending, Inc. Edina, MN (Subsidiary of Colorado Community First National Bank [Fort Morgan, CO]) SUBSIDIARIES OF SUBSIDIARIES: (CONTINUED) LOCATION: PERCENTAGE Mountain Parks Financial Services, Inc. Denver, CO (Subsidiary of Colorado Community First National Bank [Fort Morgan, CO]) Community First Minnesota Holdings, Inc. Georgetown, British (Subsidiary of Cayman Islands Community First National Bank [Fergus Falls, MN]) CFIRE, Inc. Fargo, ND (Subsidiary of Community First Minnesota Holdings, Inc.) Community First Colorado Holdings, Inc. Georgetown, British (Subsidiary of Colorado Cayman Islands Community First National Bank [Ft. Morgan, CO]) Colorado CFIRE, Inc. Fargo, ND (Subsidiary of Community First Colorado Holdings, Inc.)
2 EX-23.1 10 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 22, 1998, included in the 1997 Annual Report to Shareholders of Community First Bankshares, Inc. We also consent to the incorporation by reference in the following Registration Statements and related Prospectuses of Community First Bankshares, Inc. of our report dated January 22, 1998, with respect to the consolidated financial statements of Community First Bankshares, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1997.
Registration Form Statement No. Purpose - ------------------------------------------------------------------------------ S-8 33-44921 1987 Stock Option Plan S-8 33-48160 401(k) Retirement Plan S-3 333-37527 Omnibus Shelf Registration S-4 333-40071 Acquisition Shelf Registration
ERNST & YOUNG LLP Minneapolis, Minnesota March 10, 1998 EX-27 11 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT IN FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 222,088 1,287 12,690 0 1,498,877 180,512 182,335 2,637,057 36,194 4,855,526 3,619,334 230,571 429,851 116,476 120,000 0 204 339,090 4,855,526 218,588 59,103 906 278,597 102,632 117,253 161,344 5,352 463 125,190 67,366 45,850 702 0 46,552 2.52 2.44 0 12,507 3,616 140 0 26,215 7,857 2,419 36,194 0 0 0
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