-----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, GCgJvMnAgDkDsBCnaSPi+3vgZoHqS14ZWSx8lOvdA8g8iDlpluWqHo4+KmwEs96x x2YxKCzKkgtys8/CZbnGVw== 0001047469-98-040166.txt : 19981113 0001047469-98-040166.hdr.sgml : 19981113 ACCESSION NUMBER: 0001047469-98-040166 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: SEC FILE NUMBER: 000-19368 FILM NUMBER: 98744290 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, 1998 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 9, 1998, 47,196,422 shares of Common Stock were outstanding. 1 COMMUNITY FIRST BANKSHARES, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1998 INDEX
PAGE PART I - FINANCIAL INFORMATION: ---- Item 1. Condensed Consolidated Financial Statements and Notes ........... 3-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 11-17 Item 3. Quantitative and Qualitative Disclosure About Market Risk ....... 18 PART II - OTHER INFORMATION: Item 1. Legal Proceedings................................................ 19 Item 2. Changes in Securities............................................ 19 Item 3. Defaults Upon Senior Securities.................................. 19 Item 4. Submission of Matters to a Vote of Security Holders ............. 19 Item 5. Other Information................................................ 19 Item 6. Exhibits and Reports on Form 8-K................................. 19 SIGNATURES.......................................................................... 20
2 COMMUNITY FIRST BANKSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31, (Dollars in thousands) 1998 1997 - ---------------------- ------------- ------------ (unaudited) ASSETS Cash and due from banks .................................. $ 216,826 $ 222,088 Federal funds sold and securities purchased under agreements to resell ................................. 40,990 12,690 Interest-bearing deposits ................................ 7,482 1,287 Available-for-sale securities ............................ 1,940,993 1,498,877 Held-to-maturity securities (fair value: 9/30/98 - $69,399, 12/31/97 - $182,335) ........................ 69,399 180,512 Loans .................................................... 3,387,246 2,637,057 Less: Allowance for loan losses ..................... (45,567) (36,194) ---------- ---------- Net loans ....................................... 3,341,679 2,600,863 Bank premises and equipment, net ......................... 124,829 101,820 Accrued interest receivable .............................. 57,207 40,105 Other Assets ............................................. 44,550 99,977 Intangible Assets ........................................ 137,194 97,307 ---------- ---------- Total assets .................................... $5,981,149 $4,855,526 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing .................................. $ 833,491 $ 597,333 Interest-bearing .................................... 3,995,670 3,022,001 ---------- ---------- Total deposits .................................. 4,829,161 3,619,334 Federal funds purchased and securities sold under agreements to repurchase ............................. 116,848 43,002 Other short-term borrowings .............................. 319,912 230,571 Long-term debt ........................................... 119,280 116,476 Capital lease obligations ................................ 5,752 5,209 Accrued interest payable ................................. 28,393 20,842 Other liabilities ........................................ 25,089 360,798 ---------- ---------- Total liabilities ............................... 5,444,435 4,396,232 Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II .......... 120,000 120,000 Shareholders' equity: Common stock ......................................... 477 204 Capital surplus ...................................... 187,789 157,138 Retained earnings .................................... 238,262 183,335 Less cost of common stock in treasury - September 30, 1998 - 448,145 shares December 31, 1997 - 36,255 shares .............. (9,814) (1,383) ---------- ---------- Total shareholders' equity ..................... 416,714 339,294 ---------- ---------- Total liabilities and shareholders' equity ..... $5,981,149 $4,855,526 ---------- ---------- ---------- ----------
3 COMMUNITY FIRST BANKSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three For the Nine Months Ended Months Ended (Dollars in thousands, except per share data) 9/30/98 9/30/97 9/30/98 9/30/97 - --------------------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) Interest income: Loans ...................................................... $ 84,471 $ 60,431 $ 221,293 $ 155,748 Investment securities ...................................... 31,876 16,697 88,879 39,492 Interest-bearing deposits .................................. 125 138 204 483 Federal funds sold and resale agreements ................... 639 143 1,119 167 --------- --------- --------- --------- Total interest income ................................. 117,111 77,409 311,495 195,890 Interest expense: Deposits ................................................... 41,001 29,292 114,285 71,827 Short-term and other borrowings ............................ 7,031 1,982 13,323 6,384 Long-term debt ............................................. 2,159 2,224 6,423 3,715 --------- --------- --------- --------- Total interest expense ................................ 50,191 33,498 134,031 81,926 --------- --------- --------- --------- Net interest income ............................................ 66,920 43,911 177,464 113,964 Provision for loan losses ...................................... 4,402 1,710 7,307 5,426 --------- --------- --------- --------- Net interest income after provision for loan losses ............ 62,518 42,201 170,157 108,538 --------- --------- --------- --------- Noninterest income: Service charges on deposit accounts ........................ 7,979 4,828 20,704 11,914 Fees from fiduciary activities ............................. 1,232 832 3,596 2,684 Insurance commissions ...................................... 2,025 1,485 5,275 4,119 Net gain(loss) on sales of available-for-sale securities ... 354 62 1,302 123 Other ...................................................... 3,912 2,501 11,947 8,229 --------- --------- --------- --------- Total noninterest income: ............................. 15,502 9,708 42,824 27,069 --------- --------- --------- --------- Noninterest expense: Salaries and employee benefits ............................. 26,110 17,764 71,386 45,810 Net occupancy .............................................. 8,942 5,163 24,514 12,967 FDIC insurance ............................................. 162 124 495 226 Legal and accounting ....................................... 547 400 1,495 1,237 Other professional service ................................. 1,391 599 2,890 1,675 Data processing ............................................ 1,743 299 3,527 984 Acquisitions, integration, and conforming .................. 1,273 - 2,903 14 Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II ...................... 2,561 1,331 7,656 3,476 Amortization of intangibles ................................ 2,629 1,657 7,704 3,498 Other ...................................................... 10,173 7,111 28,384 17,341 --------- --------- --------- --------- Total noninterest expense ............................. 55,531 34,448 150,954 87,228 Income from continuing operations before income taxes and extraordinary item ............................... 22,489 17,461 62,027 48,379 Provision for income taxes ..................................... 7,950 5,391 19,513 15,669 --------- --------- --------- --------- Income from continuing operations before extraordinary item ........................................ 14,539 12,070 42,514 32,710 Discontinued operations: Income from operations of discontinued operations (less applicable income taxes) ........................ - 229 (2,232) 1,521 Loss on disposal of discontinued operations, including provision for operating losses during phase-out period (less applicable taxes) ........................ - - (1,676) - --------- --------- --------- --------- Net income before extraordinary item ........................... 14,539 12,299 38,606 34,231 Extraordinary item: Loss from early extinguishment of debt ..................... - - - (265) Net income ..................................................... $ 14,539 $ 12,299 $ 38,606 $ 33,966 --------- --------- --------- --------- --------- --------- --------- ---------
4
For the Three For the Nine Months Ended Months Ended (Dollars in thousands, except per share data) 9/30/98 9/30/97 9/30/98 9/30/97 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings per common and common equivalent share: Basic income from continuing operations before extraordinary items .......................... $ 0.31 $ 0.32 $ 0.98 $ 0.90 Discontinued operations .......................... 0.00 0.01 (0.09) 0.04 Extraordinary item ............................... $ 0.00 $ 0.00 0.00 (0.01) ----------- ----------- ----------- ----------- Basic net income ................................. $ 0.31 $ 0.33 $ 0.89 $ 0.93 ----------- ----------- ----------- ----------- Diluted income from continuing operations before extraordinary items .......................... $ 0.31 $ 0.32 $ 0.96 $ 0.86 Discontinued operations .......................... 0.00 0.00 (0.09) 0.04 Extraordinary item ............................... $ 0.00 $ 0.00 0.00 0.00 ----------- ----------- ----------- ----------- Diluted net income ............................... $ 0.31 $ 0.32 $ 0.87 $ 0.90 ----------- ----------- ----------- ----------- Average common shares outstanding: Basic ........................................ 46,709,659 37,285,344 43,508,500 36,545,992 Diluted ...................................... 47,252,121 37,985,212 44,147,577 37,868,204 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Dividend declared per common share ............... $ 0.11 $ 0.10 $ 0.33 $ 0.26 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
5 COMMUNITY FIRST BANKSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, ------------------------------ (In thousands) (Unaudited) 1998 1997 - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................ $ 38,606 $ 33,966 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ........................ 7,307 5,426 Depreciation ..................................... 10,941 6,203 Amortization of intangibles ...................... 7,704 3,498 Net of amortization of premiums & discounts on securities ............................... (512) (56) Increase in interest receivable .................. (12,623) (7,860) Increase in interest payable ..................... 5,864 2,236 Other - net .................................... (66,797) (24,900) ----------- ----------- Net cash (used) provided by operating activities .......... (9,510) 18,513 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition, net of cash acquired ..................... 56,809 133,999 Net increase in interest-bearing deposits ............. (6,096) (9,184) Purchases of available-for-sale securities ............ (2,708,980) (469,185) Maturities of available-for-sale securities ........... 2,006,967 299,317 Sales of securities, net of gains ..................... 136,436 47,310 Purchases of held-to-maturity securities .............. (5,568) (23,543) Maturities of held-to-maturity securities ............. 3,738 20,328 Net increase in loans ................................. (284,846) (26,450) Net increase in bank premises and equipment ........... (19,785) (10,584) Net decrease in minority interest ..................... - (1,311) ----------- ----------- Net cash used in investing activities ..................... (821,325) (39,303) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, NOW accounts and savings accounts ......................... 369,496 (99,057) Net increase in time accounts ............................. 304,044 88,167 Net increase (decrease) in short-term & other borrowings .. 155,762 (79,898) Net increase in long-term debt ............................ 2,804 87,741 Net proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II . - 60,000 Net proceeds from issuance of common stock ................ 48,613 1,067 Purchase of common stock held in treasury ................. (13,438) (2,777) Conversion of preferred stock to common stock ............. - (52) Sale of common stock held in treasury ..................... 1,108 984 Common stock dividends paid ............................... (14,516) (9,297) ----------- ----------- Net cash provided by financing activities ................. 853,873 46,878 ----------- ----------- Net increase in cash and cash equivalents ................. 23,038 26,088 Cash and cash equivalents at beginning of period .......... 234,778 179,332 ----------- ----------- Cash and cash equivalents at end of period ................ $ 257,816 $ 205,420 ----------- ----------- ----------- -----------
6 COMMUNITY FIRST BANKSHARES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1998 NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements, which include the accounts of Community First Bankshares, Inc. (the "Company"), its wholly-owned data processing, credit origination, insurance agency and properties subsidiaries, and its thirteen 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 considered necessary for fair presentation have been included. On April 28, 1998, the shareholders approved a charter amendment that facilitated a two-for-one split of the Company's common stock, in the form of a 100 percent dividend payable to shareholders of record on May 1, 1998 and distributed on May 15, 1998. Accordingly, the historical consolidated financial information has been restated to reflect the impact of the two-for-one split on the common share, weighted average common share and basic and diluted earnings per share data. EARNINGS PER COMMON SHARE Basic earnings per common share is calculated by dividing net income applicable to common equity by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated by dividing net income applicable to common equity by the weighted average number of shares of common stock outstanding. The weighted average number of shares of common stock outstanding is increased by the number of shares of common stock that would be issued assuming the exercise of stock options and warrants during each period. Such adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per share. NOTE B - BUSINESS COMBINATIONS AND DIVESTITURES On August 7, 1998, the Company issued approximately 1,526,000 shares of common stock to acquire Guardian Bancorp ("Guardian"), the holding company for Guardian State Bank, Salt Lake City, Utah, with offices in Salt Lake City and Sandy, Utah. At acquisition, Guardian had approximately $99 million in assets and $89 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 statements from the date of the merger. In July, 1998, the Company sold the operating assets of its two sub-prime lending subsidiaries. Seven loan production offices of Equity Lending, Inc. ("Equity Lending") were sold to FIRSTPLUS Financial Group, Inc., in a cash transaction on July 27, 1998. Servicing rights to the portfolio of automobile installment contracts originated by Mountain Parks Financial Services, Inc. ("Mountain Parks") were acquired by Cygnet Financial Services, Inc. on July 31, 1998. The Company retained approximately $50 million in loans originated by Equity Lending and servicing rights on an additional $100 million in Equity Lending loans sold to other parties. The Company also retained approximately $50 million in auto installment contracts originated by Mountain Parks. In addition to a $2.1 million operating loss in the second quarter, consisting of $707,000 attributed to quarterly operations and $1.4 million associated with one-time operating expenses related to preparing the subsidiaries for sale, the Company recognized a charge of $1.7 million for the second quarter, which reflected the expected loss on disposition of the subsidiaries. Equity 7 Lending, which originates residential non-conforming mortgages and Mountain Parks, which purchases sub-prime auto installment contracts, were acquired in December 1996, as a result of the Company's merger with Mountain Parks Financial Corporation. The two companies were classified as discontinued operations on the Company's 1997 financial statements. On July 1, 1998, the Company issued approximately 1,932,000 shares of common stock to acquire Western Bancshares of Las Cruces, Inc. ("Western"), the holding company for Western Bank, Las Cruces, New Mexico, with offices in Anthony, Hatch, and Las Cruces, New Mexico. At acquisition, Western had approximately $159 million in assets and $136 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 statements from the date of the merger. On June 12, 1998, the Company, through its Colorado subsidiary, completed the sale of its office in Ault, Colorado. The Ault office was acquired on January 23, 1998 as part of the Company's purchase and assumption of 37 offices of Banc One Corporation located in Arizona, Colorado, and Utah. The transaction included the disposition of approximately $9 million in deposits. On May 7, 1998, the Company issued 1,135,406 shares of common stock to acquire FNB, Inc. ("FNB") a bank holding company with banks in Greeley, Colorado and Fort Collins, Colorado. At acquisition, FNB had approximately $120 million in assets and $109 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 statements from the date of the merger. On April 30, 1998, the Company issued approximately 1,432,000 shares of common stock to acquire Pioneer Bank of Longmont ("Pioneer"), Longmont, Colorado, with offices in Berthoud, Longmont, Lyons, and Niwot, Colorado. At acquisition, Pioneer had approximately $138 million in assets and $128 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 statements from the date of the merger. On April 3, 1998, the Company issued approximately 852,000 shares of common stock to acquire Community Bancorp., Inc. ("CBI"), the parent company of Community First National Bank, Thornton, Colorado, with two offices in Thornton, Colorado and one office in Arvada, Colorado. At acquisition, CBI had approximately $78 million in assets and $72 million in deposits. The Company used the pooling of interests method to account for the transaction. The 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 statements from the date of the merger. 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. NOTE C - SUBSEQUENT EVENTS On October 30, 1998, the Company redeemed all of its 9.00% Exchangeable Subordinated Notes due August 15, 2005 at a redemption price of 103% of the principal amount, plus accrued interest to the 8 redemption date. The total outstanding principal amount of the notes, which were issued in July 1995, was $11.5 million. The early redemption will result in a one-time pre-tax charge of $345,000. NOTE D - ACCOUNTING CHANGES ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. REPORTING COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities which prior to adoption was reported separately in shareholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. During the third quarter of 1998 and 1997, total comprehensive income amounted to $30.4 million and $15.4 million, respectively. Total comprehensive income as of September 30, 1998 and 1997 amounted to $54.8 million and $36.9 million, respectively. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement no. 128, "Earnings Per Share", which the Company adopted on December 31, 1997. This Statement replaced the previous method of computing earnings per share with basic and diluted earnings per share and required restatement for all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The calculation of diluted earnings per share is similar to the previous diluted earnings per share. The adoption of Statement 128 did not have a material impact on the calculation of earnings per share. NOTE E - INVESTMENTS The following is a summary of available-for-sale and held-to-maturity securities at September 30, 1998:
Available-for-Sale Securities - -------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------- United States Treasury ................. $ 132,950 $ 2,756 $ - $ 135,706 United States Government agencies ...... 335,011 5,736 70 340,677 Mortgage-backed securities ............. 1,190,608 24,539 608 1,214,539 Collateralized mortgage obligations .... 75,303 650 50 75,903 State and Political Securities ......... 119,409 3,597 74 122,932 Other securities ....................... 51,548 39 351 51,236 ---------- ---------- ---------- ---------- $1,904,829 $ 37,317 $ 1,153 $1,940,993 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Held-to-Maturity Securities - --------------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair 9 Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------- Other securities..................................... 69,399 - - 69,399 - --------------------------------------------------------------------------------------------------------------- $ 69,399 $ - $ - $ 69,399 -------- ---------- ----------- --------- -------- ---------- ----------- ---------
Proceeds from the sale of available-for-sale securities during the three months ended September 30, 1998 and 1997, were $42,893,000 and $13,425,000, respectively. Gross gains of $354,000 and $75,000 were realized on sales during 1998 and 1997, respectively. Gross losses of $0 and $13,000 were realized on these sales during 1998 and 1997, respectively. Gains and losses on disposition of these securities were computed using the specific identification method. NOTE F - LOANS The composition of the loan portfolio at September 30, 1998, was as follows (in thousands): Real estate................................... $ 1,542,874 Commercial.................................... 907,437 Agricultural.................................. 318,667 Consumer and other............................ 618,268 ----------- 3,387,246 Less allowance for loan losses 45,567 ----------- Net loans.................................. $ 3,341,679 ----------- -----------
NOTE G - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers and to manage its interest rate risk. These financial instruments include commitments to extend credit and letters of credit. The contract or notional amounts of these financial instruments at September 30, 1998, were as follows (in thousands): Commitments to extend credit..................... $ 564,415 Letters of credit................................ 22,729
NOTE H - SUBORDINATED NOTES Long-term debt at September 30, 1998, included $60 million of 7.30% Subordinated Notes issued in June 1997. These notes are due June 30, 2004, with interest payable semi-annually. Long-term debt also included $12 million of 9.00% Subordinated Notes issued in July 1995, which are due August 15, 2005, with interest payable quarterly. At September 30, 1998, both issues, totaling $72 million, qualified as Tier 2 capital. The $12 million of 9.00% Subordinated Notes were subsequently redeemed on October 30, 1998 at a redemption price of 103% of the principal amount. NOTE I - INCOME TAXES The reconciliation between the provision for income taxes and the amount computed by applying the statutory federal income tax rate was as follows (in thousands):
SEPTEMBER 30, 1998 ------------------ 35% of pretax income.................................. $ 21,709 State income tax, net of federal tax benefit ......... (408) Tax-exempt interest................................... (2,760) Amortization of goodwill.............................. 659 Other ......................................... 313 --------- Provision for income taxes............................ $ 19,513 --------- ---------
NOTE J - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30 (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------- Noncash transfers of held-to-maturity securities 10 to available-for-sale securities ......................... $ 153,813 $ 42,328 Unrealized gain (loss) on available-for-sale securities ....... 27,436 4,542 Conversion of preferred stock to common stock ................. - 22,937
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, 1998, and December 31, 1997, and its results of operations for the three and nine month periods ended September 30, 1998 and 1997. Each of the acquisitions described in the table below 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. MERGER, ACQUISITION AND DIVESTITURE ACTIVITY The Company completed five acquisitions during the first nine months of 1998. As of September 30, 1998, the Company had no pending bank acquisitions. The Company completed three acquisitions during 1997. Each of these acquisitions has had, or will have, an effect upon the Company's results of operations and financial condition. During the first nine months of 1998 and the year of 1997, 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) - -------------------------------------------------------------------------- August 1998 Salt Lake City, Utah $ 99 July 1998 Las Cruces, New Mexico 159 May 1998 FNB, Inc., Colorado 120 April 1998 Longmont, Colorado 138 April 1998 Thornton, Colorado 78 December 1997 Gunnison, Colorado 90 November 1997 Phoenix, Arizona 54 July 1997 Cheyenne, Wyoming 1,100
In July 1998, the Company sold the operating assets of its two sub-prime lending subsidiaries, Mountain Parks and Equity Lending. Both Mountain Parks, which purchased auto contracts and Equity Lending, which originated residential, non-conforming mortgages, were acquired by the Company in December 1996 through the merger with Mountain Parks Financial Corporation. The Company had accounted for these entities as discontinued operations on the consolidated financial statements. At September 30, 1998, net assets of these entities retained by the Company was $47 million and $71 million for Mountain Parks and Equity Lending, respectively. 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 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. OVERVIEW For the three months ended September 30, 1998, net income was $14.5 million, an increase of $2.2 million, or 17.9%, from the $12.3 million earned during the 1997 period. The Company's basic earnings per common share for the third quarter of 1998 were $0.31, compared to $0.33 in 1997. Diluted earnings per common share for the third quarter of 1998 were $0.31. 11 Return on average assets was .97% for the third quarter of 1998, compared with 1.23% for the 1997 period. Return on average common shareholders' equity for the 1998 and 1997 periods was 14.69% and 18.59%, respectively. Principal factors contributing to these changes included the one time charges associated with the sale of the Company's sub-prime lending affiliates; incremental net noninterest expenses associated with the acquisition and integration of entities acquired during 1998 and 1997; and a decrease in net interest margin. The decrease in the net interest margin is principally due to the lower loan to deposit ratios at those institutions acquired in the Banc One and KeyBank transactions, which resulted in the Company having a greater percentage of its earning assets invested initially in lower yielding investment securities. For the nine months ended September 30, 1998, net income was $38.6 million, an increase of $4.6 million, or 13.5%, from the $34.0 million earned during the 1997 period. This included the effect of a $265,000 after tax extraordinary expense associated with the Company's early extinguishment of its $23 million in principal amount of 7.75% Subordinated Notes due April 2000, which were redeemed on March 31, 1997. Basic earnings per common share for the nine months ended September 30, 1998, were $0.89, compared to $0.93 in 1997. Diluted earnings per common share for the nine months ended September 30, 1998 were $0.87. Return on average assets and return on common equity for the nine months ended September 30, 1998 were .95% and 14.35%, respectively, as compared to the 1997 ratios of 1.36% and 18.35%, respectively. On October 30, 1998, the Company announced that in fourth quarter of 1998 it would record approximately $5.5 million in charges related to severance and other employee-related costs and the disposal of redundant computer equipment and software acquired in connection with recent acquisitions, as part of an initiative to increase the Company's operating efficiency. On October 30, 1998, the Company redeemed all of its 9.00% Exchangeable Subordinated Notes due August 15, 2005 at a redemption price of 103% of principal, which will result in a one-time pre-tax charge of $345,000 in the fourth quarter of 1998. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income for the three months ended September 30, 1998, was $66.9 million, an increase of $23.0 million, or 52.4%, from the net interest income of $43.9 million earned during the 1997 period. The increase was principally due to the increased asset base associated with the acquisitions completed during 1998 and 1997, partially offset by a decrease in the net interest margin to 5.07% during the third quarter of 1998, from 5.10% during the 1997 period. Net interest income for the nine months ended September 30, 1998 was $177.5 million, an increase of $63.5 million, or 55.7% from interest income of $114.0 million earned during the 1997 period. PROVISION FOR LOAN LOSSES The provision for loan losses for the three months ended September 30, 1998, was $4.4 million, an increase of $2.7 million, or 158.9%, from the $1.7 million provision during the 1997 period. This increase reflects the effect of the Company including the sub-prime lending affiliates which were previously recorded as discontinued operations and the Company's objective of maintaining adequate reserve levels in recognition of significant loan growth in the Company's subsidiaries, including those acquired in 1998 and 1997. 12 NONINTEREST INCOME Noninterest income for the three months ended September 30, 1998, was $15.5 million, an increase of $5.8 million, or 59.8%, from the 1997 level of $9.7 million. The increase included an increase of $6.6 million earned by banks acquired in 1998 and 1997, partially offset by a decrease in service charges on deposit accounts of $1.6 million. Noninterest income for the nine months ended September 30, 1998, was $42.8 million, an increase of $15.7 million, or 57.9% from the 1997 level of $27.1 million. The increase was due to an $8.8 million increase in deposit service charges, a $1.2 million increase in insurance commissions, a $912,000 increase in trust fees, and an increase in other income of $3.7 million, which was due primarily to banks acquired in 1998 and 1997. NONINTEREST EXPENSE Noninterest expense for the three months ended September 30, 1998, was $55.5 million, an increase of $21.1 million, or 61.3%, from the level of $34.4 million during the 1997 period. The increase was principally due to an increase of $8.3 million, or 46.6%, in salaries and employee benefits, a significant portion resulting from banks acquired in 1998 and 1997. Net occupancy increased $3.7 million, or 71.2% from $5.2 million in the period ended September 30, 1997, to $8.9 million at the end of the current period, principally due to banks acquired in 1998 and 1997. Amortization of intangibles increased $972 million or 52.9%, from $1.7 million in the period ended September 30, 1997, to $2.6 million in the current period, due principally to 1998 and 1997 acquisitions. The third quarter of 1998 included $2.6 million in payments related to Company-obligated mandatorily redeemable preferred securities, an increase of $1.3 million from the third quarter of 1997. This resulted from the increased principal amount of these securities which was $120 million in the 1998 period and $60 million in 1997. Acquisition, integration and conforming expenses of $1.3 million for the three months ended September 30, 1988 related to acquisitions completed during the third quarter. Included in these costs were charges incurred in the underwriting and completion of the transactions; the write-off of equipment, software, and other assets and data processing related conversion and conforming expenditures. Noninterest expense for the nine months ended September 30, 1998 was $151.0 million, an increase of $63.8 million, or 73.2%, from $87.2 million during the 1997 period. The increase was principally due to a $25.6 million increase in salaries and employee benefits, which included $20.1 million at banks acquired during 1998 and 1997. In addition, net occupancy increased $11.5 million, which included $6.5 million at banks acquired in 1998 and 1997. The 1998 period included $7.7 million in expenses related to Company-obligated mandatorily redeemable preferred securities, an increase of $3.2 million from the 1997 period due to the increased principal amount. Amortization of intangibles increased $4.2 million or 120.0% from $3.5 million during the period ended September 30, 1997, to $7.7 million during the current period, due primarily to 1998 and 1997 acquisitions. Acquisition, integration and conforming expenses for the nine month period ended September 30, 1998 was $2.9 million compared to $14,000 for the 1997 period. PROVISION FOR INCOME TAXES The provision for income taxes for the three months ended September 30, 1998, was $8.0 million, an increase of $2.6 million, or 48.1%, from the 1997 level of $5.4 million, due primarily to the increase in pre-tax income resulting from acquisitions completed since July 1997. The provision for income taxes for the nine months ended September 30, 1998 was $19.5 million, an increase of $3.8 million, or 24.2%, from the 1997 level of $15.7 million, due to the increase in the level of pretax income. 13 YEAR 2000 CONSIDERATIONS The Company is evaluating the potential impact of what is commonly referred to as the "Year 2000" issue. This issue addresses the potential inability of certain information systems to properly recognize and process dates containing the year 2000 and beyond. If not corrected, these systems could fail or create erroneous results. The Company has established a dedicated Year 2000 Team to focus on all significant operational areas throughout the Company. This team has worked with management to commence the following steps: (i) implementing a Year 2000 Assessment and Testing Plan for all items that may be affected by the Year 2000 date change; (ii) working with loan customers to help them understand the impact of the Year 2000 on their business; (iii) communicating with third parties that interact with the Company to ensure they are addressing the Year 2000 issue; (iv) communicating with hardware and software suppliers to ensure Year 2000 compliance among their products; and (v) contingency and disaster recovery planning to ensure Year 2000 problem resolution. The Company has identified and tested the applications it believes are mission critical, and the initial test results indicated that these systems are Year 2000 compliant. The Company expects to complete testing and establish compliance with respect to all of its applications by December 31, 1998, subject to possible equipment upgrades during 1999 and ongoing communications with third parties. 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. The Company estimates that its direct costs to achieve Year 2000 compliance between the current date and the end of 1999 will consist of up to $100,000 related to writeoffs of non-compliant equipment, up to $100,000 per year in costs of dedicated staff, and up to $200,000 per year for costs related to other staff time devoted to Year 2000 compliance. The Company also expects capital expenditures of up to $1 million for equipment upgrades related to compliance. Costs and capital expenditures in these areas have not been material for historical periods. Statements in this section which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding the timetable for Year 2000 compliance, the Company's costs and capital expenditures, the success of the Company's and others' efforts to achieve compliance, and the effects of the Year 2000 issue on the Company's future financial condition and results of operations. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. The following important factors, among others, could affect the accuracy of these statements: (i) the inherent uncertainty of the costs and timing of achieving compliance on the wide variety of systems used by the Company and its subsidiaries, (ii) the reliance on the efforts of vendors, customers, government agencies and other third parties to achieve adequate compliance and avoid disruption of the Company's business in early 2000 and (iii) the uncertainty of the ultimate costs and consequences of any unanticipated disruption in the Company's business resulting from the failure of one of the Company's applications or of a third party's systems. The foregoing list is not exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 14 FINANCIAL CONDITION LOANS Total loans were $3.4 billion at September 30, 1998 and $2.6 billion at December 31, 1997. The following table presents the Company's balance of each major category of loans:
SEPTEMBER 30, 1998 DECEMBER 31, 1997 -------------------------------------------------------------------- PERCENT OF PERCENT OF AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS -------------- ----------- -------------- ----------- Loan category: (DOLLARS IN THOUSANDS) Real estate...................... $ 1,542,874 45.55% $ 1,158,822 43.94% Commercial....................... 907,437 26.79% 708,084 26.85% Consumer and other............... 618,268 18.25% 499,924 18.96% Agricultural..................... 318,667 9.41% 270,227 10.25% -------------- ----------- -------------- ----------- Total loans........................... 3,387,246 100.00% 2,637,057 100.00% ----------- ----------- ----------- ----------- Less allowance for loan losses 45,567 36,194 -------------- -------------- Total................................. $ 3,341,679 $ 2,600,863 -------------- -------------- -------------- --------------
NONPERFORMING ASSETS At September 30, 1998, nonperforming assets were $23.5 million, an increase of $7.4 million, or 46.0%, from the $16.1 million level at December 31, 1997. The increase was principally due to the addition of the remaining loan portfolios of the Company's sub-prime lending subsidiaries which were reported as discontinued operations at December 31, 1997. At September 30, 1998, nonperforming loans as a percent of total loans was .53%, up from the December 31, 1997 level of .48%. OREO was $5.5 million at September 30, 1998, an increase of $2.1 million from $3.4 million at December 31, 1997. Nonperforming assets of the Company are summarized in the following table:
SEPTEMBER 30, DECEMBER 31, 1998 1997 --------------------------------------- Loans: Nonaccrual loans.............................. $ 17,848 $ 12,507 Restructured loans ........................... 180 140 ----------- ----------- Nonperforming loans........................... 18,028 12,647 Other real estate owned................................ 5,453 3,406 ----------- ----------- Nonperforming assets................................... $ 23,481 $ 16,053 ----------- ----------- ----------- ----------- Loans 90 days or more past due but still accruing ..... $ 2,863 $ 3,616 ----------- ----------- ----------- ----------- Nonperforming loans as a percentage of total loans .53% .48% Nonperforming assets as a percentage of total assets .39% .33% Nonperforming assets as a percentage of loans and OREO .69% .61%
ALLOWANCE FOR LOAN LOSSES At September 30, 1998 and September 30, 1997, the allowance for loan losses was $45.6 million and $36.1 million, respectively. Net charge-offs during the 1998 period were $4.0 million more than those incurred during the nine months ended September 30, 1997. 15 At September 30, 1998, the allowance for loan losses as a percentage of total loans was 1.35%, a decrease from the September 30, 1997, level of 1.43%. During the nine months ended September 30, 1998, net charge-offs increased to $6.7 million. These charge-offs related to the Company's continued periodic review of the existing loan portfolios; an increase in charge-offs related to loan growth at the Company's subsidiaries, including those recently acquired; and the addition of the remaining loan portfolios of the Company's sub-prime lending subsidiaries which were included in discontinued operations in the 1997 period. The following table sets forth the Company's allowance for loans losses:
SEPTEMBER 30 1998 1997 ----------------------- (DOLLARS IN THOUSANDS) Balance at beginning of period ............... $36,194 $26,215 Acquired bank allowance/other ................ 8,789 7,155 Charge-offs: Commercial .......................... 1,855 1,282 Real estate ......................... 593 298 Agricultural ........................ 509 522 Consumer and other ................ 6,231 2,488 ------- ------- Total charge-offs ............ 9,188 4,590 ------- ------- Recoveries: Commercial .......................... 665 682 Real estate ......................... 218 135 Agricultural ........................ 221 468 Consumer and other ................ 1,361 595 ------- ------- Total recoveries ............... 2,465 1,880 Net charge-offs .............................. 6,723 2,710 Provision charged to operations .............. 7,307 5,426 ------- ------- Balance at end of period ..................... $45,567 $36,086 ------- ------- ------- ------- Allowance as a percentage of total loans ..... 1.35% 1.43% Annualized net charge-offs to average loans outstanding ....................... 0.30% 0.17%
INVESTMENTS The investment portfolio, including available-for-sale securities and held-to-maturity securities, increased $331 million, or 19.7%, to $2.0 billion at September 30, 1998, from $1.7 billion at December 31, 1997. At September 30, 1998, the investment portfolio represented 33.6% of total assets, compared with 34.6% at December 31, 1997. In addition to investment securities, the Company had investments in interest-bearing deposits of $7 million at September 30, 1998, a $6 million increase from the $1 million at December 31, 1997. DEPOSITS Total deposits were $4.8 billion at September 30, 1998, an increase of $1.2 billion or 33.3% from $3.6 billion at December 31, 1997. Noninterest-bearing deposits at September 30, 1998, were $833 million, an increase of $236 million, or 39.5%, from $597 million at December 31, 1997. The Company's core deposits as a percent of total deposits were 87.6% and 89.0% as of September 30, 1998, and December 31, 1997, respectively. Interest-bearing deposits were $4.0 billion at September 30, 1998, an increase of $1 billion, or 33.3% from the $3.0 billion at December 31, 1997. 16 BORROWINGS Short-term borrowings of the Company were $320 million as of September 30, 1998, as compared to $231 million at December 31, 1997, an increase of $89 million, or 38.5%. Long-term debt of the Company was $119 million as of September 30, 1998, an increase of $3 million, or 2.6%, from the $116 million as of December 31, 1997. CAPITAL MANAGEMENT Shareholders' equity increased $78 million, or 23.0%, to $417 million at September 30, 1998, from $339 million at December 31, 1997. At September 30, 1998, the Company's Tier 1 capital, total risk- based capital and leverage ratios were 9.37%, 12.25%, and 6.40%, 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, 1998, the Company had risk-weighted assets of $4 billion. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK There have been no material changes in market risk exposures that affect the quantitative and qualitative disclosures presented as of December 31, 1997. 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings: None. Item 2. Changes in Securities: None. Item 3. Defaults upon Senior Securities: None. Item 4. Submission of Matters to a Vote of Security Holders: None Item 5. Other Information: None Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: Exhibit 27.1 Financial Data Schedule (b) Reports on Form 8-K: None. 19 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: ------------------------------------------------ Mark A. Anderson Vice Chairman, Chief Financial Officer, Chief Information Officer, Treasurer, Secretary (Principal Financial and Accounting Officer) 20 EX-27 2 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT IN FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 216,826 7,482 40,990 0 1,940,993 69,399 69,399 3,387,246 45,567 5,981,149 4,829,161 319,912 176,082 119,280 120,000 0 477 416,237 5,981,149 84,471 31,876 764 117,111 41,001 50,191 66,920 4,402 354 55,531 22,489 14,539 0 0 14,539 .31 .31 0 17,848 2,863 180 0 36,194 9,188 2,465 45,567 0 0 0
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