-----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, KttIOoT05TVtx+wEb2EeYCDUnQeccbBB3cIuoCLZKAUDfAoP9nh2ydroCG8wwlRa 3t9Q+MbMiXFN6FjCP7d8SA== 0000912057-96-026276.txt : 19961118 0000912057-96-026276.hdr.sgml : 19961118 ACCESSION NUMBER: 0000912057-96-026276 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19368 FILM NUMBER: 96663171 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 ----------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- -------------- Commission file number 0-19368 ----------- COMMUNITY FIRST BANKSHARES, INC. -------------------------------- (Exact name of registrant as specified in its charter) Delaware 46-0391436 ----------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 520 Main Avenue Fargo, ND 58124 ----------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) (701) 298-5600 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO --- --- At November 6,1996, 11,978,668 shares of Common Stock were outstanding. 1 COMMUNITY FIRST BANKSHARES, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1996 INDEX PART I - FINANCIAL INFORMATION: PAGE Item 1. Condensed Consolidated Financial Statements and Notes . . 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 9 PART II - OTHER INFORMATION: Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 15 Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 15 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 15 Item 4. Submission of Matters to a Vote of Security Holders . . . 15 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . 15 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 15 SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2 COMMUNITY FIRST BANKSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31, (DOLLARS IN THOUSANDS) 1996 1995 - ------------------------------------------------------------------------------------------ (unaudited) ASSETS Cash and due from banks. . . . . . . . . . . . . . . . . . . $ 102,460 $ 106,882 Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . 310 10,220 Interest-bearing deposits. . . . . . . . . . . . . . . . . . 1,962 3,065 Available-for-sale securities. . . . . . . . . . . . . . . . 408,118 405,127 Held-to-maturity securities (fair values: $218,097 and $222,227, respectively). . . . . . . . . . . . 219,311 221,417 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,589,830 1,495,450 Less: Allowance for loan losses. . . . . . . . . . . . . . (21,059) (19,549) - ------------------------------------------------------------------------------------------ Net loans. . . . . . . . . . . . . . . . . . . . . . . . 1,568,771 1,475,901 Bank premises and equipment. . . . . . . . . . . . . . . . . 42,924 35,737 Accrued interest receivable. . . . . . . . . . . . . . . . . 28,661 25,525 Other assets . . . . . . . . . . . . . . . . . . . . . . . . 23,633 20,089 INTANGIBLE ASSETS. . . . . . . . . . . . . . . . . . . . . . 21,789 22,824 - ------------------------------------------------------------------------------------------ Total assets . . . . . . . . . . . . . . . . . . . . . . $ 2,417,939 $ 2,326,787 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing. . . . . . . . . . . . . . . . . . . . $ 281,544 $ 280,292 Interest-bearing . . . . . . . . . . . . . . . . . . . . . 1,697,064 1,709,649 - ------------------------------------------------------------------------------------------ Total deposits . . . . . . . . . . . . . . . . . . . . . 1,978,608 1,989,941 Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . 62,676 42,932 Other short-term borrowings. . . . . . . . . . . . . . . . . 153,056 40,779 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 27,398 69,788 Capital lease obligations. . . . . . . . . . . . . . . . . . 3,093 1,364 Accrued interest payable . . . . . . . . . . . . . . . . . . 14,081 14,864 Other liabilities. . . . . . . . . . . . . . . . . . . . . . 8,109 10,104 - ------------------------------------------------------------------------------------------ Total liabilities. . . . . . . . . . . . . . . . . . . . 2,247,021 2,169,772 Minority interest. . . . . . . . . . . . . . . . . . . . . . 1,248 956 Shareholders' equity: Preferred stock. . . . . . . . . . . . . . . . . . . . . . 22,997 23,000 Common stock . . . . . . . . . . . . . . . . . . . . . . . 115 115 Capital surplus. . . . . . . . . . . . . . . . . . . . . . 42,350 42,177 Retained earnings. . . . . . . . . . . . . . . . . . . . . 104,904 91,831 Common stock in treasury, at cost -- September 30, 1996 -- 50,511 shares, December 31, 1995 -- 78,624 SHARES. . . . . . . . . . . . . . . . . . (696) (1,064) - ------------------------------------------------------------------------------------------ Total equity . . . . . . . . . . . . . . . . . . . . . . 169,670 156,059 - ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity . . . . . . . $ 2,417,939 $ 2,326,787 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
3 COMMUNITY FIRST BANKSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------------------------------------- (Dollars in thousands, except share and per share data) (Unaudited) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Interest income: Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,578 $ 33,396 $ 106,566 $ 89,886 Investment securities. . . . . . . . . . . . . . . . . . . 9,515 9,408 28,116 26,054 Interest-bearing deposits. . . . . . . . . . . . . . . . . 27 104 109 280 Federal funds sold and resale agreements . . . . . . . . . 26 233 372 629 - ------------------------------------------------------------------------------------------------------------------------ Total interest income. . . . . . . . . . . . . . . . . . 46,146 43,141 135,163 116,849 Interest expense: Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 17,390 17,308 52,573 46,510 Short-term and other borrowings. . . . . . . . . . . . . . 2,252 1,437 4,721 4,292 Long-term debt . . . . . . . . . . . . . . . . . . . . . . 680 1,410 2,629 2,718 - ------------------------------------------------------------------------------------------------------------------------ Total interest expense . . . . . . . . . . . . . . . . . 20,322 20,155 59,923 53,520 - ------------------------------------------------------------------------------------------------------------------------ Net interest income. . . . . . . . . . . . . . . . . . . . . 25,824 22,986 75,240 63,329 Provision for loan losses. . . . . . . . . . . . . . . . . . 1,203 651 3,318 1,686 - ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . 24,621 22,335 71,922 61,643 - ------------------------------------------------------------------------------------------------------------------------ Noninterest income: Service charges on deposit accounts. . . . . . . . . . . . 2,330 2,112 6,792 5,639 Fees from fiduciary activities . . . . . . . . . . . . . . 647 708 1,939 1,806 Insurance commissions. . . . . . . . . . . . . . . . . . . 1,295 1,307 3,464 2,930 Net loss on sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . (8) (6) (8) 7 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 783 779 2,523 2,946 - ------------------------------------------------------------------------------------------------------------------------ Total noninterest income:. . . . . . . . . . . . . . . . 5,047 4,900 14,710 13,328 - ------------------------------------------------------------------------------------------------------------------------ Noninterest expense: Salaries and employee benefits . . . . . . . . . . . . . . 10,332 8,924 30,210 25,054 Net occupancy. . . . . . . . . . . . . . . . . . . . . . . 2,691 2,524 8,014 6,806 FDIC insurance . . . . . . . . . . . . . . . . . . . . . . 502 18 621 1,878 Legal and accounting . . . . . . . . . . . . . . . . . . . 377 296 1,112 873 Other professional service . . . . . . . . . . . . . . . . 393 454 1,202 1,577 Data processing. . . . . . . . . . . . . . . . . . . . . . 263 353 731 787 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . - 164 19 763 Minority interest. . . . . . . . . . . . . . . . . . . . . 53 58 147 138 Amortization of intangibles. . . . . . . . . . . . . . . . 605 558 1,789 1,379 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,556 4,037 11,026 10,156 - ------------------------------------------------------------------------------------------------------------------------ Total noninterest expense. . . . . . . . . . . . . . . . 18,772 17,386 54,871 49,411 Income before income taxes . . . . . . . . . . . . . . . . . 10,896 9,849 31,761 25,560 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 3,634 3,355 10,691 9,356 - ------------------------------------------------------------------------------------------------------------------------ Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,262 $ 6,494 $ 21,070 $ 16,204 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Dividends on preferred stock . . . . . . . . . . . . . . . . 403 404 1,208 1,208 - ------------------------------------------------------------------------------------------------------------------------ Net income applicable to common equity . . . . . . . . . . . $ 6,859 $ 6,090 $ 19,862 $ 14,996 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Earnings per common and common equivalent share: Primary net income . . . . . . . . . . . . . . . . . . . $0.59 $0.53 $1.71 $1.31 Fully diluted net income . . . . . . . . . . . . . . . . $0.56 $0.50 $1.61 $1.25 Average number of common and common equivalent shares: Primary. . . . . . . . . . . . . . . . . . . . . . . . . 11,634,715 11,510,088 11,626,566 11,453,884 Fully diluted. . . . . . . . . . . . . . . . . . . . . . 13,082,288 12,985,980 13,078,414 12,974,639 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Common dividends declared. . . . . . . . . . . . . . . . . . $0.14 $0.12 $0.42 $0.36 - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------
4 COMMUNITY FIRST BANKSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, ------------------------- (Dollars in thousands) (Unaudited) 1996 1995 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 21,070 $ 16,204 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses. . . . . . . . . . . . . . . 3,318 1,686 Depreciation . . . . . . . . . . . . . . . . . . . . . 4,082 3,279 Amortization of intangibles. . . . . . . . . . . . . . 1,789 1,379 Amortization of premium. . . . . . . . . . . . . . . . 1,527 1,526 Increase in interest receivable. . . . . . . . . . . . (3,136) (6,264) (Decrease) increase in interest payable. . . . . . . . (783) 4,329 Other - net. . . . . . . . . . . . . . . . . . . . . . (5,183) (14,409) - ------------------------------------------------------------------------------------------ Net cash provided by operating activities. . . . . . . . . . 22,684 7,730 CASH FLOWS FROM INVESTING ACTIVITIES: Cost of acquisitions, net of cash paid . . . . . . . . . . - (4,473) Net decrease in interest-bearing deposits. . . . . . . . . 1,103 2,001 Purchases of available-for-sale securities . . . . . . . . (167,268) (19,552) Maturities of available-for-sale securities. . . . . . . . 153,765 43,731 Sales of available-for-sale securities, net of gains . . . 6,506 22,630 Purchases of held-to-maturity securities . . . . . . . . . (20,627) (56,840) Maturities of held-to-maturity securities. . . . . . . . . 22,355 32,064 Net increase in loans. . . . . . . . . . . . . . . . . . . (96,188) (78,492) Net increase in bank premises and equipment. . . . . . . . (11,269) (4,232) Net increase (decrease) in minority interest . . . . . . . 292 (4,631) - ------------------------------------------------------------------------------------------ Net cash used in investing activities. . . . . . . . . . . . (111,331) (67,794) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in demand deposits, NOW accounts and savings accounts . . . . . . . . . . . . . . . . . . . . (11,575) (78,947) Net increase in time accounts. . . . . . . . . . . . . . . 242 81,302 Net increase in short-term and other borrowings. . . . . . 132,021 24,295 Net (decrease) increase in long-term debt. . . . . . . . . (40,661) 35,664 Purchase of common stock held in treasury. . . . . . . . . (790) (56) Conversion of preferred stock to common stock. . . . . . . (4) - Sale of common stock held in treasury. . . . . . . . . . . 1,089 638 Preferred stock dividends paid . . . . . . . . . . . . . . (1,208) (1,208) Common stock dividends paid. . . . . . . . . . . . . . . . (4,799) (3,910) - ------------------------------------------------------------------------------------------ Net cash provided by financing activities. . . . . . . . . . 74,315 57,778 - ------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents. . . . . . . . . . (14,332) (2,286) Cash and cash equivalents at beginning of period . . . . . . 117,102 85,005 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period . . . . . . . . . $ 102,770 $ 82,719 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
5 COMMUNITY FIRST BANKSHARES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements, which include the accounts of Community First Bankshares, Inc. (the "Company"), its wholly-owned data processing, credit origination and insurance agency subsidiaries, and its twelve majority-owned subsidiary banks, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for fair presentation have been included. The Company acquired Minowa Bancshares, Inc. ("Minowa"), on February 22, 1995, and First Community Bankshares, Inc. ("First Community"), on July 3, 1995, in transactions accounted for as poolings of interests. Accordingly, the consolidated financial information has been restated for all periods prior to the acquisitions to include the accounts and operations of these institutions. The acquisitions of Minowa and First Community resulted in the addition of approximately $224 million and $153 million in assets, respectively. EARNINGS PER COMMON SHARE Primary earnings per common share is calculated by dividing net income, after reduction for preferred stock dividends declared, by the weighted average number of common shares and equivalents outstanding. Common share equivalents included in the computation represent the number of shares of common stock issuable upon assumed exercise of stock options and warrants during each period. On a fully diluted basis, both net income and common shares outstanding are adjusted to assume the conversion of convertible preferred stock outstanding from the beginning of the period or date of issuance, if later. Such adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per share. NOTE B - BUSINESS COMBINATIONS On June 25, 1996, the Company signed a definitive merger agreement with Mountain Parks Financial Corp. ("Mountain Parks"), a multi-bank holding company headquartered in Denver, Colorado, with banking offices in 17 Colorado communities. Mountain Parks also has two subsidiaries, including Equity Lending, Inc., an originator of nonconforming residential mortgages, and Mountain Parks Financial Services, Inc., which purchases sub-prime auto contracts and other installment loans. Upon completion of the merger, the Company will issue 1.275 shares of the Company's common stock for each share of common stock outstanding of Mountain Parks, which would result in the issuance of approximately 5.2 million shares of the Company's common stock in the merger. The completion of the transaction is subject to the approval of the shareholders of the Company, the shareholders of Mountain Parks, regulatory authorities and other conditions. This transaction is expected to be completed in either the fourth quarter of 1996 or first quarter of 1997 and is expected to be accounted for using the pooling of interests method of accounting. On October 1, 1996, the Company issued 538,803 shares of common stock to complete its merger with Financial Bancorp, Inc. ("Financial Bancorp"), which owned 100% of the outstanding capital stock of the Trinidad National Bank, Trinidad, Colorado. The transaction resulted in the addition of approximately $68 million of assets. The merger was accounted for using the pooling of interests method. Prior periods will not be restated as the merger is not material to the Company's financial statements. 6 NOTE C - INVESTMENTS The following is a summary of available-for-sale and held-to-maturity securities at September 30, 1996 (in thousands):
Available-for-Sale Securities - ------------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- United States Treasury . . . . . . . . . . . . . . . . . . $ 100,401 $ 244 $ (662) $ 99,983 United States Government agencies. . . . . . . . . . . . . 39,068 102 (374) 38,796 Mortgage-backed securities . . . . . . . . . . . . . . . . 220,979 1,434 (1,379) 221,034 Collateralized mortgage obligations. . . . . . . . . . . . 41,016 212 (255) 40,973 Other securities . . . . . . . . . . . . . . . . . . . . . 7,370 44 (82) 7,332 - ------------------------------------------------------------------------------------------------------------------- $ 408,834 $ 2,036 $ (2,752) $ 408,118 Held-to-Maturity Securities - ------------------------------------------------------------------------------------------------------------------- Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities . . . . . . . . . . . . . . . . $ 90,876 $ 432 $ (2,151) $ 89,157 State and political securities . . . . . . . . . . . . . . 56,538 710 (203) 57,045 Other securities . . . . . . . . . . . . . . . . . . . . . 71,897 1 (3) 71,895 - ------------------------------------------------------------------------------------------------------------------- $ 219,311 $ 1,143 $ (2,357) $ 218,097 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
Proceeds from the sale of available-for-sale securities during the three months ended September 30, 1996 and 1995, were $5,501,000 and $1,956,000, respectively. Gains of $2,000 and $0 were realized on sales during 1996 and 1995. Gross losses of $9,000 and $3,000 were realized on these sales during 1996 and 1995, respectively. Gains and losses at disposition of these securities were computed using the specific identification method. NOTE D - LOANS The composition of the loan portfolio at September 30, 1996, was as follows (in thousands): Real estate. . . . . . . . . . . . $612,694 Commercial . . . . . . . . . . . . 454,516 Agricultural . . . . . . . . . . . 223,940 Consumer and other . . . . . . . . 298,680 ---------- 1,589,830 Less allowance for loan losses . . (21,059) ---------- Net loans . . . . . . . . . . . . $1,568,771 ---------- ---------- NOTE E - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to manage its interest rate risk. These financial instruments include commitments to extend credit and letters of credit. The contract or notional amounts of these financial instruments at September 30, 1996, were as follows (in thousands): Commitments to extend credit. . . $281,658 Letters of credit . . . . . . . . 7,681 7 NOTE F - SUBORDINATED NOTES Long-term debt at September 30, 1996, included $23 million in subordinated notes issued in April 1993. These notes are due April 15, 2000, and bear an interest rate of 7.75%, with interest payable monthly. At September 30, 1996, $13.8 million of the notes qualified as Tier 2 capital. NOTE G - INCOME TAXES The Company's effective tax rate has declined due to expansion into additional states and implementation of certain tax strategies. 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): SEPTEMBER 30, 1996 ------------------ 35% of pretax income. . . . . . . . . . . . . . $3,814 State income tax, net of federal tax benefit. . 424 Minority interest . . . . . . . . . . . . . . . 19 Tax-exempt interest . . . . . . . . . . . . . . (730) Amortization of goodwill. . . . . . . . . . . . 119 Other . . . . . . . . . . . . . . . . . . . . . (12) ---------- Provision for income taxes. . . . . . . . . . . $3,634 NOTE H - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30 (in thousands) 1996 1995 - ------------------------------------------------------------------------ Unrealized loss on available-for-sale securities. . . $2,857 $(6,609) NOTE I - CONTINGENT LIABILITIES 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 September 30, 1996, the reserve balance was $964,000. All remaining issues subject to the reserve are expected to be resolved within a two-year period. It is management's expectation that resolution of the remaining issues will not exceed the current reserve balance. The Company's affiliate bank in Alliance, Nebraska (formerly known as The Abbott Bank), is named in a petition filed by an attorney who represented The Abbott Bank through early 1994, prior to the Company's May 1995 acquisition of the bank. The petition asserts claims relating to alleged abuse of process in connection with certain investigations and administrative actions commenced by state and federal banking regulators in February 1994. The petition claims $10 million in actual damages and $10 million in punitive damages. Based upon the facts currently known to the Company and discussions with counsel, and in light of the availability of indemnification in connection with the acquisition of The Abbott Bank and/or director and office liability insurance coverage (subject to deductible amounts), the Company believes the claims lack merit and ultimately are not likely to result in material loss to the Company or the Alliance Bank. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BASIS OF PRESENTATION The following is a discussion of the Company's financial condition as of September 30, 1996, and December 31, 1995, and its results of operations for the nine month periods ended September 30, 1996 and 1995. The Company completed seven acquisitions during 1995, and, as of September 30, 1996, the Company had two pending bank acquisitions. Each of these acquisitions has had, or will have, an effect upon the Company's results of operations and financial condition. During 1995, the Company made the following acquisitions of banks or associated holding companies: Total Assets at Date of Month and Holding Company or Acquisition Year Location of Bank (In Millions) - ----------------------------------------------------------------------- October 1995 Craig, Colorado $ 31 October 1995 Beach, North Dakota 44 July 1995 First Community (Colorado) 153 May 1995 Alliance, Nebraska 293 May 1995 Hankinson, North Dakota 8 February 1995 Minowa 224 January 1995 Vail, Colorado * __________________ *The Company's acquisition consists of a 24.75% interest in the holding company that owns 100% of the Vail Bank, which had total assets of $82 million. The Minowa and First Community 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 three companies on a combined basis for all periods presented. Each of the other acquisitions described in the above table is reflected in the Company's results of operations for all periods following the acquisition and is reflected in the Company's statement of financial condition at all dates subsequent to the acquisition. OVERVIEW For the three months ended September 30, 1996, net income was $7.3 million, an increase of $0.8 million, or 12.3%, from the $6.5 million earned during the 1995 period. The Company's primary earnings per common share for the third quarter of 1996 were $0.59, compared to $0.53 in 1995. Fully diluted earnings per common share for the third quarter of 1996 were $0.56. Net income applicable to common equity for third quarter 1996 was reduced by $403,000, due to dividends paid on preferred stock. Return on average assets was 1.23% for the third quarter of 1996, compared with 1.17% for the 1995 period. Return on average common shareholders' equity for the 1996 and 1995 periods was 19.36% and 19.61%, respectively. Factors contributing to these changes included incremental net income provided by entities acquired in 1995 and an increase in net interest margin. For the nine months ended September 30, 1996, net income was $21.1 million, an increase of $4.9 million, or 30.2%, from the $16.2 million earned during the 1995 period. The increase was primarily due to earnings contributed by banks acquired during 1995 and an increase in the net interest margin. Primary earnings per common share for the nine months ended September 30, 1996, were $1.71, compared to $1.31 in 1995. Fully diluted earnings per common share for the nine months ended September 30, 1996, were $1.61. Net income applicable to common equity for the nine month period was reduced by $1,208,000, due to dividends paid on preferred stock. 9 Return on average assets and return on common equity for the nine months ended September 30, 1996, were 1.21% and 19.22%, respectively, as compared to the 1995 ratios of 1.08% and 16.96%, respectively. Total assets were $2,418 million and $2,327 million at September 30, 1996 and December 31, 1995, respectively. The $94 million increase in loans was funded through the combination of a $14 million reduction in cash and cash equivalents, an $11 million decrease in deposits and a $89 million increase in net borrowings, primarily short-term borrowings. Bank premises and equipment increased $7.0 million, due principally to the Company's purchase, through a subsidiary, of its Fargo office facility and equipment purchases at the data processing subsidiary. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income for the three months ended September 30, 1996, was $25.8 million, an increase of $2.8 million, or 12.2%, from the net interest income of $23.0 million earned during the 1995 period. The increase was principally due to the increased asset base associated with the acquisitions completed during 1995. In addition, net interest margin increased to 4.96% during the third quarter of 1996, from 4.71% during the 1995 period. Net interest income for the nine months ended September 30, 1996, was $75.2 million, an increase of $11.9 million, or 18.8%, from the net interest income of $63.3 million earned during the 1995 period. PROVISION FOR LOAN LOSSES The provision for loan losses for the three months ended September 30, 1996, was $1,203,000, an increase of $552,000, or 84.8%, from the $651,000 provision during the 1995 period. The provision for loan losses for the nine months ended September 30, 1996, was $3,318,000, an increase of $1,632,000, or 96.8%, from the $1,686,000 provision during the 1995 period. This increase reflects the Company's objective of maintaining adequate reserve levels in recognition of significant loan growth, including acquisitions completed during 1995. NONINTEREST INCOME Noninterest income for the three months ended September 30, 1996, was $5.0 million, an increase of $147,000, or 3.0%, from the 1995 level of $4.9 million. The increase was due primarily to an increase of $218,000 in deposit service charges, offset by a decrease in trust service fees of $61,000. Noninterest income for the nine months ended September 30, 1996, was $14.7 million, an increase of $1.4 million, or 10.5%, from the level of $13.3 million earned in the 1995 period. The increase was primarily due to the combination of an increase of $860,000 as a result of banks acquired in 1995, an increase of $788,000 in bank deposit service charges, an increase of $534,000 in insurance commissions and a reduction in miscellaneous fee income of $801,000. NONINTEREST EXPENSE Noninterest expense for the three months ended September 30, 1996, was $18.8 million, an increase of $1.4 million, or 8.0%, from the level of $17.4 million during the 1995 period. The increase was principally due to an increase of $1.4 million, or 15.7%, in salaries and employee benefits. Net occupancy increased $167,000, or 6.7%, from $2.5 million in the period ended September 30, 1995, to $2.7 million at the end of the current period. FDIC expense of $502,000 for the period ended September 30, 1996, increased $484,000 from the $18,000 for the same period in 1995, reflecting a one-time charge of $480,000 for the special assessment from the Savings Association Insurance Fund ("SAIF") on deposits acquired from former savings and loan 10 associations. Amortization of intangibles increased $47,000, or 8.4%, from $558,000 in the period ended September 30,1995, to $605,000 in the current period, due to 1995 acquisitions. Noninterest expense for the nine months ended September 30, 1996, was $54.9 million, an increase of $5.5 million, or 11.1%, from the level of $49.4 million during the 1995 period. The increase was principally from banks acquired in 1995. Salaries and benefits increased $5.1 million from $25.1 million in the 1995 period to $30.2 million for the 1996 period, $1.8 million of which is attributed to banks acquired in 1995. Net occupancy was $8.0 million, a $1.2 million, or 17.6%, increase from $6.8 million in the 1995 period. FDIC expense decreased $1.3 million, or 68.4%, from the 1995 level of $1.9 million to $621,000 during the 1996 period as a result of a significant decrease in deposit premium rates which became effective beginning in the third quarter of 1995, which was partially offset by the effect of the one-time special SAIF assessment recorded during the current quarter. PROVISION FOR INCOME TAXES The provision for income taxes for the three months ended September 30,1996, was $3.6 million, an increase of $279,000, or 8.2%, from the 1995 level of $3.4 million, due primarily to the increase in pre-tax income. The provision for income taxes for the nine months ended September 30, 1996, was $10.7 million, an increase of $1.3 million, or 13.8%, from the 1995 level of $9.4 million, due to increase in the level of pretax income. FINANCIAL CONDITION LOANS At September 30, 1996, total loans were $1,590 million, an increase of $95 million, or 6.4%, from the December 31, 1995, level of $1,495 million. The following table presents the Company's balance of each major category of loans:
SEPTEMBER 30, 1996 DECEMBER 31, 1995 --------------------------------------------------------- PERCENT OF PERCENT OF AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS --------------------------------------------------------- (DOLLARS IN THOUSANDS) Loan category: Real estate. . . . . . . . . . . . . . . . . . . . . . $ 612,694 38.54% $ 573,700 38.36% Commercial . . . . . . . . . . . . . . . . . . . . . . 454,516 28.59% 443,878 29.68% Agricultural . . . . . . . . . . . . . . . . . . . . . 223,940 14.08% 223,796 14.97% Consumer and other . . . . . . . . . . . . . . . . . . 298,680 18.79% 254,076 16.99% - ------------------------------------------------------------------------------------------------------------------- Total loans. . . . . . . . . . . . . . . . . . . . . . $ 1,589,830 100.00% 1,495,450 100.00% ------- ------- ------- ------- Less allowance for loan losses . . . . . . . . . . . . . 21,059 19,549 ------------ ---------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,568,771 $1,475,901 ------------ ---------- ------------ ----------
11 NONPERFORMING ASSETS At September 30, 1996, nonperforming loans were $5.8 million, an increase of $2.6 million, or 81.3%, from the $3.2 million level at December 31, 1995. The increase was principally due to transferring selected commercial and agricultural loans to nonaccrual status as a result of regularly scheduled loan reviews, principally at banks acquired during 1995. At September 30, 1996, nonperforming loans as a percent of total loans were .37%, up from the December 31, 1995 level of .22%. Other real estate owned ("OREO") was $1.4 million at September 30, 1996, a decrease of $300,000, or 17.6%, from the $1.7 million at December 31, 1995. Nonperforming assets of the Company are summarized in the following table:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ----------------------------- Loans: Nonaccrual loans. . . . . . . . . . . . . . . . . . . . . $5,543 $2,740 Restructured loans. . . . . . . . . . . . . . . . . . . . 298 481 - ----------------------------------------------------------------------------------------- Nonperforming loans . . . . . . . . . . . . . . . . . . . 5,841 3,221 Other real estate owned. . . . . . . . . . . . . . . . . . 1,448 1,701 - ----------------------------------------------------------------------------------------- Nonperforming assets . . . . . . . . . . . . . . . . . . . $7,289 $4,922 - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Loans 90 days or more past due but still accruing. . . . . $1,790 $779 - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Nonperforming loans as a percentage of total loans . . . . .37% .22% Nonperforming assets as a percentage of total assets . . . .30% .21% Nonperforming assets as a percentage of loans and OREO . . .46% .33%
12 ALLOWANCE FOR LOAN LOSSES At September 30, 1996, the allowance for loan losses was $21.1 million, an increase of $1.6 million from the December 31, 1995 level of $19.5 million. Net charge-offs during the 1996 period were $283,000 more than those incurred during the three months ended September 30, 1995. At September 30, 1996, the allowance for loan losses as a percentage of total loans was 1.32%, a decrease from the September 30, 1995, level of 1.37%. During the nine months ended September 30, 1996, charge-offs were $2,382,000, an increase of $520,000, or 27.9%, from the $1,862,000 charged off during the 1995 period. These charge-offs related to the Company conforming the credit practices of the acquired institutions to those of its own and the continued periodic review of the existing loan portfolios. The following table sets forth the Company's allowance for loans losses: SEPTEMBER 30, 1996 1995 --------------------- (DOLLARS IN THOUSANDS) Balance at beginning of period . . . $19,549 $15,482 Acquired bank allowance. . . . . . . - 3,627 Charge-offs: Commercial. . . . . . . . . . . . . 418 224 Real estate . . . . . . . . . . . . 140 231 Agricultural. . . . . . . . . . . . 413 384 Consumer and other. . . . . . . . . 1,411 1,023 - ------------------------------------------------------- Total charge-offs. . . . . . . . 2,382 1,862 - ------------------------------------------------------- Recoveries: Commercial. . . . . . . . . . . . . 113 154 Real estate . . . . . . . . . . . . 195 55 Agricultural. . . . . . . . . . . . 61 31 Consumer and other. . . . . . . . . 205 422 - ------------------------------------------------------- Total recoveries . . . . . . . . 574 662 - ------------------------------------------------------- Net charge-offs. . . . . . . . . . . 1,808 1,200 Provision charged to operations. . . 3,318 1,686 - ------------------------------------------------------- Balance at end of period . . . . . . $21,059 $19,595 - ------------------------------------------------------- - ------------------------------------------------------- Allowance as a percentage of total loans . . . . . . . . . . . . . . . 1.32% 1.37% Annualized net charge-offs to average loans outstanding . . . . . 0.16% 0.13% INVESTMENTS The investment portfolio, including available-for-sale securities and held- to-maturity securities, was $627 million at September 30, 1996, and December 31, 1995. At September 30, 1996, the investment portfolio represented 25.9% of total assets, compared with 26.9% at December 31, 1995. In addition to investment securities, the Company had investments in interest-bearing deposits of $2 million at September 30, 1996, a $1 million decrease from the $3 million at December 31, 1995. 13 DEPOSITS Total deposits at September 30, 1996, were $1,979 million, a decrease of $11 million, or 0.6%, from $1,990 million at December 31, 1995. Noninterest- bearing deposits at September 30, 1996, were $282 million, an increase of $2 million, or 0.7%, from $280 million at December 31, 1995. The Company's core deposits as a percent of total deposits were 91.1% and 91.4% as of September 30, 1996, and December 31, 1995, respectively. Interest-bearing deposits at September 30, 1996, and December 31, 1995, were $1,697 million and $1,710 million, respectively. The Company's deposit mix among noninterest-bearing deposits and interest-bearing deposits at September 30, 1996, and December 31, 1995, was similar, indicative of the Company's relatively stable deposit base. BORROWINGS Short-term borrowings of the Company were $153 million as of September 30, 1996, as compared to $41 million at December 31, 1995, an increase of $112 million, or 273.2%. The increase is a result of management's strategy to use short-term borrowings to fund loan growth and replace selected long-term debt. Long-term debt of the Company was $27 million as of September 30, 1996, a decrease of $43 million, or 61.4%, from the $70 million as of December 31, 1995. CAPITAL MANAGEMENT Shareholders' equity increased $14 million, or 9.0%, to $170 million at September 30, 1996, from $156 million at December 31, 1995. At September 30, 1996, the Company's Tier 1 capital, total risk-based capital and leverage ratios were 8.27%, 10.20% and 6.19%, respectively, compared to minimum required levels of 4%, 8% and 3%, respectively (subject to change and the discretion of regulatory authorities to impose higher standards in individual cases). At September 30, 1996, the Company had risk-weighted assets of $1,809 million. 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings: Reference is made to the Current Report on Form 8-K dated October 1, 1996 and filed October 16, 1996. See Item 6(b) below. Item 2. Changes in Securities: None. Item 3. Defaults upon Senior Securities: None. Item 4. Submission of Matters to a Vote of Security Holders: None. Item 5. OtherInformation: None. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 27.1 Financial Data Schedule. (b) Reports on Form 8-K: 1. On October 16, 1996, the Company filed a current report on Form 8-K dated October 1, 1996. The Form 8-K reported the Company's acquisitions of Financial Bancorp, Inc. and a recent litigation matter concerning the Company. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY FIRST BANKSHARES, INC. Date: November 12, 1996 /s/ Mark A. Anderson ------------------------------------------------- Mark A. Anderson Executive Vice President, Chief Financial Officer, Treasurer, Secretary (Principal Financial and Accounting Officer) 16 EX-27 2 EXHIBIT 27 (FDS)
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT IN FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 102,460 1,962 310 0 408,118 219,311 218,097 1,589,830 21,059 2,417,939 1,978,608 153,056 87,959 27,398 0 22,997 115 169,555 2,417,939 36,578 9,515 53 46,146 17,390 20,322 25,824 1,203 (8) 18,772 10,896 7,262 0 0 7,262 .59 .56 0 5,543 1,790 298 0 19,549 2,382 574 21,059 0 0 0
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