-----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, P05LsqtwQTfX8LMCaNSOm4vgVyjm76R5F4QlZVCcpYkfqnbzWWRmgNWN29RxLbmz Cex0phadsRuwkgJEIAeNIw== 0001047469-99-010912.txt : 19990325 0001047469-99-010912.hdr.sgml : 19990325 ACCESSION NUMBER: 0001047469-99-010912 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990323 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-K405 SEC ACT: SEC FILE NUMBER: 000-19368 FILM NUMBER: 99570981 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-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the Transition period from to COMMISSION FILE NO. 000-19368 COMMUNITY FIRST BANKSHARES, INC. (Exact name of registrant as specified in its charter) DELAWARE 46-0391436 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 520 MAIN AVENUE FARGO, ND 58124-0001 ----------------------------------------------------- (Address of principal executive offices and zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (701) 298-5600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE PREFERRED STOCK PURCHASE RIGHTS 8-7/8% CUMULATIVE CAPITAL SECURITIES, $25 LIQUIDATION AMOUNT(1) 8.20% CUMULATIVE CAPITAL SECURITIES, $25 LIQUIDATION AMOUNT(2) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of March 19, 1999, assuming as market value the price of $19.2815 per share, the average between the high and low sale prices on the Nasdaq National Market, the aggregate market value of shares held by nonaffiliates was approximately $828 million. As of March 19, 1999, the Company had outstanding 47,177,803 shares of Common Stock, $.01 par value, net of treasury shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1998 Annual Report to Shareholders and the 1999 Proxy Statement for the Company's Annual Meeting of Shareholders to be held April 27, 1999, are incorporated by reference into Parts II and III, respectively, of this Form 10-K, to the extent described in such Parts. (1) The 8-7/8% Cumulative Capital Securities (the "CFB I Capital Securities") were issued by CFB Capital I ("CFB Capital I"), a wholly owned Delaware business trust subsidiary of the Company. The Company has also fully and unconditionally guaranteed all of CFB Capital I's obligations under the CFB I Capital Securities. (2) The 8.20% Cumulative Capital Securities (the "CFB II Capital Securities") were issued by CFB Capital II ("CFB Capital II"), a wholly owned Delaware business trust subsidiary of the Company. The Company has also fully and unconditionally guaranteed all of CFB Capital II's obligations under the CFB II Capital Securities. TABLE OF CONTENTS
PAGE NO. PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Item 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Item 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . 17 PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . 17 Item 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . 18 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . 18 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . 18 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . 18 PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . 18 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . 19 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . 19 PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . 19 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3 PART I ITEM 1. BUSINESS GENERAL Community First Bankshares, Inc. (the "Company"), is a multi-bank holding company that as of December 31, 1998 operated banks and bank branches (the "Banks") in 154 communities in Arizona, Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsin and Wyoming. Total assets of the Company were approximately $6.0 billion as of December 31, 1998. The Company acquired banks and bank branches in 50 communities in 1998. See "Recent Significant Acquisitions." The Banks are community banks that provide a full range of commercial and consumer banking services primarily to individuals and businesses in small and medium-sized communities and the surrounding market areas. The Company encourages local autonomy by local Bank presidents, while providing to the Banks the benefits of holding company affiliation. NATIONAL COMMUNITY BANKING STRATEGY The Company's primary strategy is to operate and continue to acquire banks and bank branches in communities which generally have populations between 3,000 and 50,000 and are located in the Company's key target acquisition states of Arizona, Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsin and Wyoming, and additionally in the adjacent states of California, Idaho, Illinois, Missouri, Nevada, Oklahoma and Texas. In addition, the Company has decided to adopt a national community banking strategy, expanding its search for bank acquisitions in similar communities in other states throughout the United States. Such communities are believed to provide the Company with the opportunity for a stable, relatively low-cost deposit base. The individual banks and bank branches sought to be acquired in the past by the Company generally had approximately $20 million to $150 million in assets. In pursuing its national community banking strategy, the Company intends to concentrate on a broader band of acquisition opportunities, focusing on banks and banking groups with $200 million to $500 million in assets. The Company provides the Banks with the advantages of affiliation with a multi-bank holding company, such as access to its lines of financial services including trust products and administration, insurance and investment services, data processing services, credit policy formulation and review, investment management and specialized staff support. The Company grants substantial autonomy to managers of the Banks with respect to day-to-day operations, customer service decisions and marketing. The Banks are encouraged to participate in community activities, support local charities and community development, and otherwise enhance their images in their communities. The Company maintains a subsidiary bank phantom stock program, pursuant to which presidents of the subsidiary Banks participate in the equity appreciation of their respective local Banks. The Company believes this program is important to provide these individuals with a direct incentive to improve the performance of their Banks. 4 THE BANKS The Banks provide a full range of commercial and consumer banking services primarily to individuals and businesses in small and medium-sized communities and the surrounding market areas. The Banks draw most of their deposits from and make most of their loans within their respective market areas. The Banks owned by the Company as of December 31, 1998, were located in Arizona, Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsin and Wyoming. COMMUNITIES SERVED The Banks, as of December 31, 1998, were located in communities with populations ranging from approximately 200 to 50,000, except for the larger communities of Fargo, North Dakota; Denver and Englewood (a Denver suburb), Colorado; Phoenix, Arizona; and Salt Lake City, Utah. Each of the Banks seeks to serve a market area with greater population because, in many cases, there are few or no other financial institutions within a reasonable distance from the community in which the Bank is located. The economies of the Banks' smaller communities, especially those in Nebraska, North Dakota and South Dakota, depend primarily on farming, farm service and agricultural supply businesses. Agriculture in these communities is affected by many factors beyond the control of the Banks, including weather, governmental policies, fluctuating commodity prices, demand and production and natural disasters. As with other small, nonmetropolitan communities, many of the communities in which the Banks presently operate have experienced and are expected to experience no growth or a decline in population. The Company has operated profitably in these communities and has continued to acquire institutions in larger markets. However, if reductions in population or adverse economic trends in specific communities result in decreased profitability in the Banks or offices located in those communities, the Company may consider selling such Banks or offices or reducing the level of services provided in such communities. ACQUISITION STRATEGY The Company intends to continue its growth by making acquisitions of community banks and other financial institutions in selected communities nationwide. The Company believes it is well-positioned to acquire and profitably operate community banks because of its experience in operating community banks, its ability to provide centralized management to those banks and its access to capital. The Company believes many owners of community banks are seeking to sell their banks for a variety of reasons, including lack of shareholder liquidity, management succession problems, the difficulty of compliance with current multiple-layered bank regulations and increasing competition from non-bank organizations. The Company believes there are over 5,000 community banks that are possible acquisition candidates in its twenty-state primary acquisition area described above and many other possible candidates in similar communities nationwide. The Company competes with individuals and institutions, including major regional bank holding companies, for suitable acquisition candidates. Acquisition competitors of the Company range from regional bank holding companies to individual bank owners who own or control banks in the Acquisition Area. The process of industry consolidation has accelerated as a result of the adoption of the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"). The IBBEA largely eliminated restrictions on interstate banking and since June 1, 1997, has permitted interstate branching, subject to special "opt-in" and "opt-out" provisions which states were able to enact by law. Most states have adopted implementing legislation. Certain aspects of the IBBEA were clarified and amended in 1997 with the passage of the Riegle-Neal 5 Clarification Act. The Economics and Growth Regulatory Paperwork Reduction Act of 1996 ("EGRPRA") streamlined application processes and eased regulations in several areas facilitating acquisitions and expansion of nonbanking activities. The effect of this legislation has both facilitated the Company's acquisitions and increased the number of potential acquirers of banks. The Company has established a due diligence review process to evaluate acquisition targets and has established acquisition parameters for target acquisitions relating to market factors, financial performance and certain nonfinancial factors. Market factors considered by the Company include the size and long-term viability of the community and market area served by the target bank, the dominance of the acquisition target (which should be the largest or second largest financial institution in the market) and the proximity of other existing Banks owned by the Company. In exploring markets in regions not currently served by the Company, management looks for similarities between the new market areas and the Company's existing market areas in terms of culture and economic bases. Financial analyses performed by the Company in evaluating acquisition prospects include review of historical performance, comparison to peers and the Company's Banks in terms of key operating performance ratios (including earnings, staffing and loan quality) and target ratios. The Company determines the price it is willing to pay for an institution based on, among other factors, cash flow and return on equity valuation models and an analysis of accretion/dilution on a marginal and a pro forma basis. Nonfinancial considerations in evaluating an acquisition prospect include the quality of the management team's skill and the demand on management resources to integrate the target institution. Finally, each target acquisition must undergo an extensive review of loan asset quality, operating procedures and deposit structure before the Company commits to a purchase. The Company's level of future acquisitions will depend, in part, on its ability to attract and retain management level employees capable of performing efficient review of credit quality standards of proposed acquisition candidates. Acquisition opportunities presented to the Company that have not met the requirements described above have not been pursued. Because of limited growth opportunities in many of the existing markets served by the Company, management believes future growth in the business of the Company will largely depend on successful execution of the Company's strategies. In addition to Company-wide efforts to increase non-interest income through sales of investment products, trust services and insurance, the future growth of the Company will depend upon consummation of acquisitions consistent with the Company's acquisition strategy, and the future growth of recent and expected acquisitions in higher growth markets. Successful completion of acquisitions by the Company depends upon such factors as the availability of suitable acquisition candidates, necessary regulatory approvals and necessary approvals of holders of the Company's and other providers of credit, compliance with applicable capital requirements and, in the case of expansion into new states, the availability of additional management resources required to operate banks in widely dispersed geographical areas. REVIEW OF ACQUISITION OPPORTUNITIES The Company routinely solicits and reviews acquisition opportunities and, at any given time, may have bids outstanding or may be involved in negotiations with the owners of financial institutions or other parties relative to a particular financial institution, its branches or its deposit accounts. The Company currently has no agreements in place to acquire other banks but is in the process of reviewing several opportunities. 6 RECENT SIGNIFICANT ACQUISITIONS On August 7, 1998, the Company acquired Guardian Bancorp ("Guardian"), the bank holding company for Guardian State Bank, headquartered in Salt Lake City, Utah, with banking offices in Salt Lake City and Sandy, Utah. At closing, Guardian had total assets of approximately $99 million, total deposits of approximately $89 million, and total stockholders equity of approximately $8.5 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 1,526,000 shares of common stock to the former holders of Guardian common stock. The value of the Company's common stock issued in the merger was approximately $38 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. On July 1, 1998, the Company acquired Western Bancshares of Las Cruces, Inc. ("Western"), the bank holding company for Western Bank, headquartered in Las Cruces, New Mexico with offices in Anthony, Hatch and Las Cruces, New Mexico. At closing, Western had total assets of approximately $159 million, total deposits of approximately $136 million, and total stockholders equity of approximately $16 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 1,932,000 shares of common stock to the former holders of Western common stock. The value of the Company's common stock issued in the merger was approximately $48 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. On May 7, 1998, the Company acquired FNB, Inc. ("FNB"), a two-bank holding company headquartered in Greeley, Colorado with offices in Greeley and Fort Collins, Colorado. At closing, FNB had total assets of approximately $120 million, total deposits of approximately $109 million, and total stockholders equity of approximately $10 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 1,135,000 shares of common stock to the former holders of FNB common stock. The value of the Company's common stock issued in the merger was approximately $29 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. On April 30, 1998, the Company acquired Pioneer Bank of Longmont ("Pioneer"), Longmont, Colorado, with five banking offices in four Colorado communities. At closing, Pioneer had total assets of approximately $138 million, total deposits of approximately $128 million, and total stockholders equity of approximately $8.9 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 1,432,000 shares of its common stock to the former holders of Pioneer common stock. The value of the Company's common stock issued in the merger was approximately $36 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. On April 3, 1998, the Company acquired Community Bancorp, Inc. ("CBI"), the parent company of Community First National Bank, Thornton, Colorado, with offices in Thornton and Arvada, Colorado. At closing, CBI had total assets of approximately $78 million, total deposits of approximately $72 million, and total stockholders equity of approximately $5.7 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 853,000 shares of common stock to the former holders of CBI common stock. The value of the Company's common stock issued in the merger was approximately $22 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. 7 On January 23, 1998, the Company acquired 37 banking offices located in Arizona, Colorado and Utah (the "Bank One Branches") from three subsidiary banks of Banc One Corporation (the "Bank One Banks"). At closing, the Bank One Branches had total deposits of approximately $730 million and loans of approximately $61 million. The Company paid a purchase price premium of approximately $44 million, equal to 6% of the deposits of the Bank One Branches at closing. The acquisition was accounted for as an acquisition of assets and assumption of liabilities and resulted in the recognition by the Company of deposit-based intangibles in an amount equal to the purchase price premium of approximately $44 million. Following the closing, the 25 Arizona offices and four Utah offices acquired from the Bank One Banks were merged into the Republic bank in Phoenix, Arizona that was recently acquired by the Company. The eight acquired Colorado offices were merged into the Company's existing Colorado affiliate bank. On December 1, 1997, the Company acquired First National Summit Bankshares, Inc., Gunnison, Colorado ("Summit"), a bank holding company that owned and operated a national bank with banking facilities in five Colorado communities. At closing, Summit had total assets of approximately $90 million, total deposits of approximately $82 million and total stockholders' equity of approximately $7 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 630,000 shares of common stock to the former holders of Summit common stock and paid approximately $1 million in cash to holders of Summit preferred stock cancelled in the merger. The value of the Company's common stock issued in the merger was approximately $15 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. On November 24, 1997, the Company acquired Republic National Bancorp, Inc., Phoenix, Arizona ("Republic"), a bank holding company that owned and operated a national bank in Phoenix, Arizona. At closing, Republic had total assets of approximately $54 million, total deposits of approximately $49 million and total stockholders' equity of approximately $4 million. Upon completion of the merger, which was accounted for as a pooling of interests, the Company issued approximately 737,000 shares of common stock to the former holders of Republic common stock. The value of the Company's common stock issued in the merger was approximately $17.4 million, based upon the trading value of the Company's common stock determined pursuant to the merger agreement. On July 14, 1997, the Company purchased KeyBank National Association, Cheyenne, Wyoming ("KeyBank Wyoming"), from KeyCorp, its parent corporation, ("KeyCorp"), for a purchase price of $135 million. KeyBank Wyoming has been renamed "Community First National Bank." At closing, KeyBank Wyoming had total assets of approximately $1.1 billion and 28 banking offices located in 24 communities in Wyoming, including Cheyenne, Laramie, Casper, Sheridan and Jackson. The Company believes its Wyoming banking network is the largest in Wyoming, providing a full range of commercial and consumer banking services throughout the state. The transaction was accounted for as a business combination using the purchase method of accounting and resulted in the recognition of goodwill by the Company of approximately $60 million. RECENT DIVESTITURES In July, 1998, the Company sold the operating assets of its two sub-prime lending subsidiaries. In a cash transaction on July 27, 1998, the Company sold seven loan production offices of Equity Lending, Inc. ("ELI") to FIRSTPLUS Financial Group, Inc. On July 31, 1998, the Company also sold servicing rights to the portfolio of automobile installment contracts originated by Mountain Parks Financial Services, Inc. ("MPFS") to Cygnet Financial Services, Inc. The Company retained approximately $50 million in loans 8 originated by ELI and servicing rights on an additional $100 million in ELI loans sold to other parties. The Company also retained approximately $50 million in auto installment contracts originated by MPFS. ELI and MPFS were acquired in December 1996 as a result of the Company's merger with Mountain Parks Financial Corporation. At December 31, 1998, the Company had approximately $25 million in performing sub-prime mortgages and $40 million in automobile installment contracts. The Company expects to sell these assets in the first half of 1999, and the Company anticipates that after the sale, it will not pursue further sub-prime lending activities. See "Sale of Sub-Prime Lending Business" in the 1998 Annual Report to Shareholders incorporated by reference in this Form 10-K. 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 transactions included the disposition of approximately $9 million in deposits. ADMINISTRATION OF BANKS The Company provides policy and management direction and specialized staff support in general areas while relying on Bank managers for day-to-day operations, customer service decisions and community relations. The Company is responsible for policy-related functions, such as supervisory credit review, audits, personnel policies and internal examination activities. Resource allocations for administrative support by the Company are balanced to provide adequate support services for the Banks' operations, while carefully controlling service costs charged to the Banks. The major areas of administration are as follows: CREDIT. The Company's lending activities are guided by the general loan policy established by the Board of Directors. The Senior Credit Committee of the Company has established loan approval limits for each region of the Company and each subsidiary Bank. Amounts in excess of the individual Bank lending authority are presented to the Regional Credit Officers. Loans above $1,500,000 per nonclassified borrower and $250,000 per classified borrower are presented to the Senior Credit Committee for approval. The Company's credit policy establishes guidelines for approval of all credits, including local loans and purchased loans and loan participations. The credits of the Banks are subject to internal review by Bank officers every 12 months. The loan portfolios of the Banks are subject to examination by the Company's credit examination staff every 12 to 24 months, the frequency of which is based on a variety of factors, including the credit quality of the institution. The credit examination staff is also responsible for credit review with respect to the assets of banks to be acquired by the Company. FINANCE. The Board of Directors of the Company has established policies in the areas of asset/liability management, investments, capital expenditures, accounting procedures and capital and dividend management. Policies are implemented and monitored for compliance by the Chief Financial Officer and the Asset/Liability Committee of the Company. OPERATIONS. Community First Service Corporation ("CFSC"), a subsidiary of the Company, provides data processing and operations support services to the Banks by contract. CFSC's system is designed to provide for all Bank and customer data processing needs at the lowest possible cost and can be expanded to accommodate future growth and additional service applications. The Company believes CFSC has sufficient capacity to provide services to the banks the Company has agreed to acquire. In addition to its own office facilities in Fargo, North Dakota, CFSC also has a data processing facility in Golden, Colorado. Additional expenditures for equipment, consistent with the increased data processing volumes, would likely be necessary if additional significant acquisitions occur during 1999. 9 OTHER SERVICES. The Company provides other services for the benefit of the Banks, such as outside professional services, central human resources services, benefits administration, marketing guidance and centralized purchasing of supplies. INSURANCE AGENCIES The Company currently owns and operates insurance agencies located in 32 communities served by the Banks through its subsidiaries, Community Insurance, Inc. ("CII"), and Community First Insurance Agencies, Inc. ("CFIA"). These agencies are primarily engaged in the sale of property and casualty insurance and make some sales of other types of insurance, such as life, accident and crop hail insurance. The Company had commission revenue of $7.2 million in 1998. OTHER ACTIVITIES The Company has steadily consolidated Banks located in each state into single legal charters with multiple locations. As of December 31, 1998, the Company had 11 separately chartered subsidiary Banks and 6 nonbank subsidiaries. Subsidiary Banks of the Company in seven locations maintain trust departments, but their services are more broadly available and the Company may expand its trust activities in the future. Trust services are made available to customers in several locations through local trust officers or by appointment with members of the trust department. In 1999 the Company plans to consolidate all of its trust activity administration in the trust department in Fargo, North Dakota. Most of the Banks also sell annuities and other permitted securities through an arrangement with INVEST Financial Corporation, a Delaware Corporation, and INVEST Financial Corporation Insurance Agency, Inc. of Illinois (collectively, "INVEST"). In March 1998, the Company entered into a three year agreement with INVEST under which INVEST would provide securities brokerage, insurance and investment advisory services to customers through INVEST centers located within the Company's subsidiary bank branches. The agreement also provides for INVEST to share sales commissions with the Company pursuant to an agreed upon commission schedule and requires INVEST to perform various compliance and administrative functions related to its activities. Federal bank regulation permits bank holding companies to engage in other limited activities, such as the distribution of certain types of securities, and future changes in such regulation are expected to further expand the types of activities in which the Company may engage. Although the Company intends to maintain its focus on the banking business in its targeted market areas, the Company will consider other permitted business activities as opportunities arise. The non-interest income activities of the Company in insurance, trust and securities sales are expected to become collectively a material revenue and profit center of the Company within the next few years. COMPETITION Commercial banking is highly competitive. In the conduct of certain aspects of their business, the Banks compete with other commercial banks, savings and loan institutions, issuers of fixed income investments, finance corporations, credit unions and money market funds, among other types of institutions. The Banks compete with these institutions in such areas as obtaining new deposits, offering new types of services and setting loan rates and interest rates on various types of deposits, as well as other aspects of the banking business. Management believes community residents and businesses prefer to deal with local banks and the Banks have generally been able to compete successfully in their respective communities because of the Company's emphasis on local ownership and the autonomy of Bank management in community relations. At the same time, the Company provides the Banks with the advantages of centralized 10 sophisticated administration and the opportunity to make larger loans and diversify their lending activity through Bank group participations. Further, because most of the Banks have a significant market share in the communities they serve, the Company believes the Banks can, to a degree, influence deposit and loan pricing in their markets and are subject to less competition based on deposit and loan pricing than would be the case in larger metropolitan markets with more competitors. However, the Banks have experienced increased price competition from credit unions in certain market areas in recent periods. Recent changes in government regulation of banking, particularly the legislation which removes restrictions on interstate banking and permits interstate branching, or legislation in certain states to permit statewide branching, may increase competition by both out-of-state and in-state banking organizations and by other financial institutions. See "Supervision and Regulation," below. The Banks compete with other financial institutions, including government lending agencies, for high quality loans and the Company competes with securities and insurance firms and other banking institutions in the non-interest income activities of insurance, securities sales and trust activities in the Banks' market areas and for purchases of loan assets and investment assets. While management believes the Banks will continue to compete successfully in their communities, there is no assurance that future competition will not adversely affect the Banks' earnings. EMPLOYEES The Company had 2,839 employees at December 31, 1998, including 2,219 full-time employees and 620 part-time employees. Of these individuals, 291 were employed at the holding company level, 2,147 (including 1,652 full-time employees) were employed at the Bank level, 299 were employed by CFSC and 102 were employed by CII and CFIA. SUPERVISION AND REGULATION GENERAL. As a bank holding company, the Company is subject to supervision and examination by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company's national bank subsidiaries are regulated by the Office of the Comptroller of the Currency ("OCC") while its only state-chartered banking subsidiary is regulated by the South Dakota Division of Banking. The deposits of the Company's national and state banking subsidiaries are insured by the Bank Insurance Fund ("BIF"), which subjects such subsidiaries to regulation by the Federal Deposit Insurance Corporation ("FDIC"). In addition to the impact of direct regulation, commercial banks are affected significantly by action taken by the Federal Reserve Board with respect to the money supply and credit availability. The Company has other financial services subsidiaries that are subject to regulation by the Federal Reserve Board and other applicable federal and state agencies. For example, the Company's insurance subsidiary is subject to regulation by the state insurance licensing and regulatory agencies having jurisdiction in each office location. Congress continues to consider wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's banking, insurance and securities industries. The extent to which the business of the Company may be affected by these changes will depend upon when and in what form any of these proposals will finally be adopted. HOLDING COMPANY REGULATION. The Company is a bank holding company within the meaning of the BHC Act. As a result, the Company's activities are subject to certain limitations under the BHC Act, and 11 transactions between the Company and its affiliates are subject to certain restrictions. Further, the Company is required to file periodic reports with the Federal Reserve Board and is subject to regular examination. As a matter of policy, the Federal Reserve Board expects a bank holding company to act as a source of financial and managerial strength to each of its subsidiary banks and to commit capital and other resources to support each subsidiary bank. The Federal Reserve Board has the authority to issue cease and desist orders against the Company if the Federal Reserve Board determines that actions by the Company are unsafe, unsound or violate the law. Under certain circumstances, stock redemptions and dividends or distributions by the Company with respect to its equity securities may be considered unsafe or unsound practices. Under the BHC Act, the Company must obtain prior Federal Reserve Board approval before the Company acquires direct or indirect ownership or control of 5% or more of the voting stock of any bank or bank holding company, or the Company merges or consolidates with another bank holding company. Further, the bank holding company is generally prohibited from acquiring direct or indirect ownership or control of a company that is not a bank or bank holding company, unless the Federal Reserve Board has, by order or regulation, determined that the proposed non-banking activity is so closely related to banking or managing or controlling banks as to be a proper incident thereto. In reviewing any application or proposal by a bank holding company, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the community to be served, as well as the probable effect of the transaction upon competition. BANK REGULATION. The banks are subject to detailed federal and state laws and regulation. National bank subsidiaries of the Company are primarily supervised by the OCC, a bureau of the United States Department of the Treasury. The OCC regularly examines national banks in such areas as reserves, loans, investments, trust services, management practices, compliance with the Community Reinvestment Act and other aspects of bank operations and policies. These examinations are designed for the protection of the deposit insurance system and the enforcement of federal and state laws and regulations and not for the shareholders of the Company. In addition to undergoing these regular examinations, national banks must furnish quarterly reports to the OCC containing detailed and accurate financial statements and schedules. One bank subsidiary of the Company is chartered under South Dakota state law, and therefore regulated by the FDIC and the South Dakota Division of Banking. Each of these agencies conducts regular examinations of the Bank, generally on an alternating basis, which are comparable in scope and purpose to the examinations of national banks by the OCC, discussed above. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business and investments a bank may make, reserves a bank must maintain, loans a bank may bank and the collateral it takes, activities of banks with respect to mergers and consolidations and the establishment and closure of branches. The OCC, in the case of national banks, and the FDIC, in the case of state-chartered, nonmember banks, are the respective primary federal regulatory authorities under the Financial Institutions Supervisory Act, and are thereby provided authority under that Act to impose penalties, initiate civil and administrative actions and take other steps intended to prevent a bank from engaging in an unsafe or an unsound practice in the conduct of its business. With the adoption of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA"), Congress made comprehensive revisions to the bank regulatory and funding provisions of the Federal Deposit Insurance Act. Under FDICIA and the IBBEA, the primary regulatory authorities are required to take "prompt corrective action" with respect to depository institutions insured by the FDIC that do not meet the criteria for classification as either "well capitalized" 12 or "adequately capitalized," based upon the institution's leverage ratio, risk-adjusted Tier 1 capital ratio and risk-adjusted total capital ratio. As of December 31, 1998, all of the Company's banking subsidiaries were classified as "well capitalized." Under-capitalized depository institutions are subject to a wide range of limitations in operations and activities, including capital distributions, payment of management fees, and limitations upon institution growth. FDICIA, as amended by IBBEA, directs each primary federal regulatory agency to establish regulations or guidelines relating to operational and managerial standards. The federal banking agencies have published final rules implementing the safety and soundness standards required by FDICIA in the areas of internal controls and information systems, internal audit systems, loan documentation, asset growth, asset quality, earnings and compensation, fees and benefits. The impact of such standards on the Company has not been material. FDIC INSURANCE. The FDIC insures deposits of the Banks up to the prescribed limit per depositor through the BIF, and the amount of FDIC assessments paid by each BIF member institution is based upon its relative risk of default as measured by regulatory capital ratios and other factors. The BIF assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. As of December 31, 1998, each of the Banks qualified for the lowest BIF assessment rate. Effective January 1, 1997, all FDIC-insured depository institutions are also required to pay an assessment to provide funds for payment of interest on Financing Corporation ("FICO") bonds. Until December 31, 1999, or when the last savings and loan association ceases to exist, whichever occurs first, institutions must pay approximately 1.3 cents per $100 of BIF-assessable deposits. 13 EXECUTIVE OFFICERS The executive officers of the Company are as follows:
Name Age Position - ---- --- -------- Donald R. Mengedoth 54 President, Chief Executive Officer and Chairman of the Board Mark A. Anderson 41 Vice Chairman - Corporate Services, Chief Financial Officer, Chief Information Officer, Secretary and Treasurer Ronald K. Strand 52 Vice Chairman - Financial Services Division David A. Lee 55 Executive Vice President of Regional Banking Robert W. Jorgensen 51 Senior Vice President and Wyoming Region Manager Thomas R. Anderson 43 Senior Vice President - Treasury Cynithia U. Davis 46 Senior Vice President and Southwestern Region Manager Keith A. Dickelman 44 Senior Vice President and Colorado Region Manager Dan M. Fisher 44 President and Chief Executive Officer, Community First Service Corporation Thomas E. Hansen 46 Senior Vice President and Central Region Manager Bruce A. Heysse 47 Senior Vice President - Acquisitions and Integration Thomas A. Hilt 56 Senior Vice President and Chief Administrative Officer Gary A. Knutson 51 Senior Vice President and Eastern Region Manager Charles A. Mausbach 47 Senior Vice President and Western Region Manager Harriette S. McCaul 48 Senior Vice President - Human Resources Brad J. Rasmus 37 Senior Vice President & Financial Services Sales Manager Patricia J. Staples 43 Senior Vice President of Marketing Craig A. Weiss 37 Senior Vice President - Finance
Donald R. Mengedoth has been President, Chief Executive Officer, Chairman of the Board and a director of the Company since its organization in 1986. He was Senior Vice President of First Bank System, 14 Inc. ("FBS"), currently known as U.S. Bancorp, from 1982 to 1987 and has worked in the banking business since 1966, including management positions in retail banking operations, human resources and commercial lending. From 1984 to 1987, Mr. Mengedoth was Regional Managing Director of FBS. From 1979 to 1982, Mr. Mengedoth was Vice President - Operations for FBS. Prior to that time, he was Senior Vice President of First Bank Milwaukee. He has been First Vice President of the American Bankers Association since October 1998. Mark A. Anderson has been Vice Chairman - Corporate Services of the Company since October 1998, Chief Financial Officer, Secretary and Treasurer of the Company since its organization in 1986 and Chief Information Officer since February 1998. He was Vice President and Regional Controller for FBS from 1984 to 1987. From 1979 to 1984, he held various positions with FBS-affiliated banks in the finance and credit analysis areas. Mr. Anderson is a Chartered Financial Analyst and a Certified Management Accountant. Ronald K. Strand has been Vice Chairman - Financial Services Division since October 1998. He was Executive Vice President - Banking Group since February 1993 and was previously Senior Vice President and Region Manager for South Dakota and North Dakota for the Company from January 1991 to February 1993. Previously, Mr. Strand had been Vice President and Regional Manager for the Company and President, Chief Executive Officer and a director of the Company's affiliate bank in Wahpeton, North Dakota since 1988. Prior to his affiliation with the Company, he served as President and Chief Executive Officer of Norwest Bank of North Dakota, N.A., Wahpeton, from 1985 until 1988. He was employed by Norwest for a total of 15 years, having previously worked in Norwest banks in Jamestown, North Dakota, and Moorhead, Minnesota. David A. Lee has been Executive Vice President of Regional Banking since October 1998. He was previously Senior Vice President and Eastern Region Manager and had been a Region Manager of the Company since 1988. He was President and Chief Executive Officer and a director of the Company's affiliate bank in Little Falls from 1987 to January 1991. Mr. Lee held various positions with FBS from 1966 to 1987. Robert W. Jorgensen has been Senior Vice President and Wyoming Region Manager since January 1999. He was previously President of Community First National Bank, Paynesville, Minnesota from 1989 to 1998. Thomas R. Anderson has been Senior Vice President - Treasury since February 1998. He was previously Vice President/Funds Manager of the Company from 1988 to 1997 and Funds Management Officer from 1987 to 1988. Prior to 1987, he was employed by Norwest Corporation for seven years, most recently as a Senior Financial Analyst. Cynthia U. Davis has been Senior Vice President and Southwestern Region Manager since October 1997. From October 1987 to October 1997, she held various positions with Banc One Corporation, including Vice President, Retail Delivery for Banc One Corporation and Vice President Region Manager for 36 Bank One banking centers in Northern Arizona. She has a total of 23 years of banking experience in Arizona, Idaho and California. Keith A. Dickelman has been Senior Vice President and Colorado Region Manager since January, 1998. He was previously President of Community First National Bank, Fergus Falls, Minnesota from 1995 to 1997 and from 1992 to 1995 served as a Senior Loan Officer and Senior Vice President of Community First National Bank, Fargo, North Dakota. Dan M. Fisher has been President and Chief Executive Officer of Community First Service Corporation since October 1998 and previously served as Executive Vice President - Bank Operations at the subsidiary. Mr. Fisher was previously District Manager and Senior Vice President of Fiserv Inc., a financial services data and item processor from October 1996 to September 1998. Prior to that, he served as Senior 15 Vice President and Operations Manager of Norwest Bank Minnesota, N.A. from August 1988 to October 1996. Thomas E. Hansen has been Senior Vice President and Central Region Manager since April 1993. He also served as President, Chief Executive Officer and a director of the Company's affiliate bank in Fargo, North Dakota from April 1993 to December 1996. Previously, he was employed by Norwest Bank Fargo for 19 years, most recently as President. Bruce A. Heysse has been Senior Vice President - Acquisitions and Integration since July 1996. He was Senior Vice President and Integration Manager of the Company from November 1995 to June 1996. He was Vice President and Senior Credit Officer of the Company from 1987 to November 1995. He began his banking career at the Company's affiliate bank in Wahpeton, North Dakota, and had a total of 11 years of banking experience prior to joining the Company. Thomas A. Hilt has been Senior Vice President and Chief Administrative Officer of the Company since 1987 and President of Community First Service Corporation, the Company's data processing subsidiary, since 1988. He was Vice President and Manager - Operations Support for the Regional Division of FBS from 1984 to 1987. Prior to 1984, he held various positions with FBS since 1967, including responsibility for systems development, programming, audit and examination functions. Gary A. Knutson has been Senior Vice President and Eastern Region Manager since July, 1996 and previously was Senior Vice President and Western Region Manager of the Company since September 1993. He was President, Chief Executive Officer and a director of the Company's affiliate bank in Wahpeton, North Dakota from January 1991 to September 1993. He began his banking career at the Company's affiliate bank in Lidgerwood, North Dakota, and had a total of 14 years of banking experience prior to joining the Company. Charles A. Mausbach has been Senior Vice President and Western Region Manager since March 1998. He was President of Community First National Bank, Worthington, Minnesota from October 1992 to February 1998. Harriette S. McCaul, Ph.D., has been Senior Vice President - Human Resources since February 1997. Previously, she was the Dean of the College of Business Administration at North Dakota State University in Fargo, North Dakota. She joined NDSU in 1983 and held various teaching and administrative positions in the Business Department and human resources area. Prior to that time, she was an instructor at Moorhead State University, Moorhead, Minnesota, and the director of faculty and staff benefits at the University of Kansas. Brad J. Rasmus has been Senior Vice President - Financial Services since February 1999. He was previously Vice President & Financial Services Sales Manager. Mr. Rasmus has been employed with the Company since 1995. Patricia J. Staples has been Senior Vice President of Marketing since July 1994. Previously, Ms. Staples was employed as the public relations manager with MeritCare Health System in Fargo, North Dakota for 10 years. 16 Craig A. Weiss has been Senior Vice President - Finance since February 1998. He was previously Vice President Finance of the Company from 1988 to 1997 and Finance and Accounting Manager from 1987 to 1998. Prior to 1987, he was employed by First Bank System, most recently as a Regional Financial Analyst. Mr. Weiss is a certified public accountant. ELECTION. The Company's officers are elected by the Board of Directors. The officers serve until their successors are elected or until their earlier resignation, removal or death. ITEM 2. PROPERTIES In January 1996, the Company formed a new subsidiary, Community First Properties, Inc. ("CFPI"), for the purpose of acquiring and owning the space currently occupied by the Company. CFPI owns all of the portions of the office building not owned by the Company's Fargo Bank subsidiary at 520 Main Avenue, Fargo, North Dakota. The Company maintains its offices at 520 Main Avenue, Fargo, North Dakota, consisting of approximately 34,000 square feet at an annual rental of $443,000, payable to its subsidiary, CFPI. The Company believes these facilities will be adequate for the foreseeable future. The Company also utilizes office space at affiliate banks located in Denver, Colorado and Cheyenne, Wyoming as well as leasing approximately 4,000 square feet of office space in Phoenix, Arizona at an annual rental of approximately $84,000. Each of the Banks owns its main office and those of its branches, and these facilities range in size from approximately 1,200 to 36,000 square feet. During 1997, the Company constructed and owns a 47,000 square foot two-story building in Fargo, North Dakota which is leased to CFSC. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company and its subsidiaries are subject to various legal actions and proceedings in the normal course of business, some of which may involve substantial claims for compensatory damages. In some cases, these actions and proceedings relate in whole or in part to activities of banks prior to their acquisition and may be covered by agreements of former owners of these banks to indemnify the Company. Although litigation is subject to many uncertainties and the ultimate exposure with respect to current matters cannot be ascertained, management does not believe that the final outcome will have a material adverse effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information as to the principal market on which the Company's common stock is traded, market price information for the common stock of the Company, the approximate number of holders of record as 17 of December 31, 1998, and the Company's dividend policy is incorporated herein by reference from the inside back cover of the 1998 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1998, consisting of data captioned "Financial Highlights" on the facing page to page 1 of the 1998 Annual Report to Shareholders, "Consolidated Statement of Condition--Five-Year Summary" on page 40 of the Annual Report and "Consolidated Statement of Income-Five Year Summary" on page 41 of the Annual Report are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 11 through 22 of the 1998 Annual Report to Shareholders is incorporated hereby by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth on pages 12 through 22 of the 1998 Annual Report to Shareholders under the caption "Management's Discussion and Analysis - Results of Operations, Financial Condition and Asset/Liability Management" is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Statements of Financial Condition of the Company as of December 31, 1998 and 1997, and the related Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each of the three years ended December 31, 1998, the Notes to the Consolidated Financial Statements and the Report of Ernst & Young LLP, independent auditors, contained in the Company's 1998 Annual Report to Shareholders on pages 23 through 39 and reconciliation of amounts previously reported in Form 10-Q to restated financial data as currently included in Exhibit 99.4, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth in the Company's 1999 Proxy Statement under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Compliance" is incorporated herein by reference. Information regarding the executive officers of the Company is included under separate caption in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information set forth in the 1999 Proxy Statement under the caption "Executive Compensation" is incorporated herein by reference, except that information under the captions "Compensation Committee Report on Executive Compensation" and "Comparative Stock Performance" is not so incorporated. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth in the 1999 Proxy Statement under the caption "Security Ownership of Principal Shareholders and Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth in the 1999 Proxy Statement under the caption "Certain Transactions" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS FORM 10-K: 1. FINANCIAL STATEMENTS. See Item 8, above. 2. FINANCIAL STATEMENT SCHEDULES. All financial statement schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 3. PRO FORMA FINANCIAL INFORMATION. None. (b) REPORTS ON FORM 8-K. None. (c) EXHIBITS.
Exhibit Number Description - ------- ----------- 2.1 Agreement and Plan of Reorganization dated as of June 25, 1996 between the Registrant and Mountain Parks Financial Corp. (incorporated by reference to the Appendix to the Registrant's Joint Proxy Statement with Mountain Parks Financial Corp. included in the Registration Statement on Form S-4 [File No. 333-14439], as declared effective by the Commission on November 7, 1996). 19 Exhibit Number Description - ------- ----------- 2.2 Stock Purchase Agreement dated as of February 18, 1997 by and among the Registrant, KeyCorp and Key Bank of the Rocky Mountains, Inc. (incorporated by reference to Exhibit 2.8 to the Registrant's Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed with the Commission as of May 8, 1997 [the "1996 Form 10-K"]). 2.3 Restated Agreement and Plan of Merger dated as of August 22, 1997, including Agreement and First Amendment to Agreement dated as of the same date, between the Registrant and First National Summit Bankshares, Inc. (incorporated by reference to Appendices A and B to the Proxy Statement-Prospectus contained in the Registrant's Registration Statement on Form S-4 [File No. 333-38997] filed with the Commission on October 29, 1997). 2.4 Restated Agreement and Plan of Merger dated as of August 28, 1997 between the Registrant and Republic National Bancorp, Inc. (incorporated by reference to Appendix A to the Proxy Statement-Prospectus contained in the Registrant's Registration Statement on Form S-4 [File No. 333-38225] filed with the Commission on October 20, 1997). 2.5 Office Purchase and Assumption Agreement dated as of the 10th day of September, 1997 by and between Bank One, Arizona, National Association, Bank One, Colorado, National Association, Bank One, Utah, National Association and the Registrant, (incorporated by reference to Exhibit 2.6 to the Registrant's Registration Statement on Form S-4 [File No. 333-36091], filed with the Commission on September 22, 1997). 2.6 Agreement and Plan of Merger dated as of November 6, 1997, among the Registrant, Community First National Bank and Pioneer Bank of Longmont (the "Parties")(incorporated by reference to Exhibit 2.7 to the Registrant's Registration Statement on Form S-4 [File No. 333-37527], filed with the Commission on November 21, 1997), and as amended by First Amendment to Agreement and Plan of Merger dated as of the 19th day of December, 1997, by and among the Parties (incorporated by reference to Appendix B to the Proxy Statement-Prospectus contained in the Registrant's Registration Statement on Form S-4 [File No. 333-48825] filed with the Commission on March 31, 1998). 2.7 Agreement and Plan of Merger dated as of January 8, 1998 by and between the Registrant and Community Bancorp, Inc. (incorporated by reference to Exhibit 2.14 to the Registrant's Registration Statement on Form S-4 [File No. 333-49367] filed with the Commission on June 9, 1998 (the "June 1998 Form S-4")), and as amended by First Amendment to Agreement and Plan of Merger, dated as of the 9th day of March, 1998, between the Registrant and Community Bancorp, Inc. (incorporated by reference to Exhibit 2.15 to the June 1998 Form S-4). 2.8 Agreement and Plan of Merger dated as of April 2, 1998 between the Registrant and Western Bancshares of Las Cruces, Inc. (incorporated by reference to Exhibit 2.16 to the June 1998 Form S-4). 20 Exhibit Number Description - ------- ----------- 2.9 Agreement and Plan of Merger dated as of May 18, 1998 between the Registrant and Guardian Bancorp. (incorporated by reference to Exhibit 2.17 to the June 1998 Form S-4). 2.10 Agreement and Plan of Merger dated as of January 12, 1998 between the Registrant and FNB, Inc. (incorporated by reference to Exhibit 2.16 to the June 1998 Form S-4). 3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the 1996 Form 10-K), as amended by a Certificate of Amendment to the Registrant's Certificate of Incorporation as filed with the Delaware Secretary of State on May 7, 1998 and attached hereto. 3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 [File No. 33-41246], as declared effective by the Commission on August 13, 1991 [the "1991 S-1"]). 4.1 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant (incorporated by reference to Exhibit A to Exhibit 1 to the Registrant's Registration Statement on Form 8-A, filed with the Commission on January 9, 1995 [the "Form 8-A"]). 4.2 Form of Rights Agreement dated as of January 5, 1995, between the Registrant, and Norwest Bank Minnesota, National Association ("Norwest Bank"), which includes as Exhibit B thereto the form of Rights Certificate (incorporated by reference to Exhibit 1 to the Form 8-A.) 4.3 Subordinated Indenture dated February 5, 1997, between the Registrant and Wilmington Trust Company, as Indenture Trustee, including form of Junior Subordinated Indenture (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 [File No. 333-19921] filed with the Commission as of January 30, 1997 [the "1997 CFB Capital I Form S-3"]). 4.4 Amended and Restated Trust Agreement of CFB Capital I dated February 5, 1997, including Form of Capital Security Certificate of CFB Capital I (incorporated by reference to Exhibit 4.5 to the 1997 CFB Capital I Form S-3). 4.5 Capital Securities Guarantee Agreement dated as of February 5, 1997, between the Registrant and Wilmington Trust Company as Trustee (incorporated by reference to Exhibit 4.7 to the 1997 CFB Capital I Form S-3). 4.6 Indenture dated June 24, 1997 relating to the Registrant's 7.30% Subordinated Notes Due 2004 (the "New Notes") between the Registrant and Norwest Bank, as trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-4 [File No. 333-36091] as declared effective by the Commission on November 10, 1997 [the "1997 Subordinated Note Form S-4"]). 4.7 Subordinated Indenture dated December 10, 1997, between the Registrant and Wilmington Trust Company, as Indenture Trustee, including form of Junior Subordinated Indenture (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-3 [File No. 333- 21 Exhibit Number Description - ------- ----------- 37521] as declared effective by the Commission on December 4, 1997 [the "1997 CFB Capital II Form S-3"]). 4.8 Amended and Restated Trust Agreement of CFB Capital II dated December 10, 1997, including Form of Capital Security Certificate of CFB Capital II (incorporated by reference to Exhibit 4.5 to the 1997 CFB Capital II Form S-3). 4.9 Capital Securities Guarantee Agreement dated as of December 10, 1997, between the Registrant and Wilmington Trust Company as Trustee (incorporated by reference to Exhibit 4.7 to the 1997 CFB Capital II Form S-3). 10.1 1998 Annual Incentive Plan for Holding Company Management.* 10.2 Restated 1987 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-8 [File No. 33-46744], as declared effective by the Commission on May 6, 1992).* 10.3 Form of Tax Sharing Agreement between the Registrant and each of its subsidiary Banks (incorporated by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 [the "1995 Form 10-K"]). 10.4 Form of Service Agreement for Data Processing between Community First Service Corporation and each of the subsidiary Banks of the Registrant (incorporated by reference to Exhibit 10.4 to the 1995 Form 10-K). 10.5 Form of Bank Services Agreement between the Registrant and each of its subsidiary Banks (incorporated by reference to Exhibit 10.5 to the 1995 Form 10-K). 10.6 Form of Agency Agreement between the Registrant and each of its subsidiary Banks, and Assignment of Agency Agreement and Second Assignment of Agency Agreement, which assign the Registrant's interest in the Agency Agreement to Community First Financial, Inc. (relating to the Registrant's subsidiary Banks) (incorporated by reference to Exhibit 10.6 to the 1995 Form 10-K). 10.7 Lease dated April 27, 1993, between Community First Properties, Inc. (formerly Fargo Tower Partners) and the Registrant (incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.8 Promissory Note dated July 14, 1997 (Term Note) in the principal amount of $30,000,000, issued to Norwest Bank, as Agent, on behalf of Harris Trust and Savings Bank ("Harris"), Band of America National Trust and Savings Association ("Bank of America") and Norwest (incorporated by reference to Exhibit 10.8 to Registrant's Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 21, 1997 [the "1997 Form 10-K"]). 22 Exhibit Number Description - ------- ----------- 10.9 Promissory Notes dated July 14, 1997 (Current Notes), each in the principal amount of $8,333,333.33, issued to each of Harris Bank of America, and Norwest (incorporated by reference to Exhibit 10.9 to the 1997 Form 10-K). 10.10 Credit Agreement dated July 14, 1997 among the Company, Harris Bank of America, Norwest as a lender, and Norwest as Agent (incorporated by reference to Exhibit 10.10 to the 1997 Form 10-K). 10.11 Form of Indemnification Agreement entered into by and between the Registrant and the Registrant's officers and directors (incorporated by reference to Exhibit 10.33 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 [the "1992 Form 10-K"]). 10.12 1996 Stock Option Plan, as approved by the Board of Directors on February 6, 1996 (incorporated by reference to Exhibit 10.15 to the 1995 Form 10-K), and as amended by resolution of the Board of Directors on February 1, 1999 in the form attached. 10.13 Supplemental Executive Retirement Plan, effective as of August 1, 1995 (incorporated by reference to Exhibit 10.13 to the 1997 Form 10-K).* 10.14 Registrant's Deferred Compensation Plan for Members of the Board of Directors, effective August 1, 1993, including First Amendment to the Registrant's Deferred Compensation Plan for Members of the Board of Directors, effective as of February 1, 1999. 10.15.1 Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Donald R. Mengedoth.* 10.15.2 Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Mark A. Anderson.* 10.15.3 Form of Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Messrs. David A. Lee, Ronald K. Strand and Bruce A. Heysse.* 10.15.4 Form of Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Registrant's executive officers.* 13.1 Annual Report to Shareholders. 21.1 Subsidiaries of the Registrant. 23 Exhibit Number Description - ------- ----------- 23.1 Consent of Ernst & Young LLP. 23.2 Consent of Baird, Kurtz & Dobson. 23.3 Consent of Starr Colton Pena Vogel & Co. 23.4 Consent of Simpson & Company. 27.1 Financial Data Schedule relating to Financial Statements at December 31, 1998. 27.2 Restated Financial Data Schedules relating to Restated Financial Statements at December 31, 1997 and December 31, 1996. 27.3 Restated Financial Data Schedules relating to Restated Financial Statements at March 31, 1998, June 30, 1998 and September 30, 1998. 27.4 Restated Financial Data Schedules relating to Restated Financial Statements at March 31, 1997, June 30, 1997 and September 30, 1997. 99.1 Report of Baird, Kurtz & Dobson regarding financial statements of Community Bancorp, Inc. 99.2 Report of Starr Colton Pena Vogel & Co. regarding financial statements of Western Bancshares of Las Cruces, Inc. 99.3 Report of Simpson & Company regarding financial statements of Guardian Bancorp. 99.4 Reconciliation of Amounts Previously Reported.
- ---------------- *Executive compensation plans and arrangements. 24 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY FIRST BANKSHARES, INC. ("Registrant") Dated: March 22, 1999 By /s/ Donald R. Mengedoth ---------------------------- Donald R. Mengedoth President, Chief Executive Officer and Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant, in the capacities and on the dates indicated.
Signature and Title Date - ------------------- ---- /s/ Donald R. Mengedoth March 22, 1999 - --------------------------------------------- Donald R. Mengedoth President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) /s/ Mark A. Anderson March 22, 1999 - --------------------------------------------- Mark A. Anderson Vice Chairman-Corporate Services, Chief Financial Officer, Secretary, Treasurer and Chief Information Officer (Principal Financial and Accounting Officer) /s/ Patricia A. Adam March 22, 1999 - --------------------------------------------- Patricia A. Adam, Director /s/ James T. Anderson March 22, 1999 - --------------------------------------------- James T. Anderson, Director /s/ Patrick E. Benedict March 22, 1999 - --------------------------------------------- Patrick E. Benedict, Director 25 Signature and Title Date - ------------------- ---- /s/ Patrick Delaney March 22, 1999 - --------------------------------------------- Patrick Delaney, Director /s/ John H. Flittie March 22, 1999 - --------------------------------------------- John H. Flittie, Director /s/ Darrell G. Knudson March 22, 1999 - --------------------------------------------- Darrell G. Knudson, Director /s/ Dennis M. Mathisen March 22, 1999 - --------------------------------------------- Dennis M. Mathisen, Director /s/ Marilyn R. Seymann March 22, 1999 - --------------------------------------------- Marilyn R. Seymann, Director /s/ Thomas C. Wold March 22, 1999 - --------------------------------------------- Thomas C. Wold, Director /s/ Harvey L. Wollman March 22, 1999 - --------------------------------------------- Harvey L. Wollman, Director
26 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 3.1 Certificate of Amendment to the Registrant's Certificate of Incorporation as filed with the Delaware Secretary of State on May 7, 1998 10.1 1998 Annual Incentive Plan for Holding Company Management 10.12 Amendments to 1996 Stock Option Plan Adopted on February 1, 1999 10.14 Registrant's Deferred Compensation Plan for Members of the Board of Directors, effective August 1, 1993, including First Amendment to the Registrant's Deferred Compensation Plan for Members of the Board of Directors, effective as of February 1, 1999 10.15.1 Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Donald R. Mengedoth 10.15.2 Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Mark A. Anderson 10.15.3 Form of Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Messrs. David A. Lee, Ronald K. Strand and Bruce A. Heysse 10.15.4 Form of Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Registrant's executive officers 13.1 Annual Report to Shareholders 21.1 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Baird, Kurtz & Dobson 23.3 Consent of Starr Colton Pena Vogel & Co. 23.4 Consent of Simpson & Company 27.1 Financial Data Schedule relating to Financial Statements at December 31, 1998 27.2 Restated Financial Data Schedules relating to Restated Financial Statements at December 31, 1997 and December 31, 1996. -i- 27.3 Restated Financial Data Schedules relating to Restated Financial Statements at March 31, 1998, June 30, 1998 and September 30, 1998. 27.4 Restated Financial Data Schedules relating to Restated Financial Statements at March 31, 1997, June 30, 1997 and September 30, 1997. 99.1 Report of Baird, Kurtz & Dobson regarding financial statements of Community Bancorp, Inc. 99.2 Report of Starr Colton Pena Vogel & Co. regarding financial statements of Western Bancshares of Las Cruces, Inc. 99.3 Report of Simpson & Company regarding financial statements of Guardian Bancorp 99.4 Reconciliation of Amounts Previously Reported
-ii- EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF COMMUNITY FIRST BANKSHARES, INC. The undersigned, Mark A. Anderson, Executive Vice President of Community First Bankshares, Inc., a Delaware corporation (the "Company"), subject to the provisions of the General Corporation Law of the State of Delaware, does hereby certify that the following resolutions were duly adopted by the Board of Directors of the Company on February 3, 1998, and duly approved by the shareholders of the Company on April 28, 1998, in accordance with Section 242 of the General Corporation Law of the State of Delaware and that said resolutions are now in full force and effect: RESOLVED, that the first sentence of Article IV of the Company's Restated and Amended Certificate of Incorporation be, and it hereby is, replaced with the following: "The total number of shares of stock which the corporation shall have authority to issue is Eighty-Two Million (82,000,000) shares, divided into Eighty Million (80,000,000) shares of Common Stock, $.01 par value per share ("Common Stock"), and Two Million (2,000,000) shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). RESOLVED FURTHER, that the officers of the Company be, and they hereby are, authorized and directed to execute such documents and certificates and take such other action as may be necessary or appropriate to give effect to the foregoing resolution. IN WITNESS WHEREOF, I have hereunto set my hand on this 4th day of May, 1998. /s/ Mark A. Anderson ------------------------------------------ Mark A. Anderson, Executive Vice President STATE OF NORTH DAKOTA ) ) ss. COUNTY OF CASS ) The foregoing instrument was acknowledged before me this 4th day of May, 1998, by Mark A. Anderson, Executive Vice President of Community First Bankshares, Inc., a Delaware Corporation, on behalf of the Corporation. /s/ Judy M. Smith ------------------------------------ Notary Public My Commission: [Notary stamp] ---------------------- EX-10.1 3 EXHIBIT 10.1 EXHIBIT 10.1 COMMUNITY FIRST BANKSHARES, INC. ANNUAL INCENTIVE PLAN 1998 1998 AIP
GROUP TARGET INCENTIVE MAXIMUM ----- ---------------- ------- I CEO 40% 80% II EVP'S 30% 60% III SVP'S 20% 40% IV VP'S 10% 20%
SPLIT 50% INTERNAL & 50% EXTERNAL
TARGET INTERNAL EXTERNAL ------ -------- -------- I 40% 20% 20% II 30% 15% 15% III 20% 10% 10% IV 10% 5% 5%
INTERNAL AWARD CALCULATION Based on performance versus plan EPS as target. No award if less than 90% of plan. Double internal amount @ 110.6% of plan (see schedule). Round up at .5 (plan) and down at < .5.
AWARD % OF BASE SALARY FULLY DILUTED --------------------------------- % OF PLAN EPS I II III IV - --------- ------------- ---- ---- ---- ---- Under 90.0 2.54 0 0 0 0 91.0 2.56 2.0 1.5 1.0 .5 92.0 2.59 4.0 3.0 2.0 1.0 93.0 2.62 6.0 4.5 3.0 1.5 94.0 2.65 8.0 6.0 4.0 2.0 95.0 2.68 10.0 7.5 5.0 2.5 96.0 2.71 12.0 9.0 6.0 3.0 97.0 2.74 14.0 10.5 7.0 3.5 98.0 2.78 16.0 12.0 8.0 4.0 99.0 2.99 18.0 13.5 9.0 4.5 100.0 2.82 20.0 15.0 10.0 5.0 101.0 2.84 21.3 16.0 10.7 5.3 101.5 2.86 22.7 17.0 11.3 5.7 102.1 2.88 24.0 18.0 12.0 6.0 102.8 2.90 25.3 19.0 12.7 6.3 103.5 2.92 26.7 20.0 13.3 6.7 104.5 2.94 28.0 21.0 14.0 7.0 105.0 2.96 29.3 22.0 14.7 7.3 105.7 2.98 30.7 23.0 15.3 7.7 106.4 3.00 32.0 24.0 16.0 8.0 107.1 3.02 33.3 25.0 16.7 8.3 107.8 3.04 34.7 26.0 17.3 8.7 108.5 3.06 36.0 27.0 18.0 9.0 109.2 3.08 37.3 28.0 18.7 9.3 110.0 3.10 38.7 29.0 19.3 9.7 110.6 3.12 40.0 30.0 20.0 10.0
-2- EXTERNAL AWARD CALCULATION SNL peer group (20 banks) for CURRENT PERFORMANCE YEAR based on group as of December 31, 1995. Combines incentive for ROE and growth (see matrix). SNL 20 BANK GROUP Percentile 75th or higher 100% 150% 200% ROE 50th 50% 100% 150% 49th or lower 0% 50% 100% 49th or lower 50th 75th or higher Percentile asset growth rate External award calculation:
% OF SALARY AT PERFORMANCE LEVEL ------------------------------------------------- TARGET 50% 100% 150% 200% ------ --- ---- ---- ---- I 20% 10% 20% 30% 40% II 15% 7.5% 15% 22.5% 30% III 10% 5% 10% 15% 20% IV 5% 2.5% 5% 7.5% 10%
The SELECTED PEER GROUP reflects our selection of the NINETEEN OTHER INSTITUTIONS most like the subject institution to be used as a peer group in comparing relative compensation levels. For banks with assets of less than $5 billion, the automated process searches in sequence for: 1. Banks in the same state within 40% of total assets. 2. Banks in the same region within 40% of total assets. 3. Banks in the same state within 80% of total assets. 4. Banks in the same region within 80% of total assets. -3- 5. Any bank within 40% of total assets. 6. Any bank within 80% of total assets. 7. Banks closest in asset size. If at any point in the sequence nineteen banks are found, the sequence stops and those banks form the Selected Peer Group. If step six is reached and there are still not nineteen other banks, the banks closest in asset size anywhere in the country are chosen to round out the peer group. -4- EX-10.12 4 EXHIBIT 10.12 EXHIBIT 10.12 AMENDMENTS TO 1996 STOCK OPTION PLAN Adopted on February 1, 1999 Article 6 of the Plan shall be amended to add a new Section 6.7 to read as follows: 6.7 The Committee will have the authority, in its discretion, to award reload option rights ("Reload Option Rights") in conjunction with the grant of Options. Reload Option Rights must be awarded at the time an Option is granted and each Option Agreement shall state whether the Committee has authorized Reload Option Rights with respect to the underlying Options. Reload Option Rights awarded with respect to an Option shall provide that the Optionee who is an employee and who exercises the Option by delivering (or attesting to ownership of) Common Stock that has been held for at least six months instead of paying cash, or who pays tax withholding by delivering Common Stock, or by having Common Stock withheld from exercise, shall automatically be granted on the date of such exercise (the "Reload Date") an additional Option (a "Reload Option") (a) for that number of shares of Common Stock of the Company equal to the number of shares of Common Stock of the Company used by the Optionee to exercise the underlying Option or to pay tax withholding due upon such exercise; (b) having an exercise price not less than 100% of the Fair Market Value of the Common Stock covered by the Reload Option on the Reload Date; (c) having an expiration date not later than the expiration date of the Option being exercised and (d) otherwise having terms permissible for the grant of an Option under the terms of this Plan. Each Reload Option will become vested and exercisable, and shall have such additional terms and be subject to such additional restrictions and conditions, if any, as shall be determined, in its discretion, by the Committee, including, without limitation, a condition that the Optionee retain the shares issued upon exercise of the Option for a specified period of time. No Reload Option shall provide for a grant, when exercised, of subsequent Reload Options. Subsection (b) of the second sentence of Section 7 shall be amended to read as follows: "(b) the term of such Option shall be ten years." Such amendment shall be effective with respect to options granted after December 31, 1998. EX-10.14 5 EXHIBIT 10.14 EXHIBIT 10.14 COMMUNITY FIRST BANKSHARES, INC. DEFERRED COMPENSATION PLAN FOR MEMBERS OF THE BOARD OF DIRECTORS THIS INSTRUMENT, ESTABLISHING THE COMMUNITY FIRST BANKSHARES, INC. DEFERRED COMPENSATION PLAN FOR MEMBERS OF THE BOARD OF DIRECTORS (THE "PLAN"), IS MADE AND ENTERED INTO BY COMMUNITY FIRST BANKSHARES, INC., A DELAWARE CORPORATION, AND SHALL BE EFFECTIVE AS OF AUGUST 1, 1993. 1. PURPOSE OF PLAN. The purpose of this Plan is to provide Participants with supplemental retirement benefits in the form of deferred compensation as set forth herein. 2. DEFINITIONS. 2.1 BOARD. "Board" is the Board of Directors of Community First Bankshares, Inc. 2.2 CFB. "CFB" is Community First Bankshares, Inc., a Delaware corporation. 2.3 CODE. The "Code" is the Internal Revenue Code of 1986, as amended. 2.4 COMMITTEE. "Committee" includes the following committees of the Board: Nominating Committee, Audit Committee, Finance & Loan Policy Committee, Personnel & Compensation Committee and Stock Option Committee. 2.5 COVERED COMPENSATION. "Covered Compensation" is directors' retainers and fees for all Board and Committee meetings. 2.6 COMPENSATION. "Deferred Compensation" is the Participant's Covered Compensation which such Participant has elected to have treated as Deferred Compensation under Article 3 of this Plan. 2.7 PARTICIPANT. "Participant" is any non-employee Board member. Each such individual shall continue to be eligible to participate in this Plan until such individual ceases to be a Board member as described above; provided, however, that an individual who has elected to defer Covered Compensation under the Plan shall continue to be a Participant in this Plan until benefits under this Plan are fully paid. 3. DEFERRED COMPENSATION BENEFITS. 3.1 Each Participant may elect to have treated as Deferred Compensation up to 100% of such Participant's Covered Compensation which is earned subsequent to the date of such election and during the period covered by the election. 3.2 Any election of Deferred Compensation pursuant to Section 3.1 shall be in writing, shall be made prior to the beginning of the calendar year and shall be applicable to all types of Covered Compensation earned for the next calendar year. Such election shall remain in effect for and shall be irrevocable during the calendar year. A new election shall be made for each calendar year in which a Participant elects to have all or part of his or her Covered Compensation for such year treated as Deferred Compensation under the Plan. Notwithstanding the foregoing, an election of Deferred Compensation for the period August 1, 1993 through December 31, 1993 shall be made prior to July 31, 1993, and shall be applicable to all types of Covered Compensation earned during such period. 3.3 On the date that an amount of Deferred Compensation under Section 3.1 would otherwise be paid to the Participant, the amount of such Deferred Compensation shall be credited to an account on the books of CFB. No Participant shall derive any rights or benefits in or to any assets of CFB solely from the establishment or maintenance of such accounts on the books of CFB. 4. DEEMED INVESTMENT OF DEFERRALS. 4.1 Prior to the time any deferral is actually paid to the Participant as provided below, the deferral shall be credited with interest as provided in Section 4.2 of this Plan. 4.2 Each amount deferred shall be deemed to bear and shall be credited with an amount equal to interest from the date such amount is deferred, compounded annually, at the interest rate payable on five-year U.S. Treasury Notes as announced by the Federal Reserve Bank of Minneapolis on the last business day of the preceding year. The deemed interest rate shall be specified in advance of each calendar year, except that the interest rate for the period August 1, 1993 through December 31, 1993 shall be specified prior to July 31, 1993. CFB shall notify the Participant of the method for determining the interest rate with which Deferred Compensation will be deemed credited for the succeeding calendar year on or before the date the Participant makes his election of Deferred Compensation for such calendar year. The selection of an interest rate by which adjustments to the Participant's Deferred Compensation will be determined shall be solely for the purpose of establishing a method of calculating the increases in such Deferred Compensation and shall in no way obligate CFB to set aside any assets or to invest any assets it may set aside in any particular type of investment. Adjustments shall be determined by CFB no less often than annually, and CFB's determination shall be final. 5. DISTRIBUTIONS FROM ACCOUNTS. 5.1 Following the Participant's termination of directorship with CFB, a Participant shall receive a distribution of cash equal to the then-current value of the Participant's account at such time and in such manner as the Participant specifies, in accordance with Sections 5.2 and 5.3 of this Plan. Such election, once made, shall be irrevocable as to the amount deferred pursuant to that election. 5.2 A Participant may elect to have the amounts deferred each year (plus deemed interest thereon, as provided in Article 4 hereof) distributed in one of the following forms, provided that such election is in writing, is irrevocable, and is executed prior to the first day of the taxable year to which such deferral applies: (a) distribution in a single lump sum; (b) distribution in five equal annual installments; (c) distribution in ten equal annual installments; or (d) distribution of $10,000.00 annually until the account is depleted. Lump sum payments shall be made and installment payments shall commence on the 15th day of the first calendar month immediately following the date specified in the Participant's election, with succeeding installment amounts paid on each anniversary of such date. The amount of each installment under (b) and (c) shall be determined each year by dividing the total of the account by the number of installments remaining to be paid, including the current installment. 5.3 A Participant may elect to have the amount deferred each year distributed at such time as provided below, provided that such election is in writing, is irrevocable, and is executed prior to the first day of the taxable year to which such deferral applies: (a) in the year following the Participant's termination of directorship with CFB; or (b) in the year in which the fifth anniversary of the Participant's termination of directorship occurs. 5.4 If the Participant is deceased, the distribution shall be payable to the beneficiary or survivor of the Participant in the form payable to the Participant hereunder. In the event a beneficiary dies before receiving all the payments due to such beneficiary, the then-remaining payments shall be paid to the legal representatives of the beneficiary's estate. The Board, in its discretion, may accelerate the payment of benefits under this Plan to the Participant's beneficiary. 5.5 In the event a benefit is payable to a minor or a person incapable of handling the disposition of his property, the Board may pay such benefit to the guardian, legal representative or person having the care or custody of such minor or incompetent person. The Board may require proof of incompetency, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Board and CFB from all liability with respect to such benefit. 6. FIDUCIARY DUTIES. The Board shall have full power to construe, interpret and administer this Plan, including to make any determination required under this Plan and to make such rules and regulations as it deems advisable for the operation of this Plan. A majority of the Board shall constitute a quorum. No member of the Board shall participate in any action to determine his or her individual rights or benefits under this Plan that does not apply equally to all Participants in the Plan. Actions of the Board shall be by a majority of persons constituting a quorum and eligible to vote on an issue. Meetings may be held in person or by telephone. Action by the Board may be taken in writing without a meeting provided such action is executed by all disinterested members of the Board. All determinations of the Board shall be final. 7. BENEFITS UNFUNDED. The rights of beneficiaries, survivors and Participants to benefits from this Plan are solely as unsecured creditors of CFB. Benefits payable under this Plan shall be payable from the general assets of CFB, and there shall be no fund or other assets securing the payment of such benefits. Any and all assets used by CFB to provide for the payment of benefits hereunder shall in all cases remain assets of CFB. 8. BENEFICIARIES AND SURVIVORS. Each Participant who elects to defer Covered Compensation under the Plan shall designate a beneficiary by filing a written notice of such designation with CFB in such form as CFB may prescribe. The Participant may revoke or modify said designation at any time by a further written designation. The Participant's beneficiary designation shall be deemed automatically revoked in the event of the death of the beneficiary or, if the beneficiary is the Participant's spouse, in the event of dissolution of marriage. If no designation shall be in effect at the time when any benefits payable under this Plan shall become due, the beneficiary shall be the spouse of the Participant or, if no spouse is then living, the Participant's children or their issue by right of representation or, if none, the legal representatives of the Participant's estate. 9. PLAN ADMINISTRATOR, AMENDMENT & CLAIMS PROCEDURE. 9.1 The Plan Administrator of this Plan is the Board, which shall have full power to amend this Plan from time to time or to terminate this Plan, except what no such amendment or termination shall deprive a Participant or beneficiary or survivor thereof of any benefits accrued under this Plan prior to such amendment or termination without the written consent of such Participant or, if deceased, the beneficiary or survivor thereof. 9.2 If the Participant or the Participant's beneficiary (the "Claimant") is denied all or a portion of an expected benefit under this Plan for any reason, he may file a claim with the Board. The Board shall notify the Claimant within 60 days of allowance or denial of the claim, unless the Claimant receives written notice from the Board prior to the end of the 60-day period stating that special circumstances require an extension of the time for decision. The notice of the Board's decision shall be in writing, sent by mail to the Claimant's last known address and, if a denial of the claim, must contain the following information: (a) the specific reasons for the denial; (b) specific reference to pertinent provisions of the Plan on which the denial is based; and (c) if applicable, a description of any additional information or material necessary to perfect the claim, an explanation of why such information or material is necessary, and an explanation of the claims review procedure. 9.3 A Claimant is entitled to request a review of any denial of his claim by the Board. The request for review must be submitted in writing within 60 days of mailing of notice of the denial. Absent a request for review within the 60-day period, the claim will be deemed to be conclusively denied. The Claimant or his representative shall be entitled to review all pertinent documents and to submit issues and comments orally and in writing. If the request for review by a Claimant concerns the interpretation and application of the provisions of this Plan and CFB's obligations, then the review shall be conducted by a separate committee consisting of three persons designated or appointed by the Board. The separate committee shall afford the Claimant a hearing and the opportunity to review all pertinent documents and submit issues and comments orally and in writing and shall render a review decision in writing, all within 60 days after receipt of a request for a review, provided that, in special circumstances (such as the necessity of holding a hearing) the committee may extend the time for decision by not more than 60 days upon written notice to the Claimant. The Claimant shall receive written notice of separate Committee's review decision, together with specific reasons for the decision and reference to the pertinent provisions of the Plan. In the event the decision or review is not furnished to the Claimant within the time required, the claim shall be deemed denied on review. 10. MISCELLANEOUS. 10.1 Notices under this Plan to CFB or the Board shall be sent by certified mail, return receipt requested, to the following address (or to such other address as may be designated in writing from time to time): Community First Bankshares, Inc. Attn: Mark Anderson 520 Main Avenue Fargo, ND 58124 Notices under this Plan to Participants or their beneficiaries or survivors shall be sent by certified mail to the last known address for such person(s) on the books and records of CFB. 10.2 Neither this Plan nor any action taken hereunder shall be construed as giving a Participant the right to be retained or continue as a member of the Board of Directors. 10.3 Expenses of administering the Plan shall be borne by CFB. 10.4 A Participant's benefits under this Plan may not be assigned, transferred, pledged or otherwise hypothecated by said Participant or the beneficiary or survivor thereof, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owed by the Participant or his or her beneficiaries, or be transferrable by operation of law in the event of bankruptcy, insolvency or otherwise of the Participant or any beneficiary. 10.5 This Plan shall be governed by the laws of the State of Delaware except to the extent preempted by federal law. 10.6 The captions at the head of an article, section or paragraph of this Plan are designed for convenience of reference only and are not to be resorted to for the purpose of interpreting any provision of this Plan. Where appropriate, the masculine includes the feminine, the singular includes the plural, and vice versa. 10.7 The invalidity of any portion of this Plan shall not invalidate the remainder thereof, and said remainder shall continue in full force and effect. 10.8 The provisions of this Plan shall be binding upon the Participant and CFB and their successors, assigns, heirs, executors and beneficiaries. IN WITNESS WHEREOF, the Board of Directors of Community First Bankshares, Inc. has authorized its officer to execute this Plan, to be effective as of the date first above written. COMMUNITY FIRST BANKSHARES, INC. By: /s/ Donald R. Mengedoth --------------------------------- It: President ------------------------------ FIRST AMENDMENT COMMUNITY FIRST BANKSHARES, INC. DEFERRED COMPENSATION PLAN FOR MEMBERS OF THE BOARD OF DIRECTORS THIS INSTRUMENT, amending the Deferred Compensation Plan for Members of the Board of Directors (the "Plan"), is made and entered into by Community First Bankshares, Inc. ("CFB"), and shall be effective as of February 1, 1999. RECITALS WHEREAS, CFB adopted the Plan for the benefit of its nonemployee directors effective as of August 1, 1993; and WHEREAS, Section 9.1 of the Plan authorizes the Board of Directors to amend the Plan from time to time, provided such Amendment does not reduce the benefits accrued thereunder; NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 3.2 is amended to add at the end thereof a new sentence to read as follows: "Notwithstanding the foregoing, an election of Deferred Compensation for the period February 1 to December 31, 1999 shall be made prior to January 31, 1999, and shall be applicable to all types of Covered Compensation earned during such period." 2. Article 4 is amended in its entirety to read as follows: "4. DEEMED INVESTMENT OF DEFERRALS. 4.1 Each Participant shall designate at the time of his or her initial election to defer each year, that form or forms of investment specified in Section 4.2 or 4.3 below in which such amounts deferred shall be deemed invested during the period prior to the time any deferral is actually paid to the Participant and the percentage deemed invested in each form, in increments of 25%. Notwithstanding the foregoing, each Participant may designate, prior to February 1, 1999, that form or forms of investment with respect to amounts deferred prior to February 1, 1999. The designation of the form or forms of investment, once made, shall remain in effect, except that each Participant may, prior to January 1 of any subsequent year, change the deemed investment of amounts previously deferred, Deferred Compensation, if any, for the next calendar year, or both. 4.2 If designated by the Participant, part or all of the amount deferred shall be deemed to bear and shall be credited with an amount equal to interest from the date such amount is deferred, compounded annually, at the interest rate payable on five-year U.S. Treasury Notes as announced by the Federal Reserve Bank of Minneapolis on the last business day of November of the preceding year. The deemed interest rate shall be specified in advance of each calendar year. CFB shall notify the Participant of the method for determining the interest rate with which Deferred Compensation will be deemed credited for the succeeding calendar year on or before the date the Participant makes his election of Deferred Compensation for such calendar year. Such amounts shall be designated as the Participant's Deferred Cash Account. 4.3 If designated by the Participant, part or all of the amount deferred shall be deemed to bear and shall be credited with dividends and appreciation as if invested in common stock of CFB. Deferred Compensation shall be deemed invested in whole shares of common stock of CFB as of the first business day of the month following the date when such Compensation would otherwise be paid to the Participant, by dividing the amount deferred by the closing sale price of the common stock of CFB for such day, or if no such sale is made on such day, the most recent previous day on which such sale occurred, in each case as officially reported on the principal stock market on which the common stock of CFB is then listed or admitted to trading. To the extent dividends are paid on common stock of CFB, dividend equivalents shall be calculated with respect to such shares of common stock of CFB then credited to each Participant, which amounts shall be converted to additional whole units of common stock of CFB as of the first business day of the month following the date when such dividends would otherwise be paid on such units. Any deferred amounts which are not deemed invested in whole units of CFB stock and consequently represent less than a whole unit of CFB stock shall be credited with interest at an annual rate of 3% until additional deferred amounts accumulate to represent a whole unit. Such amounts shall be designated as the Participant's Deferred Stock Account. 4.4 The selection of a deemed rate of return by which adjustments to the Participant's Deferred Compensation will be determined shall be solely for the purpose of establishing a method of calculating the increases or decreases in such Deferred Compensation and shall in no way obligate CFB to set aside any assets or to invest any assets it may set aside in any particular type of investment. Adjustments shall be determined by CFB and reported to Participants no less often than annually, and CFB's determination shall be final. CFB may, in its discretion, establish a "grantor trust" for the payment of Deferred Compensation due hereunder, the assets of which shall be at all times subject to the claims of creditors of CFB as provided for in such trust, provided such trust does not alter the characterization of the Plan as an "unfunded plan" for purposes of the Internal Revenue Code. Such trust shall make distributions in accordance with the terms of the Plan. 3. Section 5.1 of the Plan is hereby amended in its entirety to read as follows: "5.1 Following the Participant's termination of directorship with CFB, a Participant shall receive a distribution in cash equal to the then-current value of the Participant's account at such time and in such manner as the Participant specifies, in accordance with Sections 5.2 and 5.3 of this Plan. Such election, once made, may be changed as to all amounts so deferred by the Participant, provided that no election shall be made subsequent to the Participant's termination of directorship and any election made during the calendar year shall be effective only as to distributions that are made or begin on or after January 1 of the following year." 4. The first paragraph of Section 5.2 of the Plan is hereby amended in its entirety to read as follows: "5.2 A Participant may elect to have the amounts deferred under the Plan (plus deemed rate of return thereon, as provided in Article 4 hereof) distributed in one of the following forms, provided that such election is in writing and is executed prior to January 1 of the year in which such distribution would otherwise begin:" 5. The first paragraph of Section 5.3 of the Plan is hereby amended in its entirety to read as follows: "5.3 A Participant may elect to have the under the Plan (plus deemed interest thereon, as provided in Article 4 hereof) distributed as provided below, provided that such election is in writing and is executed prior to January 1 of the year in which such distribution would otherwise begin:" 6. Sections 5.4 and 5.5 shall be renumbered as 5.5 and 5.6 respectively and a new Section 5.4 shall be added to read as follows: "5.4 The amounts in the Participant's Deferred Cash Account shall be distributed in cash. The amounts in the Participant's Deferred Share Account shall be distributed in the form of whole shares of common stock of CFB and cash for any deferred amounts that equate to less than one share. CFB may reserve the appropriate number of shares as may be necessary to fund distributions hereunder. The shares to be delivered under the Plan may consist of authorized but unissued shares of common stock of CFB or shares reacquired by CFB, including shares purchased in the open market. 7. Except as amended herein, the Plan shall remain in full force and effect. EX-10.15-1 6 EXHIBIT 10.15.1 EXHIBIT 10.15.1 COMMUNITY FIRST BANKSHARES, INC. CHANGE IN CONTROL SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT ("Agreement") is entered into effective as of December 1, 1998, by and between Community First Bankshares, Inc. a bank holding company organized under the laws of the state of Delaware ("CFB") and Donald Mengedoth, residing in Fargo, ND ("Executive"). WHEREAS, CFB considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CFB and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of CFB, its policies, methods, personnel, and problems, a significant contribution to the profitability, growth, and financial strength of CFB; and WHEREAS, CFB, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the Executive in the performance of the Executive's duties, to the detriment of CFB and its shareholders; and WHEREAS, it is in the best interests of CFB and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to CFB of the Executive in the event of a Change in Control; and WHEREAS, CFB desires to assure Executive of certain benefits in the event of Executive's severance from employment with CFB without Cause following a Change in Control; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and promises stated below, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, CFB and Executive agree as follows: 1. EMPLOYMENT. To be eligible to receive benefits under this Agreement, (a) Executive must maintain employment with CFB until after a Change in Control and (b) a Severance of Executive's employment shall have occurred during the Term of this Agreement and after a Change in Control. Prior to a Change in Control, Executive shall have no right to benefits under this Agreement. For purposes of this Agreement, Severance shall mean either the involuntary termination of Executive's employment with CFB without Cause or Executive's voluntary termination of employment with CFB resignation for Good Reason; where Cause has the definition set forth in Section 7(c)(ii) and Good Reason has the definition set forth in Section 7(a)(ii). 2. TERM OF AGREEMENT. Subject to the provisions for earlier termination provided in this Agreement, the Term of this Agreement shall commence on the effective date of this Agreement as stated above and shall continue through December 31, 2001, and shall be extended for successive one-year periods thereafter unless the Board of Directors of CFB ("Board") shall have given written notice to Executive not later than September 30 of the last year of the original or extended Term of this Agreement of CFB's election to discontinue the Term of this Agreement; provided, however, that if a Change in Control shall have occurred during the original or extended Term of this Agreement, the Term of this Agreement shall continue, irrespective of any action of the Board of CFB, for a period of not less than 24 months beyond the month in which such Change in Control occurred. In the event that more than one Change in Control shall occur during the original or extended Term of this Agreement, the 24-month period shall follow the last Change in Control. The Term of this Agreement shall expire and this Agreement shall neither impose nor confer any further rights or obligations on CFB or Executive on the day after the end of the Term of this Agreement. Expiration of the Term of this Agreement of itself and without subsequent action by CFB or Executive shall not end the employment relationship between CFB and Executive. On or before the expiration of the Term of this Agreement, this Agreement shall terminate due to the resignation of Executive as set forth in Section 7(a), death of Executive as set forth in Section 7(b), discharge of Executive as set forth in Section 7(c) or disability of Executive as set forth in Section 7(d); provided that any rights or obligations which expressly or impliedly survive termination of this Agreement shall continue to be binding and enforceable by CFB and Executive. 3. EXECUTIVE'S DUTIES. During the Term of this Agreement, Executive shall serve as Chairman and Chief Executive Officer or such successor position as Executive voluntarily accepts, with such customary duties and responsibilities as may be assigned from time to time to Executive by CFB, provided that such duties and responsibilities are at all times consistent with the duties and responsibilities of such position. Executive shall devote exclusive attention and time during normal business hours to the business and affairs of CFB and, to the extent necessary to discharge the duties and responsibilities of Executive's position, shall perform faithfully and efficiently to the best of Executive's abilities such duties and responsibilities. 4. BASE COMPENSATION. For services rendered by Executive, CFB shall pay to Executive Base Compensation of $450,000 per annum payable in accordance with CFB's customary payroll practice for its management personnel. Base Compensation shall be reviewed at least annually as of the close of each fiscal year of CFB and may be increased to reflect inflation or such other adjustments as CFB may deem appropriate, but original Base Compensation or Base Compensation as subsequently increased shall not be decreased thereafter, except for across-the-board percentage salary reductions similarly affecting all management personnel of CFB. 5. ADDITIONAL BENEFITS. In addition to Base Compensation, Executive shall be entitled to receive all fringe benefits customarily offered by CFB to its executives including, without 2 limitation, participation in CFB's Annual Incentive Compensation Plan at the participation level established by CFB for Executive as of the date of this Agreement, other incentive plans and perquisites offered generally to key employees, the various employee benefit plans or programs provided to the employees of CFB in general subject to the eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved by the Board during the Term of this Agreement. Nothing in this Section 5 shall prohibit CFB from making any changes in any of the plans, programs or benefits described in this Section 5, provided the change similarly affects all management personnel of CFB. 6. CHANGE IN CONTROL. (a) For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: (i) any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CFB is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CFB's then outstanding securities; (ii) during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CFB, and any new director [other than a director designated by a person who has entered into agreement with CFB to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CFB or nomination for election by CFB's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Board of Directors of CFB; (iii) the stockholders of CFB approve a merger or consolidation of CFB with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CFB outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CFB or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CFB or similar transaction in which no "person" acquires 3 more than 25% of the combined voting power of CFB's then outstanding securities; (iv) the stockholders of CFB approve a plan of complete liquidation or a sale or disposition by CFB of all or substantially all of CFB's assets. "The sale or disposition by CFB of all or substantially all of CFB's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CFB or of any direct or indirect subsidiary of CFB (including the stock of any direct or indirect subsidiary of CFB) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CFB determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CFB. For purposes of the preceding sentence, the "fair market value of CFB" shall be the aggregate market value of CFB's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CFB's other outstanding equity securities. The aggregate market value of CFB's common stock shall be determined by multiplying the number of shares of CFB common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CFB of all or substantially all of CFB's assets by the average closing price for CFB's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CFB shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CFB's common stock or by such other method as the Board of Directors of CFB shall determine is appropriate; and (v) the Board of Directors of CFB determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of CFB. (b) In the event of a Change in Control, any options granted to Executive that are not vested on the date of a Change in Control shall be immediately fully (100%) vested and shall be exercisable in accordance with their respective terms and conditions. 7. TERMINATION. This Agreement may be terminated prior to the end of the Term of this Agreement subject to the provisions of this Section 7. (a) RESIGNATION. (i) Executive may resign, including by reason of retirement, at any time and thereby terminate this Agreement. In the event of such resignation, except 4 in the case of resignation for Good Reason following a Change in Control, all rights and obligations of CFB and Executive under this Agreement shall cease on the date of resignation. (ii) If Executive resigns for Good Reason following a Change in Control, Executive shall be entitled to the compensation and benefits provided in Section 7(c)(I). "Good Reason" shall mean (A) the material breach of any of CFB's obligations under this Agreement without Executive's written consent or (B) the occurrence of any of the following circumstances without Executive's express written consent unless such circumstances are fully corrected prior to the Date of Termination specified in Executive's Notice of Termination: (1) the assignment to Executive of any duties and responsibilities inconsistent with the position that Executive held immediately prior to the Change in Control, relocation of the Executive to an office or site more than 50 miles from the Executive's job location prior to the Change in Control, or a significant adverse alteration in the nature or status of Executive's duties and responsibilities or the conditions of Executive's employment from those in effect immediately prior to the Change in Control; (2) a reduction by CFB in Executive's Base Compensation; (3) the failure by CFB to pay to Executive any portion of Executive's current compensation or any portion of an installment of deferred compensation under any deferred compensation program of CFB within seven days of the date such compensation is due; (4) the failure by CFB to continue in effect any compensation plan in which Executive participated immediately prior to a Change in Control if that compensation plan is material to Executive's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by CFB to continue Executive's participation in such compensation plan (or in such substitute or alternative plan) on a basis at least as favorable, both in terms of the amount of benefits provided and the level of Executive's participation relative to other participants, as existed prior to the Change in Control; (5) the failure by CFB to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of CFB's pension, savings, life insurance, medical, health, accident, or disability plans in which Executive was participating at the time of 5 the Change in Control, the taking of any action by CFB which would materially reduce, directly or indirectly, any of such benefits or deprive Executive of any material fringe benefit or policy or program for the benefit of the management personnel of CFB enjoyed by Executive at the time of the Change in Control; (6) the failure by CFB to provide Executive with the number of paid vacation days to which Executive is entitled in accordance with CFB's normal vacation policy in effect at the time of the Change in Control; (7) the failure of CFB to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (8) any purported termination of Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(e). (iii) Notwithstanding anything herein to the contrary, during the period commencing on the 90th day following a Change in Control and ending on the 180th day following a Change in Control, Executive may voluntarily terminate his employment for any reason, and such termination shall be deemed "Good Reason" for all purposes of this Agreement. (iv) Executive's rights to resign pursuant to this Section 7(a) shall not be affected by incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason. (b) DEATH. Upon Executive's death, this Agreement shall terminate and CFB shall have no obligations to Executive or Executive's legal representatives with respect to this Agreement. Executive's death prior to the Date of Termination stated in any Notice of Termination given by CFB or Executive shall invalidate and supersede the Notice of Termination. Termination of this Agreement shall not affect any of the death benefits payable to Executive's dependents, survivors or beneficiaries under any plan or program under which Executive was covered at the time of death. (c) DISCHARGE. (i) CFB may terminate, without any liability to Executive under this Agreement, this Agreement and Executive's employment by discharging Executive for any reason deemed sufficient by CFB if the Date of Termination associated with such discharge occurs prior to a Change in Control. In the event that 6 this Agreement and Executive's employment are terminated by discharge during the Term of this Agreement following a Change in Control by CFB for any reason other than Cause [as defined in Section 7(c)(ii)] or Disability [as defined in Section 7(d)(I)], then, subject to Sections 7(c)(iii), 7(g) and 7(h): (A) CFB shall pay to Executive, within 15 days of the Date of Termination, an amount in cash equal to the greater of four million and no/100 dollars ($4,000,000.00) or three (3) times the sum of: (1) the higher of (a) the Executive's annual Base Compensation as in effect immediately prior to the Notice of Termination, or (b) Executive's highest annual Base Compensation over the 24-month period preceding the Notice of Termination; and (2) the maximum annual incentive award payable Executive (without giving any effect to any reduction that would constitute Good Reason under Section 7(a)(ii)(4) of this Agreement) under CFB's Annual Incentive Compensation Plan (or any substitute or alternative plan) for such year in lieu of any other payment thereunder; and (3) the average percentage of employer matching contributions to the CFB Retirement Savings Plan and Trust (as a percent of Compensation as defined in the Plan) and employer contributions to the CFB Employee Stock Ownership Plan and Trust on behalf of Executive for the three most recent Plan Years ending immediately prior to the Date of Termination. (B) for the 36-month period after Date of Termination, CFB, at its cost, shall provide or arrange to provide Executive and Executive's dependents with life, disability, accident and group health insurance benefits substantially similar to those which Executive and Executive's dependents were receiving immediately prior to the Notice of Termination; benefits otherwise receivable by Executive pursuant to this Section 7(c)(I)(B) shall be reduced to the extent comparable benefits are actually received by Executive and Executive's dependents during the 36-month period following Executive's Date of Termination from another employer or employer's plan or program, and any such benefits actually received by Executive and Executive's dependents shall be reported to CFB; (C) in lieu of shares of restricted stock granted to Executive by CFB upon which the restricted period does not lapse upon Date of Termination, 7 CFB shall pay to Executive within 30 days of the Date of Termination a lump-sum cash payment equal to the greater of (1) the highest quoted per share sales price for common shares on the New York Stock Exchange during the ten-day period commencing on the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume of the common shares is highest), or (2) the fixed or formula price for the acquisition of common shares specified in an agreement in connection with any Change in Control; (D) in lieu of shares of common stock of CFB ("Common Shares") issuable upon exercise of outstanding options ("Options"), if any, granted to Executive under a CFB Option Plan (which Options shall be canceled upon the making of the payment referred to below), within 15 days of the Date of Termination CFB shall pay to Executive a lump-sum amount in cash equal to the product of: (1) the excess of, in the case of an "incentive stock option" [as defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code")] , the closing price of common shares as reported on the New York Stock Exchange on or nearest the Date of Termination (or, if not listed on such exchange, on a nationally recognized or quotation system on which trading volume in the common shares is highest) and, in the case of all other Options, the greater of (a) the highest quoted per share sales price for common shares on the New York Stock Exchange during the ten-day period commencing on the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume of the common shares is highest), or (b) the fixed or formula price for the acquisition of common shares specified in an agreement in connection with any Change in Control, over the per share option price of each Option held by Executive (whether or not then fully exercisable); and (2) the number of common shares of CFB covered by each such Option; (E) for a period of 12 months following Date of Termination, CFB shall pay the expenses for such outplacement services as Executive may require, with such services to be performed by an agency CFB shall designate; 8 (F) CFB shall pay to Executive all legal fees and expenses incurred by Executive as a result of termination of employment (including, but not limited to, all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder); and (G) in the event any additional or new incentive compensation, deferred compensation or other type of bonus program is instituted by CFB ("New Incentive Program"), the maximum award payable to Executive under the New Incentive Program for such year in lieu of any other payment thereunder, assuming for purposes hereof that Executive had been employed for all of such year, that all performance objectives for such year had been met at the maximum levels and that Executive had been entitled to a full award thereunder. (ii) None of the obligations imposed on CFB by Sections 7(c) (I) (A) through (G) shall apply in the event Executive is discharged for Cause, in which event this Agreement shall terminate on the Date of Termination without further rights or obligations on the part of Executive or CFB under this Agreement. "Cause" shall mean: (A) the willful and continued failure by Executive (other than any such failure resulting from (1) Executive's incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by Executive for Good Reason or (3) CFB's active or passive obstruction of the performance of Executive's duties and responsibilities) to perform substantially the duties and responsibilities of Executive's position with CFB after a written demand for substantial performance is delivered to Executive by the Board, which demand specifically identifies the manner in which the Board believes that Executive has not substantially performed the duties or responsibilities; (B) the conviction of Executive by a court of competent jurisdiction for felony criminal conduct; (C) the willful engaging by Executive in fraud or dishonesty which is demonstrably and materially injurious to CFB, monetarily or otherwise; No act, or failure to act, on Executive's part shall be deemed "willful" unless committed, or omitted by Executive in bad faith and without reasonable belief that Executive's act or failure to act was in the best interest of CFB. Executive shall not be terminated for Cause unless and until CFB shall have delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a 9 meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive's conduct was Cause and specifying the particulars thereof in detail. (d) DISABILITY. If, following a Change in Control, Executive shall have been absent from the substantial performance of Executive's duties and responsibilities with CFB for six consecutive months as a result of Executive's incapacity due to physical or mental illness, as determined by Executive's physician and within 30 days after written notice to return is given by CFB, Executive shall not have returned to the substantial performance of the duties and responsibilities, of Executive's position, CFB may terminate this Agreement as of the end of the 30-day period, after which termination neither CFB nor the Executive shall have rights or obligations under this Agreement and Executive shall not be entitled to any compensation or benefits pursuant to this Agreement. The termination of this Agreement shall not terminate Executive's employment of itself and without further express action by CFB or affect in any way Executive's rights or benefits under CFB Long Term Disability Plan. (e) NOTICE OF TERMINATION. Any purported termination of this Agreement by CFB or by Executive shall be communicated by written Notice of Termination to the other party in accordance with Section 10. Notice of Termination shall mean a notice given not less than 30 days prior to the Date of Termination stated in the notice which shall set forth in reasonable detail the basis for termination of this Agreement by CFB, or, in the case of resignation by Executive for Good Reason, the basis for such resignation. No purported termination which is not affected pursuant to this Section 7(e) shall be valid or effective. (f) DATE OF TERMINATION. Date of Termination shall mean the date specified in the Notice of Termination. Following a Change in Control, either party may, within 15 days after any Notice of Termination is given, provide notice to the other party pursuant to Section 10 that a dispute exists concerning the termination of this Agreement. Notwithstanding the pendency of any such dispute, CFB shall continue to perform CFB's obligations to Executive under this Agreement, pay Executive full compensation in effect when the Notice of Termination giving rise to the dispute was given (including, but not limited to, Base Compensation) and continue Executive as a participant in all compensation, benefit and insurance plans in which Executive was participating when the Notice of Termination giving rise to the dispute was given, and Executive shall continue to perform Executive's duties and responsibilities with CFB unless prevented or relieved by CFB from so performing, until the dispute is finally resolved in accordance with Section 16, but in no event after the expiration of the Term of this Agreement. 10 (g) MITIGATION. Executive shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owing by Executive to CFB, or otherwise. In the event that, following a Notice of Termination given to Executive by CFB, Executive elects to receive all payments and benefits provided by CFB's severance plan or policy for employees in general in lieu of any payments and benefits under this Agreement, Executive shall receive no payments or benefits under this Agreement as a result of Severance of the Executive by CFB. (h) POTENTIAL EXCISE TAX. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, CFB shall pay to Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by Executive as a result of the receipt of such compensation) to place Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. CFB shall pay such additional compensation upon the earlier of (i) the time at which CFB withholds such excise tax from any payments to Executive; or (ii) 30 days after Executive notifies CFB that Executive has paid such excise tax pursuant to a tax return filed by Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of CFB hereunder, Executive agrees, in the event Executive makes any payment pursuant to the preceding sentence, to negotiate with CFB in good faith with respect to procedures reasonably requested by CFB which would afford CFB the ability to contest the imposition of such excise tax; provided, however, that Executive will not be required to afford CFB any right to contest the applicability of any such excise tax to the extent that Executive reasonably determines that such contest is inconsistent with the overall tax interests of Executive. CFB agrees to hold in confidence and not to disclose, without Executive's prior written consent, any information with regard to Executive's tax position which CFB obtains pursuant to this subsection. 11 8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by CFB or any of its affiliated companies except as provided in Section 7 (g) with respect to CFB's severance plan or policy and for which Executive may qualify. Nothing in this Agreement shall limit or otherwise adversely affect such rights as Executive may have under any stock option or other agreements with CFB or any of its affiliated corporations. 9. ASSIGNMENT AND DELEGATION. The obligations of Executive under this Agreement are personal and may not be delegated by Executive or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment, delegation or transfer. CFB may assign CFB's rights under this Agreement and delegate all obligations under this Agreement, either in whole or in part, to any parent, affiliate, or subsidiary organization or company of CFB, provided that the obligations of CFB under this Agreement shall remain the obligations of CFB for which CFB shall be primarily liable notwithstanding the assignment and delegation. 10. NOTICES. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or when mailed by United States registered mail, return receipt requested, postage prepaid, addressed to CFB as its principal office address, directed to the attention of the Board, and to Executive at Executive's residence address on the records of CFB or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. 11. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which other provisions shall remain in full force and effect. 12. SUCCESSORS: BINDING AGREEMENT. (a) CFB shall require any successor (whether direct or indirect, by purchase, merger, consolidation, contract or otherwise) to all or substantially all of the business or assets of CFB expressly to assume and agree to perform this Agreement in the same manner and to the same extent that CFB would be required to perform it if no such succession had taken place. Failure of CFB to obtain such agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall also entitle Executive to resign for Good Reason. CFB shall include any successor to its business or assets which executes and delivers the Agreement required by this Section 12 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devises and legatees. If Executive 12 should die while any amounts would be payable to Executive if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if none of the foregoing, to Executive's estate. 13. INDEMNIFICATION. (a) CFB shall pay, on behalf of Executive and Executive's executors, administrators or assigns, any amount which Executive is or becomes legally obligated to pay as a result of any claim or claims made against Executive by reason of Executive's service as an employee, Director or Officer of CFB. The payments that CFB will be obligated to make shall include (without limitation) damages, judgments, settlements, costs and expenses of investigation, costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs of attachment and similar bonds; provided, however, that CFB shall not be obligated to pay fines or other obligations or fees imposed by law or otherwise that CFB is prohibited by applicable law from paying as indemnity or for any other reason. (b) Costs and expenses (including, without limitation, attorney fees) incurred by Executive in defending or investigating any action, suit, proceeding or claim shall be paid by CFB in advance of the disposition of such matter upon receipt of a written undertaking by or on behalf of Executive to repay any such amounts if it is ultimately determined that Executive is not entitled to indemnification under this Agreement. (c) If a claim under this Agreement is not paid by or on behalf of CFB within ninety days after a written claim has been received by CFB, Executive may at any time thereafter bring suit or proceed under Section 16 against CFB to recover the unpaid amount of the claim and, if successful in whole or in part, Executive shall also be entitled to be paid the expenses, including attorneys' fees, of prosecuting such claim. (d) In the event of payment under this Agreement, CFB shall be subrogated to the extent of such payment to all of the rights of recovery of Executive, who shall execute all documents required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable CFB effectively to bring suit to enforce such rights. (e) CFB shall not be liable under this Agreement to make any payment in connection with any claim made against Executive: (i) for which payment is actually made to Executive under an insurance policy maintained by CFB, except in respect of any excess beyond the amount of payment under such insurance; 13 (ii) for which Executive is indemnified by CFB otherwise than pursuant to this Agreement; (iii) based upon or attributable to Executive's gaining in fact any personal profit or advantage to which Executive was not legally entitled; (iv) for an accounting of profits made from the purchase or sale by Executive of securities of CFB within the meaning of Section 16(b) of the Exchange Act; or (v) brought about or contributed to by the dishonesty of Executive; provided, however, that notwithstanding the foregoing, Executive shall be protected under this Agreement as to any claims upon which suit may be brought alleging dishonesty on the part of Executive, unless a judgment or other final adjudication thereof adverse to Executive shall establish that Executive committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. (f) Executive, as a condition precedent to his right to be indemnified under this Agreement, shall give to CFB notice in accordance with Section 10 as soon as practicable of any claim made against Executive for which indemnity will or could be sought under this Agreement. Executive shall give CFB such information and cooperation as it may reasonably require and as shall be within Executive's power. (g) Nothing herein shall be deemed to diminish or otherwise restrict Executive's right to indemnification under any provision of the Certificate of Incorporation or Bylaws of CFB or under State of Delaware law. 14. MISCELLANEOUS. No provision of this Agreement may be modified or waived unless such waiver or modification is agreed to in writing and signed by Executive and such officer of CFB as may be specifically authorized by the Board. No waiver by either party at any time of any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement is an integration of the parties' agreement; no agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Dakota. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original document but all of which together will constitute one instrument. 14 16. DISPUTE RESOLUTION. Executive shall be permitted (but not required) to elect that any dispute or controversy arising under or in connection with this Agreement be resolved in Fargo, North Dakota, by any recognized method of alternative dispute resolution or by arbitration in accordance with the rules of the American Arbitration Association then in effect. The parties shall select a mutually acceptable single arbitrator to resolve the dispute or if they fail or are unable to do so, each side shall within the following ten business days select a single arbitrator and the two so selected shall select a third arbitrator within the following ten business days. The arbitrator shall have no power to award any punitive or exemplary damages. The arbitrator may construe or interpret, but shall not ignore or vary the terms of this Agreement, and shall be bound by controlling law. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party bay any court of competent jurisdiction in North Dakota or elsewhere. All legal fees and costs incurred by Executive in connection with the resolution of any dispute or controversy under or in connection with this Agreement shall be reimbursed by CFB as bills for such services are presented by Executive to CFB. 17. AUTHORITY. The authority of CFB to execute and perform this Agreement is contained in a resolution of the Board of Directors of CFB dated December 1, 1998. IN WITNESS WHEREOF, Community First Bankshares, Inc. and Executive have executed this Agreement on December 1,1998, to be effective for all purposes. COMMUNITY FIRST BANKSHARES, INC. By /s/ Mark A. Anderson ---------------------------------- Its Vice Chairman and CFO ---------------------------------- EXECUTIVE: /s/ Donald Mengedoth ------------------------------ Donald Mengedoth 15 EX-10.15-2 7 EXHIBIT 10.15.2 EXHIBIT 10.15.2 COMMUNITY FIRST BANKSHARES, INC. CHANGE IN CONTROL SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT ("Agreement") is entered into effective as of December 1, 1998, by and between Community First Bankshares, Inc. a bank holding company organized under the laws of the state of Delaware ("CFB") and Mark Anderson, residing in Fargo, ND ("Executive"). WHEREAS, CFB considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CFB and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of CFB, its policies, methods, personnel, and problems, a significant contribution to the profitability, growth, and financial strength of CFB; and WHEREAS, CFB, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the Executive in the performance of the Executive's duties, to the detriment of CFB and its shareholders; and WHEREAS, it is in the best interests of CFB and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to CFB of the Executive in the event of a Change in Control; and WHEREAS, CFB desires to assure Executive of certain benefits in the event of Executive's severance from employment with CFB without Cause following a Change in Control; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and promises stated below, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, CFB and Executive agree as follows: 1. EMPLOYMENT. To be eligible to receive benefits under this Agreement, (a) Executive must maintain employment with CFB until after a Change in Control and (b) a Severance of Executive's employment shall have occurred during the Term of this Agreement and after a Change in Control. Prior to a Change in Control, Executive shall have no right to benefits under this Agreement. For purposes of this Agreement, Severance shall mean either the involuntary termination of Executive's employment with CFB without Cause or Executive's voluntary termination of employment with CFB resignation for Good Reason; where Cause has the definition set forth in Section 7(c)(ii) and Good Reason has the definition set forth in Section 7(a)(ii). 2. TERM OF AGREEMENT. Subject to the provisions for earlier termination provided in this Agreement, the Term of this Agreement shall commence on the effective date of this Agreement as stated above and shall continue through December 31, 2001, and shall be extended for successive one-year periods thereafter unless the Board of Directors of CFB ("Board") shall have given written notice to Executive not later than September 30 of the last year of the original or extended Term of this Agreement of CFB's election to discontinue the Term of this Agreement; provided, however, that if a Change in Control shall have occurred during the original or extended Term of this Agreement, the Term of this Agreement shall continue, irrespective of any action of the Board of CFB, for a period of not less than 24 months beyond the month in which such Change in Control occurred. In the event that more than one Change in Control shall occur during the original or extended Term of this Agreement, the 24-month period shall follow the last Change in Control. The Term of this Agreement shall expire and this Agreement shall neither impose nor confer any further rights or obligations on CFB or Executive on the day after the end of the Term of this Agreement. Expiration of the Term of this Agreement of itself and without subsequent action by CFB or Executive shall not end the employment relationship between CFB and Executive. On or before the expiration of the Term of this Agreement, this Agreement shall terminate due to the resignation of Executive as set forth in Section 7(a), death of Executive as set forth in Section 7(b), discharge of Executive as set forth in Section 7(c) or disability of Executive as set forth in Section 7(d); provided that any rights or obligations which expressly or impliedly survive termination of this Agreement shall continue to be binding and enforceable by CFB and Executive. 3. EXECUTIVE'S DUTIES. During the Term of this Agreement, Executive shall serve as Vice Chairman and Chief Financial Officer or such successor position as Executive voluntarily accepts, with such customary duties and responsibilities as may be assigned from time to time to Executive by CFB, provided that such duties and responsibilities are at all times consistent with the duties and responsibilities of such position. Executive shall devote exclusive attention and time during normal business hours to the business and affairs of CFB and, to the extent necessary to discharge the duties and responsibilities of Executive's position, shall perform faithfully and efficiently to the best of Executive's abilities such duties and responsibilities. 4. BASE COMPENSATION. For services rendered by Executive, CFB shall pay to Executive Base Compensation of $300,000 per annum payable in accordance with CFB's customary payroll practice for its management personnel. Base Compensation shall be reviewed at least annually as of the close of each fiscal year of CFB and may be increased to reflect inflation or such other adjustments as CFB may deem appropriate, but original Base Compensation or Base Compensation as subsequently increased shall not be decreased thereafter, except for across-the-board percentage salary reductions similarly affecting all management personnel of CFB. 2 5. ADDITIONAL BENEFITS. In addition to Base Compensation, Executive shall be entitled to receive all fringe benefits customarily offered by CFB to its executives including, without limitation, participation in CFB's Annual Incentive Compensation Plan at the participation level established by CFB for Executive as of the date of this Agreement, other incentive plans and perquisites offered generally to key employees, the various employee benefit plans or programs provided to the employees of CFB in general subject to the eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved by the Board during the Term of this Agreement. Nothing in this Section 5 shall prohibit CFB from making any changes in any of the plans, programs or benefits described in this Section 5, provided the change similarly affects all management personnel of CFB. 6. CHANGE IN CONTROL. (a) For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: (i) any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CFB is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CFB's then outstanding securities; (ii) during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CFB, and any new director [other than a director designated by a person who has entered into agreement with CFB to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CFB or nomination for election by CFB's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Board of Directors of CFB; (iii) the stockholders of CFB approve a merger or consolidation of CFB with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CFB outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CFB or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a 3 recapitalization of CFB or similar transaction in which no "person" acquires more than 25% of the combined voting power of CFB's then outstanding securities; (iv) the stockholders of CFB approve a plan of complete liquidation or a sale or disposition by CFB of all or substantially all of CFB's assets. "The sale or disposition by CFB of all or substantially all of CFB's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CFB or of any direct or indirect subsidiary of CFB (including the stock of any direct or indirect subsidiary of CFB) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CFB determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CFB. For purposes of the preceding sentence, the "fair market value of CFB" shall be the aggregate market value of CFB's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CFB's other outstanding equity securities. The aggregate market value of CFB's common stock shall be determined by multiplying the number of shares of CFB common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CFB of all or substantially all of CFB's assets by the average closing price for CFB's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CFB shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CFB's common stock or by such other method as the Board of Directors of CFB shall determine is appropriate; and (v) the Board of Directors of CFB determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of CFB. (b) In the event of a Change in Control, any options granted to Executive that are not vested on the date of a Change in Control shall be immediately fully (100%) vested and shall be exercisable in accordance with their respective terms and conditions. 7. TERMINATION. This Agreement may be terminated prior to the end of the Term of this Agreement subject to the provisions of this Section 7. (a) RESIGNATION. 4 (i) Executive may resign, including by reason of retirement, at any time and thereby terminate this Agreement. In the event of such resignation, except in the case of resignation for Good Reason following a Change in Control, all rights and obligations of CFB and Executive under this Agreement shall cease on the date of resignation. (ii) If Executive resigns for Good Reason following a Change in Control, Executive shall be entitled to the compensation and benefits provided in Section 7(c)(I). "Good Reason" shall mean (A) the material breach of any of CFB's obligations under this Agreement without Executive's written consent or (B) the occurrence of any of the following circumstances without Executive's express written consent unless such circumstances are fully corrected prior to the Date of Termination specified in Executive's Notice of Termination: (1) the assignment to Executive of any duties and responsibilities inconsistent with the position that Executive held immediately prior to the Change in Control, relocation of the Executive to an office or site more than 50 miles from the Executive's job location prior to the Change in Control, or a significant adverse alteration in the nature or status of Executive's duties and responsibilities or the conditions of Executive's employment from those in effect immediately prior to the Change in Control; (2) a reduction by CFB in Executive's Base Compensation; (3) the failure by CFB to pay to Executive any portion of Executive's current compensation or any portion of an installment of deferred compensation under any deferred compensation program of CFB within seven days of the date such compensation is due; (4) the failure by CFB to continue in effect any compensation plan in which Executive participated immediately prior to a Change in Control if that compensation plan is material to Executive's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by CFB to continue Executive's participation in such compensation plan (or in such substitute or alternative plan) on a basis at least as favorable, both in terms of the amount of benefits provided and the level of Executive's participation relative to other participants, as existed prior to the Change in Control; (5) the failure by CFB to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of CFB's pension, savings, life insurance, medical, health, accident, or 5 disability plans in which Executive was participating at the time of the Change in Control, the taking of any action by CFB which would materially reduce, directly or indirectly, any of such benefits or deprive Executive of any material fringe benefit or policy or program for the benefit of the management personnel of CFB enjoyed by Executive at the time of the Change in Control; (6) the failure by CFB to provide Executive with the number of paid vacation days to which Executive is entitled in accordance with CFB's normal vacation policy in effect at the time of the Change in Control; (7) the failure of CFB to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (8) any purported termination of Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(e). (iii) Notwithstanding anything herein to the contrary, during the period commencing on the 90th day following a Change in Control and ending on the 180th day following a Change in Control, Executive may voluntarily terminate his employment for any reason, and such termination shall be deemed "Good Reason" for all purposes of this Agreement. (iv) Executive's rights to resign pursuant to this Section 7(a) shall not be affected by incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason. (b) DEATH. Upon Executive's death, this Agreement shall terminate and CFB shall have no obligations to Executive or Executive's legal representatives with respect to this Agreement. Executive's death prior to the Date of Termination stated in any Notice of Termination given by CFB or Executive shall invalidate and supersede the Notice of Termination. Termination of this Agreement shall not affect any of the death benefits payable to Executive's dependents, survivors or beneficiaries under any plan or program under which Executive was covered at the time of death. 6 (c) DISCHARGE. (i) CFB may terminate, without any liability to Executive under this Agreement, this Agreement and Executive's employment by discharging Executive for any reason deemed sufficient by CFB if the Date of Termination associated with such discharge occurs prior to a Change in Control. In the event that this Agreement and Executive's employment are terminated by discharge during the Term of this Agreement following a Change in Control by CFB for any reason other than Cause [as defined in Section 7(c)(ii)] or Disability [as defined in Section 7(d)(I)], then, subject to Sections 7(c)(iii), 7(g) and 7(h): (A) CFB shall pay to Executive, within 15 days of the Date of Termination, an amount in cash equal to the greater of three million and no/100 dollars ($3,000,000.00) or three (3) times the sum of: (1) the higher of (a) the Executive's annual Base Compensation as in effect immediately prior to the Notice of Termination, or (b) Executive's highest annual Base Compensation over the 24-month period preceding the Notice of Termination; and (2) the maximum annual incentive award payable Executive (without giving any effect to any reduction that would constitute Good Reason under Section 7(a)(ii)(4) of this Agreement) under CFB's Annual Incentive Compensation Plan (or any substitute or alternative plan) for such year in lieu of any other payment thereunder; and (3) the average percentage of employer matching contributions to the CFB Retirement Savings Plan and Trust (as a percent of Compensation as defined in the Plan) and employer contributions to the CFB Employee Stock Ownership Plan and Trust on behalf of Executive for the three most recent Plan Years ending immediately prior to the Date of Termination. (B) for the 36-month period after Date of Termination, CFB, at its cost, shall provide or arrange to provide Executive and Executive's dependents with life, disability, accident and group health insurance benefits substantially similar to those which Executive and Executive's dependents were receiving immediately prior to the Notice of Termination; benefits otherwise receivable by Executive pursuant to this Section 7(c)(I)(B) shall be reduced to the extent comparable benefits are actually received by Executive and 7 Executive's dependents during the 36-month period following Executive's Date of Termination from another employer or employer's plan or program, and any such benefits actually received by Executive and Executive's dependents shall be reported to CFB; (C) in lieu of shares of restricted stock granted to Executive by CFB upon which the restricted period does not lapse upon Date of Termination, CFB shall pay to Executive within 30 days of the Date of Termination a lump-sum cash payment equal to the greater of (1) the highest quoted per share sales price for common shares on the New York Stock Exchange during the ten-day period commencing on the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume of the common shares is highest), or (2) the fixed or formula price for the acquisition of common shares specified in an agreement in connection with any Change in Control; (D) in lieu of shares of common stock of CFB ("Common Shares") issuable upon exercise of outstanding options ("Options"), if any, granted to Executive under a CFB Option Plan (which Options shall be canceled upon the making of the payment referred to below), within 15 days of the Date of Termination CFB shall pay to Executive a lump-sum amount in cash equal to the product of: (1) the excess of, in the case of an "incentive stock option" [as defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code")], the closing price of common shares as reported on the New York Stock Exchange on or nearest the Date of Termination (or, if not listed on such exchange, on a nationally recognized or quotation system on which trading volume in the common shares is highest) and, in the case of all other Options, the greater of (a) the highest quoted per share sales price for common shares on the New York Stock Exchange during the ten-day period commencing on the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume of the common shares is highest), or (b) the fixed or formula price for the acquisition of common shares specified in an agreement in connection with any Change in Control, over the per share option price of each Option held by Executive (whether or not then fully exercisable); and (2) the number of common shares of CFB covered by each such Option; 8 (E) for a period of 12 months following Date of Termination, CFB shall pay the expenses for such outplacement services as Executive may require, with such services to be performed by an agency CFB shall designate; (F) CFB shall pay to Executive all legal fees and expenses incurred by Executive as a result of termination of employment (including, but not limited to, all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder); and (G) in the event any additional or new incentive compensation, deferred compensation or other type of bonus program is instituted by CFB ("New Incentive Program"), the maximum award payable to Executive under the New Incentive Program for such year in lieu of any other payment thereunder, assuming for purposes hereof that Executive had been employed for all of such year, that all performance objectives for such year had been met at the maximum levels and that Executive had been entitled to a full award thereunder. (ii) None of the obligations imposed on CFB by Sections 7(c) (I) (A) through (G) shall apply in the event Executive is discharged for Cause, in which event this Agreement shall terminate on the Date of Termination without further rights or obligations on the part of Executive or CFB under this Agreement. "Cause" shall mean: (A) the willful and continued failure by Executive (other than any such failure resulting from (1) Executive's incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by Executive for Good Reason or (3) CFB's active or passive obstruction of the performance of Executive's duties and responsibilities) to perform substantially the duties and responsibilities of Executive's position with CFB after a written demand for substantial performance is delivered to Executive by the Board, which demand specifically identifies the manner in which the Board believes that Executive has not substantially performed the duties or responsibilities; (B) the conviction of Executive by a court of competent jurisdiction for felony criminal conduct; (C) the willful engaging by Executive in fraud or dishonesty which is demonstrably and materially injurious to CFB, monetarily or otherwise; No act, or failure to act, on Executive's part shall be deemed "willful" unless committed, or omitted by Executive in bad 9 faith and without reasonable belief that Executive's act or failure to act was in the best interest of CFB. Executive shall not be terminated for Cause unless and until CFB shall have delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive's conduct was Cause and specifying the particulars thereof in detail. (d) DISABILITY. If, following a Change in Control, Executive shall have been absent from the substantial performance of Executive's duties and responsibilities with CFB for six consecutive months as a result of Executive's incapacity due to physical or mental illness, as determined by Executive's physician and within 30 days after written notice to return is given by CFB, Executive shall not have returned to the substantial performance of the duties and responsibilities, of Executive's position, CFB may terminate this Agreement as of the end of the 30-day period, after which termination neither CFB nor the Executive shall have rights or obligations under this Agreement and Executive shall not be entitled to any compensation or benefits pursuant to this Agreement. The termination of this Agreement shall not terminate Executive's employment of itself and without further express action by CFB or affect in any way Executive's rights or benefits under CFB Long Term Disability Plan. (e) NOTICE OF TERMINATION. Any purported termination of this Agreement by CFB or by Executive shall be communicated by written Notice of Termination to the other party in accordance with Section 10. Notice of Termination shall mean a notice given not less than 30 days prior to the Date of Termination stated in the notice which shall set forth in reasonable detail the basis for termination of this Agreement by CFB, or, in the case of resignation by Executive for Good Reason, the basis for such resignation. No purported termination which is not affected pursuant to this Section 7(e) shall be valid or effective. (f) DATE OF TERMINATION. Date of Termination shall mean the date specified in the Notice of Termination. Following a Change in Control, either party may, within 15 days after any Notice of Termination is given, provide notice to the other party pursuant to Section 10 that a dispute exists concerning the termination of this Agreement. Notwithstanding the pendency of any such dispute, CFB shall continue to perform CFB's obligations to Executive under this Agreement, pay Executive full compensation in effect when the Notice of Termination giving rise to the dispute was given (including, but not limited to, Base Compensation) and continue Executive as a participant in all compensation, benefit and insurance plans in which Executive was participating when the Notice of Termination giving rise to the dispute was given, and Executive shall continue to perform Executive's duties and responsibilities with 10 CFB unless prevented or relieved by CFB from so performing, until the dispute is finally resolved in accordance with Section 16, but in no event after the expiration of the Term of this Agreement. (g) MITIGATION. Executive shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owing by Executive to CFB, or otherwise. In the event that, following a Notice of Termination given to Executive by CFB, Executive elects to receive all payments and benefits provided by CFB's severance plan or policy for employees in general in lieu of any payments and benefits under this Agreement, Executive shall receive no payments or benefits under this Agreement as a result of Severance of the Executive by CFB. (h) POTENTIAL EXCISE TAX. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, CFB shall pay to Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by Executive as a result of the receipt of such compensation) to place Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. CFB shall pay such additional compensation upon the earlier of (i) the time at which CFB withholds such excise tax from any payments to Executive; or (ii) 30 days after Executive notifies CFB that Executive has paid such excise tax pursuant to a tax return filed by Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of CFB hereunder, Executive agrees, in the event Executive makes any payment pursuant to the preceding sentence, to negotiate with CFB in good faith with respect to procedures reasonably requested by CFB which would afford CFB the ability to contest the imposition of such excise tax; provided, however, that Executive will not be required to afford CFB any right to contest the applicability of any such excise tax to the extent that Executive reasonably determines that such contest is inconsistent with the overall tax interests of Executive. 11 CFB agrees to hold in confidence and not to disclose, without Executive's prior written consent, any information with regard to Executive's tax position which CFB obtains pursuant to this subsection. 8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by CFB or any of its affiliated companies except as provided in Section 7 (g) with respect to CFB's severance plan or policy and for which Executive may qualify. Nothing in this Agreement shall limit or otherwise adversely affect such rights as Executive may have under any stock option or other agreements with CFB or any of its affiliated corporations. 9. ASSIGNMENT AND DELEGATION. The obligations of Executive under this Agreement are personal and may not be delegated by Executive or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment, delegation or transfer. CFB may assign CFB's rights under this Agreement and delegate all obligations under this Agreement, either in whole or in part, to any parent, affiliate, or subsidiary organization or company of CFB, provided that the obligations of CFB under this Agreement shall remain the obligations of CFB for which CFB shall be primarily liable notwithstanding the assignment and delegation. 10. NOTICES. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or when mailed by United States registered mail, return receipt requested, postage prepaid, addressed to CFB as its principal office address, directed to the attention of the Board, and to Executive at Executive's residence address on the records of CFB or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. 11. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which other provisions shall remain in full force and effect. 12. SUCCESSORS: BINDING AGREEMENT. (a) CFB shall require any successor (whether direct or indirect, by purchase, merger, consolidation, contract or otherwise) to all or substantially all of the business or assets of CFB expressly to assume and agree to perform this Agreement in the same manner and to the same extent that CFB would be required to perform it if no such succession had taken place. Failure of CFB to obtain such agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall also entitle Executive to resign for Good Reason. CFB shall include any successor to its business or assets which executes and delivers the Agreement required by this Section 12 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. 12 (b) This Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devises and legatees. If Executive should die while any amounts would be payable to Executive if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if none of the foregoing, to Executive's estate. 13. INDEMNIFICATION. (a) CFB shall pay, on behalf of Executive and Executive's executors, administrators or assigns, any amount which Executive is or becomes legally obligated to pay as a result of any claim or claims made against Executive by reason of Executive's service as an employee, Director or Officer of CFB. The payments that CFB will be obligated to make shall include (without limitation) damages, judgments, settlements, costs and expenses of investigation, costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs of attachment and similar bonds; provided, however, that CFB shall not be obligated to pay fines or other obligations or fees imposed by law or otherwise that CFB is prohibited by applicable law from paying as indemnity or for any other reason. (b) Costs and expenses (including, without limitation, attorney fees) incurred by Executive in defending or investigating any action, suit, proceeding or claim shall be paid by CFB in advance of the disposition of such matter upon receipt of a written undertaking by or on behalf of Executive to repay any such amounts if it is ultimately determined that Executive is not entitled to indemnification under this Agreement. (c) If a claim under this Agreement is not paid by or on behalf of CFB within ninety days after a written claim has been received by CFB, Executive may at any time thereafter bring suit or proceed under Section 16 against CFB to recover the unpaid amount of the claim and, if successful in whole or in part, Executive shall also be entitled to be paid the expenses, including attorneys' fees, of prosecuting such claim. (d) In the event of payment under this Agreement, CFB shall be subrogated to the extent of such payment to all of the rights of recovery of Executive, who shall execute all documents required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable CFB effectively to bring suit to enforce such rights. (e) CFB shall not be liable under this Agreement to make any payment in connection with any claim made against Executive: 13 (i) for which payment is actually made to Executive under an insurance policy maintained by CFB, except in respect of any excess beyond the amount of payment under such insurance; (ii) for which Executive is indemnified by CFB otherwise than pursuant to this Agreement; (iii) based upon or attributable to Executive's gaining in fact any personal profit or advantage to which Executive was not legally entitled; (iv) for an accounting of profits made from the purchase or sale by Executive of securities of CFB within the meaning of Section 16(b) of the Exchange Act; or (v) brought about or contributed to by the dishonesty of Executive; provided, however, that notwithstanding the foregoing, Executive shall be protected under this Agreement as to any claims upon which suit may be brought alleging dishonesty on the part of Executive, unless a judgment or other final adjudication thereof adverse to Executive shall establish that Executive committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. (f) Executive, as a condition precedent to his right to be indemnified under this Agreement, shall give to CFB notice in accordance with Section 10 as soon as practicable of any claim made against Executive for which indemnity will or could be sought under this Agreement. Executive shall give CFB such information and cooperation as it may reasonably require and as shall be within Executive's power. (g) Nothing herein shall be deemed to diminish or otherwise restrict Executive's right to indemnification under any provision of the Certificate of Incorporation or Bylaws of CFB or under State of Delaware law. 14. MISCELLANEOUS. No provision of this Agreement may be modified or waived unless such waiver or modification is agreed to in writing and signed by Executive and such officer of CFB as may be specifically authorized by the Board. No waiver by either party at any time of any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement is an integration of the parties' agreement; no agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Dakota. 14 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original document but all of which together will constitute one instrument. 16. DISPUTE RESOLUTION. Executive shall be permitted (but not required) to elect that any dispute or controversy arising under or in connection with this Agreement be resolved in Fargo, North Dakota, by any recognized method of alternative dispute resolution or by arbitration in accordance with the rules of the American Arbitration Association then in effect. The parties shall select a mutually acceptable single arbitrator to resolve the dispute or if they fail or are unable to do so, each side shall within the following ten business days select a single arbitrator and the two so selected shall select a third arbitrator within the following ten business days. The arbitrator shall have no power to award any punitive or exemplary damages. The arbitrator may construe or interpret, but shall not ignore or vary the terms of this Agreement, and shall be bound by controlling law. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party bay any court of competent jurisdiction in North Dakota or elsewhere. All legal fees and costs incurred by Executive in connection with the resolution of any dispute or controversy under or in connection with this Agreement shall be reimbursed by CFB as bills for such services are presented by Executive to CFB. 17. AUTHORITY. The authority of CFB to execute and perform this Agreement is contained in a resolution of the Board of Directors of CFB dated December 1, 1998. IN WITNESS WHEREOF, Community First Bankshares, Inc. and Executive have executed this Agreement on December 1,1998, to be effective for all purposes. COMMUNITY FIRST BANKSHARES, INC. By DONALD R. MENGEDOTH ----------------------------- Its PRESIDENT AND CEO ----------------------------- EXECUTIVE: /s/ MARK ANDERSON -------------------------------- Mark Anderson EX-10.15-3 8 EXHIBIT 10.15.3 Exhibit 10.15.3 COMMUNITY FIRST BANKSHARES, INC. CHANGE IN CONTROL SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT ("Agreement") is entered into effective as of December 1, 1998, by and between Community First Bankshares, Inc. a bank holding company organized under the laws of the state of Delaware ("CFB") and _____________, residing in Fargo, ND ("Executive"). WHEREAS, CFB considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CFB and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of CFB, its policies, methods, personnel, and problems, a significant contribution to the profitability, growth, and financial strength of CFB; and WHEREAS, CFB, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the Executive in the performance of the Executive's duties, to the detriment of CFB and its shareholders; and WHEREAS, it is in the best interests of CFB and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to CFB of the Executive in the event of a Change in Control; and WHEREAS, CFB desires to assure Executive of certain benefits in the event of Executive's severance from employment with CFB without Cause following a Change in Control; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and promises stated below, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, CFB and Executive agree as follows: 1. EMPLOYMENT. To be eligible to receive benefits under this Agreement, (a) Executive must maintain employment with CFB until after a Change in Control and (b) a Severance of Executive's employment shall have occurred during the Term of this Agreement and after a Change in Control. Prior to a Change in Control, Executive shall have no right to benefits under this Agreement. For purposes of this Agreement, Severance shall mean either the involuntary termination of Executive's employment with CFB without Cause or Executive's voluntary termination of employment with CFB resignation for Good Reason; where Cause has the definition set forth in Section 7(c)(ii) and Good Reason has the definition set forth in Section 7(a)(ii). 2. TERM OF AGREEMENT. Subject to the provisions for earlier termination provided in this Agreement, the Term of this Agreement shall commence on the effective date of this Agreement as stated above and shall continue through December 31, 2001, and shall be extended for successive one-year periods thereafter unless the Board of Directors of CFB ("Board") shall have given written notice 1 to Executive not later than September 30 of the last year of the original or extended Term of this Agreement of CFB's election to discontinue the Term of this Agreement; provided, however, that if a Change in Control shall have occurred during the original or extended Term of this Agreement, the Term of this Agreement shall continue, irrespective of any action of the Board of CFB, for a period of not less than 24 months beyond the month in which such Change in Control occurred. In the event that more than one Change in Control shall occur during the original or extended Term of this Agreement, the 24-month period shall follow the last Change in Control. The Term of this Agreement shall expire and this Agreement shall neither impose nor confer any further rights or obligations on CFB or Executive on the day after the end of the Term of this Agreement. Expiration of the Term of this Agreement of itself and without subsequent action by CFB or Executive shall not end the employment relationship between CFB and Executive. On or before the expiration of the Term of this Agreement, this Agreement shall terminate due to the resignation of Executive as set forth in Section 7(a), death of Executive as set forth in Section 7(b), discharge of Executive as set forth in Section 7(c) or disability of Executive as set forth in Section 7(d); provided that any rights or obligations which expressly or impliedly survive termination of this Agreement shall continue to be binding and enforceable by CFB and Executive. 3. EXECUTIVE'S DUTIES. During the Term of this Agreement, Executive shall serve as [title] or such successor position as Executive voluntarily accepts, with such customary duties and responsibilities as may be assigned from time to time to Executive by CFB, provided that such duties and responsibilities are at all times consistent with the duties and responsibilities of such position. Executive shall devote exclusive attention and time during normal business hours to the business and affairs of CFB and, to the extent necessary to discharge the duties and responsibilities of Executive's position, shall perform faithfully and efficiently to the best of Executive's abilities such duties and responsibilities. 4. BASE COMPENSATION. For services rendered by Executive, CFB shall pay to Executive Base Compensation of [$ ] per annum payable in accordance with CFB's customary payroll practice for its management personnel. Base Compensation shall be reviewed at least annually as of the close of each fiscal year of CFB and may be increased to reflect inflation or such other adjustments as CFB may deem appropriate, but original Base Compensation or Base Compensation as subsequently increased shall not be decreased thereafter, except for across-the-board percentage salary reductions similarly affecting all management personnel of CFB. 5. ADDITIONAL BENEFITS. In addition to Base Compensation, Executive shall be entitled to receive all fringe benefits customarily offered by CFB to its executives including, without limitation, participation in CFB's Annual Incentive Compensation Plan at the participation level established by CFB for Executive as of the date of this Agreement, other incentive plans and perquisites offered generally to key employees, the various employee benefit plans or programs provided to the employees of CFB in general subject to the eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved by the Board during the Term of this Agreement. Nothing in this Section 5 shall prohibit CFB from making any changes in any of the plans, programs or benefits described in this Section 5, provided the change similarly affects all management personnel of CFB. 6. CHANGE IN CONTROL. 2 (a) For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: (i) any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CFB is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CFB's then outstanding securities; (ii) during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CFB, and any new director [other than a director designated by a person who has entered into agreement with CFB to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CFB or nomination for election by CFB's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Board of Directors of CFB; (iii) the stockholders of CFB approve a merger or consolidation of CFB with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CFB outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CFB or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of CFB or similar transaction in which no "person" acquires more than 25% of the combined voting power of CFB's then outstanding securities; (iv) the stockholders of CFB approve a plan of complete liquidation or a sale or disposition by CFB of all or substantially all of CFB's assets. "The sale or disposition by CFB of all or substantially all of CFB's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CFB or of any direct or indirect subsidiary of CFB (including the stock of any direct or indirect subsidiary of CFB) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CFB determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CFB. For purposes of the preceding sentence, the "fair market value of CFB" shall be the aggregate market value of CFB's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CFB's other outstanding equity securities. The aggregate market value of CFB's common stock shall be determined by multiplying the number of shares of 3 CFB common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CFB of all or substantially all of CFB's assets by the average closing price for CFB's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CFB shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CFB's common stock or by such other method as the Board of Directors of CFB shall determine is appropriate; and (v) the Board of Directors of CFB determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of CFB. (b) In the event of a Change in Control, any options granted to Executive that are not vested on the date of a Change in Control shall be immediately fully (100%) vested and shall be exercisable in accordance with their respective terms and conditions. 7. TERMINATION. This Agreement may be terminated prior to the end of the Term of this Agreement subject to the provisions of this Section 7. (a) RESIGNATION. (i) Executive may resign, including by reason of retirement, at any time and thereby terminate this Agreement. In the event of such resignation, except in the case of resignation for Good Reason following a Change in Control, all rights and obligations of CFB and Executive under this Agreement shall cease on the date of resignation. (ii) If Executive resigns for Good Reason following a Change in Control, Executive shall be entitled to the compensation and benefits provided in Section 7(c)(I). "Good Reason" shall mean (A) the material breach of any of CFB's obligations under this Agreement without Executive's written consent or (B) the occurrence of any of the following circumstances without Executive's express written consent unless such circumstances are fully corrected prior to the Date of Termination specified in Executive's Notice of Termination: (1) the assignment to Executive of any duties and responsibilities inconsistent with the position that Executive held immediately prior to the Change in Control, relocation of the Executive to an office or site more than 50 miles from the Executive's job location prior to the Change in Control, or a significant adverse alteration in the nature or status of Executive's duties and responsibilities or the conditions of Executive's employment from those in effect immediately prior to the Change in Control; (2) a reduction by CFB in Executive's Base Compensation; 4 (3) the failure by CFB to pay to Executive any portion of Executive's current compensation or any portion of an installment of deferred compensation under any deferred compensation program of CFB within seven days of the date such compensation is due; (4) the failure by CFB to continue in effect any compensation plan in which Executive participated immediately prior to a Change in Control if that compensation plan is material to Executive's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by CFB to continue Executive's participation in such compensation plan (or in such substitute or alternative plan) on a basis at least as favorable, both in terms of the amount of benefits provided and the level of Executive's participation relative to other participants, as existed prior to the Change in Control; (5) the failure by CFB to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of CFB's pension, savings, life insurance, medical, health, accident, or disability plans in which Executive was participating at the time of the Change in Control, the taking of any action by CFB which would materially reduce, directly or indirectly, any of such benefits or deprive Executive of any material fringe benefit or policy or program for the benefit of the management personnel of CFB enjoyed by Executive at the time of the Change in Control; (6) the failure by CFB to provide Executive with the number of paid vacation days to which Executive is entitled in accordance with CFB's normal vacation policy in effect at the time of the Change in Control; (7) the failure of CFB to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (8) any purported termination of Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(e). (iii) Executive's rights to resign pursuant to this Section 7(a) shall not be affected by incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason. (b) DEATH. Upon Executive's death, this Agreement shall terminate and CFB shall have no obligations to Executive or Executive's legal representatives with respect to this Agreement. Executive's death prior to the Date of Termination stated in any Notice of Termination given by CFB or Executive shall invalidate and supersede the Notice of Termination. 5 Termination of this Agreement shall not affect any of the death benefits payable to Executive's dependents, survivors or beneficiaries under any plan or program under which Executive was covered at the time of death. (c) DISCHARGE. (i) CFB may terminate, without any liability to Executive under this Agreement, this Agreement and Executive's employment by discharging Executive for any reason deemed sufficient by CFB if the Date of Termination associated with such discharge occurs prior to a Change in Control. In the event that this Agreement and Executive's employment are terminated by discharge during the Term of this Agreement following a Change in Control by CFB for any reason other than Cause [as defined in Section 7(c)(ii)] or Disability [as defined in Section 7(d)(I)], then, subject to Sections 7(c)(iii), 7(g) and 7(h): (A) CFB shall pay to Executive, within 15 days of the Date of Termination, an amount in cash equal to two (2) times the sum of: (1) the higher of (a) the Executive's annual Base Compensation as in effect immediately prior to the Notice of Termination, or (b) Executive's highest annual Base Compensation over the 24-month period preceding the Notice of Termination; and (2) the maximum annual incentive award payable Executive (without giving any effect to any reduction that would constitute Good Reason under Section 7(a)(ii)(4) of this Agreement) under CFB's Annual Incentive Compensation Plan (or any substitute or alternative plan) for such year in lieu of any other payment thereunder; and (3) the average percentage of employer matching contributions to the CFB Retirement Savings Plan and Trust (as a percent of Compensation as defined in the Plan) and employer contributions to the CFB Employee Stock Ownership Plan and Trust on behalf of Executive for the three most recent Plan Years ending immediately prior to the Date of Termination. (B) for the 24-month period after Date of Termination, CFB, at its cost, shall provide or arrange to provide Executive and Executive's dependents with life, disability, accident and group health insurance benefits substantially similar to those which Executive and Executive's dependents were receiving immediately prior to the Notice of Termination; benefits otherwise receivable by Executive pursuant to this Section 7(c)(I)(B) shall be reduced to the extent comparable benefits are actually received by Executive and Executive's dependents during the 24-month period following Executive's Date of Termination from another employer or employer's plan or program, and any such benefits actually received by Executive and Executive's dependents shall be reported to CFB; 6 (C) in lieu of shares of restricted stock granted to Executive by CFB upon which the restricted period does not lapse upon Date of Termination, CFB shall pay to Executive within 30 days of the Date of Termination a lump-sum cash payment equal to the greater of (1) the highest quoted per share sales price for common shares on the New York Stock Exchange during the ten-day period commencing on the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume of the common shares is highest), or (2) the fixed or formula price for the acquisition of common shares specified in an agreement in connection with any Change in Control; (D) in lieu of shares of common stock of CFB ("Common Shares") issuable upon exercise of outstanding options ("Options"), if any, granted to Executive under a CFB Option Plan (which Options shall be canceled upon the making of the payment referred to below), within 15 days of the Date of Termination CFB shall pay to Executive a lump-sum amount in cash equal to the product of: (1) the excess of, in the case of an "incentive stock option" [as defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code")], the closing price of common shares as reported on the New York Stock Exchange on or nearest the Date of Termination (or, if not listed on such exchange, on a nationally recognized or quotation system on which trading volume in the common shares is highest) and, in the case of all other Options, the greater of (a) the highest quoted per share sales price for common shares on the New York Stock Exchange during the ten-day period commencing on the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume of the common shares is highest), or (b) the fixed or formula price for the acquisition of common shares specified in an agreement in connection with any Change in Control, over the per share option price of each Option held by Executive (whether or not then fully exercisable); and (2) the number of common shares of CFB covered by each such Option; (E) for a period of 12 months following Date of Termination, CFB shall pay the expenses for such outplacement services as Executive may require, with such services to be performed by an agency CFB shall designate; (F) CFB shall pay to Executive all legal fees and expenses incurred by Executive as a result of termination of employment (including, but not limited to, all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right 7 or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder); and (G) in the event any additional or new incentive compensation, deferred compensation or other type of bonus program is instituted by CFB ("New Incentive Program"), the maximum award payable to Executive under the New Incentive Program for such year in lieu of any other payment thereunder, assuming for purposes hereof that Executive had been employed for all of such year, that all performance objectives for such year had been met at the maximum levels and that Executive had been entitled to a full award thereunder. (ii) None of the obligations imposed on CFB by Sections 7(c) (I) (A) through (G) shall apply in the event Executive is discharged for Cause, in which event this Agreement shall terminate on the Date of Termination without further rights or obligations on the part of Executive or CFB under this Agreement. "Cause" shall mean: (A) the willful and continued failure by Executive (other than any such failure resulting from (1) Executive's incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by Executive for Good Reason or (3) CFB's active or passive obstruction of the performance of Executive's duties and responsibilities) to perform substantially the duties and responsibilities of Executive's position with CFB after a written demand for substantial performance is delivered to Executive by the Board, which demand specifically identifies the manner in which the Board believes that Executive has not substantially performed the duties or responsibilities; (B) the conviction of Executive by a court of competent jurisdiction for felony criminal conduct; (C) the willful engaging by Executive in fraud or dishonesty which is demonstrably and materially injurious to CFB, monetarily or otherwise; No act, or failure to act, on Executive's part shall be deemed "willful" unless committed, or omitted by Executive in bad faith and without reasonable belief that Executive's act or failure to act was in the best interest of CFB. Executive shall not be terminated for Cause unless and until CFB shall have delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive's conduct was Cause and specifying the particulars thereof in detail. (d) DISABILITY. If, following a Change in Control, Executive shall have been absent from the substantial performance of Executive's duties and responsibilities with CFB for six consecutive months as a result of Executive's incapacity due to physical or mental illness, as determined by Executive's physician and within 30 days after written notice to return is 8 given by CFB, Executive shall not have returned to the substantial performance of the duties and responsibilities, of Executive's position, CFB may terminate this Agreement as of the end of the 30-day period, after which termination neither CFB nor the Executive shall have rights or obligations under this Agreement and Executive shall not be entitled to any compensation or benefits pursuant to this Agreement. The termination of this Agreement shall not terminate Executive's employment of itself and without further express action by CFB or affect in any way Executive's rights or benefits under CFB Long Term Disability Plan. (e) NOTICE OF TERMINATION. Any purported termination of this Agreement by CFB or by Executive shall be communicated by written Notice of Termination to the other party in accordance with Section 10. Notice of Termination shall mean a notice given not less than 30 days prior to the Date of Termination stated in the notice which shall set forth in reasonable detail the basis for termination of this Agreement by CFB, or, in the case of resignation by Executive for Good Reason, the basis for such resignation. No purported termination which is not affected pursuant to this Section 7(e) shall be valid or effective. (f) DATE OF TERMINATION. Date of Termination shall mean the date specified in the Notice of Termination. Following a Change in Control, either party may, within 15 days after any Notice of Termination is given, provide notice to the other party pursuant to Section 10 that a dispute exists concerning the termination of this Agreement. Notwithstanding the pendency of any such dispute, CFB shall continue to perform CFB's obligations to Executive under this Agreement, pay Executive full compensation in effect when the Notice of Termination giving rise to the dispute was given (including, but not limited to, Base Compensation) and continue Executive as a participant in all compensation, benefit and insurance plans in which Executive was participating when the Notice of Termination giving rise to the dispute was given, and Executive shall continue to perform Executive's duties and responsibilities with CFB unless prevented or relieved by CFB from so performing, until the dispute is finally resolved in accordance with Section 16, but in no event after the expiration of the Term of this Agreement. (g) MITIGATION. Executive shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owing by Executive to CFB, or otherwise. In the event that, following a Notice of Termination given to Executive by CFB, Executive elects to receive all payments and benefits provided by CFB's severance plan or policy for employees in general in lieu of any payments and benefits under this Agreement, Executive shall receive no payments or benefits under this Agreement as a result of Severance of the Executive by CFB. (h) POTENTIAL EXCISE TAX. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, CFB shall pay to Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by Executive as a result of the 9 receipt of such compensation) to place Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. CFB shall pay such additional compensation upon the earlier of (i) the time at which CFB withholds such excise tax from any payments to Executive; or (ii) 30 days after Executive notifies CFB that Executive has paid such excise tax pursuant to a tax return filed by Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of CFB hereunder, Executive agrees, in the event Executive makes any payment pursuant to the preceding sentence, to negotiate with CFB in good faith with respect to procedures reasonably requested by CFB which would afford CFB the ability to contest the imposition of such excise tax; provided, however, that Executive will not be required to afford CFB any right to contest the applicability of any such excise tax to the extent that Executive reasonably determines that such contest is inconsistent with the overall tax interests of Executive. CFB agrees to hold in confidence and not to disclose, without Executive's prior written consent, any information with regard to Executive's tax position which CFB obtains pursuant to this subsection. 8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by CFB or any of its affiliated companies except as provided in Section 7 (g) with respect to CFB's severance plan or policy and for which Executive may qualify. Nothing in this Agreement shall limit or otherwise adversely affect such rights as Executive may have under any stock option or other agreements with CFB or any of its affiliated corporations. 9. ASSIGNMENT AND DELEGATION. The obligations of Executive under this Agreement are personal and may not be delegated by Executive or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment, delegation or transfer. CFB may assign CFB's rights under this Agreement and delegate all obligations under this Agreement, either in whole or in part, to any parent, affiliate, or subsidiary organization or company of CFB, provided that the obligations of CFB under this Agreement shall remain the obligations of CFB for which CFB shall be primarily liable notwithstanding the assignment and delegation. 10. NOTICES. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or when mailed by United States registered mail, return receipt requested, postage prepaid, addressed to CFB as its principal office address, directed to the attention of the Board, and to Executive at Executive's residence address on the records of CFB or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. 10 11. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which other provisions shall remain in full force and effect. 12. SUCCESSORS: BINDING AGREEMENT. (a) CFB shall require any successor (whether direct or indirect, by purchase, merger, consolidation, contract or otherwise) to all or substantially all of the business or assets of CFB expressly to assume and agree to perform this Agreement in the same manner and to the same extent that CFB would be required to perform it if no such succession had taken place. Failure of CFB to obtain such agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall also entitle Executive to resign for Good Reason. CFB shall include any successor to its business or assets which executes and delivers the Agreement required by this Section 12 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devises and legatees. If Executive should die while any amounts would be payable to Executive if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if none of the foregoing, to Executive's estate. 13. INDEMNIFICATION. (a) CFB shall pay, on behalf of Executive and Executive's executors, administrators or assigns, any amount which Executive is or becomes legally obligated to pay as a result of any claim or claims made against Executive by reason of Executive's service as an employee, Director or Officer of CFB. The payments that CFB will be obligated to make shall include (without limitation) damages, judgments, settlements, costs and expenses of investigation, costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs of attachment and similar bonds; provided, however, that CFB shall not be obligated to pay fines or other obligations or fees imposed by law or otherwise that CFB is prohibited by applicable law from paying as indemnity or for any other reason. (b) Costs and expenses (including, without limitation, attorney fees) incurred by Executive in defending or investigating any action, suit, proceeding or claim shall be paid by CFB in advance of the disposition of such matter upon receipt of a written undertaking by or on behalf of Executive to repay any such amounts if it is ultimately determined that Executive is not entitled to indemnification under this Agreement. (c) If a claim under this Agreement is not paid by or on behalf of CFB within ninety days after a written claim has been received by CFB, Executive may at any time thereafter bring suit or proceed under Section 16 against CFB to recover the unpaid amount of the claim and, if 11 successful in whole or in part, Executive shall also be entitled to be paid the expenses, including attorneys' fees, of prosecuting such claim. (d) In the event of payment under this Agreement, CFB shall be subrogated to the extent of such payment to all of the rights of recovery of Executive, who shall execute all documents required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable CFB effectively to bring suit to enforce such rights. (e) CFB shall not be liable under this Agreement to make any payment in connection with any claim made against Executive: (i) for which payment is actually made to Executive under an insurance policy maintained by CFB, except in respect of any excess beyond the amount of payment under such insurance; (ii) for which Executive is indemnified by CFB otherwise than pursuant to this Agreement; (iii)based upon or attributable to Executive's gaining in fact any personal profit or advantage to which Executive was not legally entitled; (iv) for an accounting of profits made from the purchase or sale by Executive of securities of CFB within the meaning of Section 16(b) of the Exchange Act; or (v) brought about or contributed to by the dishonesty of Executive; provided, however, that notwithstanding the foregoing, Executive shall be protected under this Agreement as to any claims upon which suit may be brought alleging dishonesty on the part of Executive, unless a judgment or other final adjudication thereof adverse to Executive shall establish that Executive committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. (f) Executive, as a condition precedent to his right to be indemnified under this Agreement, shall give to CFB notice in accordance with Section 10 as soon as practicable of any claim made against Executive for which indemnity will or could be sought under this Agreement. Executive shall give CFB such information and cooperation as it may reasonably require and as shall be within Executive's power. (g) Nothing herein shall be deemed to diminish or otherwise restrict Executive's right to indemnification under any provision of the Certificate of Incorporation or Bylaws of CFB or under State of Delaware law. 14. MISCELLANEOUS. No provision of this Agreement may be modified or waived unless such waiver or modification is agreed to in writing and signed by Executive and such officer of CFB as may be specifically authorized by the Board. No waiver by either party at any time of any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior 12 or subsequent time. This Agreement is an integration of the parties' agreement; no agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Dakota. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original document but all of which together will constitute one instrument. 16. DISPUTE RESOLUTION. Executive shall be permitted (but not required) to elect that any dispute or controversy arising under or in connection with this Agreement be resolved in Fargo, North Dakota, by any recognized method of alternative dispute resolution or by arbitration in accordance with the rules of the American Arbitration Association then in effect. The parties shall select a mutually acceptable single arbitrator to resolve the dispute or if they fail or are unable to do so, each side shall within the following ten business days select a single arbitrator and the two so selected shall select a third arbitrator within the following ten business days. The arbitrator shall have no power to award any punitive or exemplary damages. The arbitrator may construe or interpret, but shall not ignore or vary the terms of this Agreement, and shall be bound by controlling law. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party bay any court of competent jurisdiction in North Dakota or elsewhere. All legal fees and costs incurred by Executive in connection with the resolution of any dispute or controversy under or in connection with this Agreement shall be reimbursed by CFB as bills for such services are presented by Executive to CFB. 17. AUTHORITY. The authority of CFB to execute and perform this Agreement is contained in a resolution of the Board of Directors of CFB dated December 1, 1998. IN WITNESS WHEREOF, Community First Bankshares, Inc. and Executive have executed this Agreement on December 1, 1998, to be effective for all purposes. COMMUNITY FIRST BANKSHARES, INC. By___________________________________ Its__________________________________ EXECUTIVE: _____________________________________ 13 EX-10.15-4 9 EXHIBIT 10.15.4 EXHIBIT 10.15.4 COMMUNITY FIRST BANKSHARES, INC. CHANGE IN CONTROL SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT ("Agreement") is entered into effective as of December 1, 1998, by and between Community First Bankshares, Inc. a bank holding company organized under the laws of the state of Delaware ("CFB") and _____________________, residing in Fargo, ND ("Executive"). WHEREAS, CFB considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of CFB and its shareholders; and WHEREAS, the Executive has made and is expected to make, due to Executive's intimate knowledge of the business and affairs of CFB, its policies, methods, personnel, and problems, a significant contribution to the profitability, growth, and financial strength of CFB; and WHEREAS, CFB, as a publicly held corporation, recognizes that the possibility of a Change in Control may exist, and that such possibility and the uncertainty and questions which it may raise among management may result in the departure or distraction of the Executive in the performance of the Executive's duties, to the detriment of CFB and its shareholders; and WHEREAS, it is in the best interests of CFB and its stockholders to reinforce and encourage the continued attention and dedication of management personnel, including Executive, to their assigned duties without distraction and to ensure the continued availability to CFB of the Executive in the event of a Change in Control; and WHEREAS, CFB desires to assure Executive of certain benefits in the event of Executive's severance from employment with CFB without Cause following a Change in Control; NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and promises stated below, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, CFB and Executive agree as follows: 1. EMPLOYMENT. To be eligible to receive benefits under this Agreement, (a) Executive must maintain employment with CFB until after a Change in Control and (b) a Severance of Executive's employment shall have occurred during the Term of this Agreement and after a Change in Control. Prior to a Change in Control, Executive shall have no right to benefits under this Agreement. For purposes of this Agreement, Severance shall mean either the involuntary termination of Executive's employment with CFB without Cause or Executive's voluntary termination of employment with CFB resignation for Good Reason; where Cause has the definition set forth in Section 7(c)(ii) and Good Reason has the definition set forth in Section 7(a)(ii). 2. TERM OF AGREEMENT. Subject to the provisions for earlier termination provided in this Agreement, the Term of this Agreement shall commence on the effective date of this Agreement as stated above and shall continue through December 31, 2001, and shall be extended for successive one-year periods thereafter unless the Board of Directors of CFB ("Board") shall have given written notice to Executive not later than September 30 of the last year of the original or extended Term of this Agreement of CFB's election to discontinue the Term of this Agreement; provided, however, that if a Change in Control shall have occurred during the original or extended Term of this Agreement, the Term of this Agreement shall continue, irrespective of any action of the Board of CFB, for a period of not less than 24 months beyond the month in which such Change in Control occurred. In the event that more than one Change in Control shall occur during the original or extended Term of this Agreement, the 24-month period shall follow the last Change in Control. The Term of this Agreement shall expire and this Agreement shall neither impose nor confer any further rights or obligations on CFB or Executive on the day after the end of the Term of this Agreement. Expiration of the Term of this Agreement of itself and without subsequent action by CFB or Executive shall not end the employment relationship between CFB and Executive. On or before the expiration of the Term of this Agreement, this Agreement shall terminate due to the resignation of Executive as set forth in Section 7(a), death of Executive as set forth in Section 7(b), discharge of Executive as set forth in Section 7(c) or disability of Executive as set forth in Section 7(d); provided that any rights or obligations which expressly or impliedly survive termination of this Agreement shall continue to be binding and enforceable by CFB and Executive. 3. EXECUTIVE'S DUTIES. During the Term of this Agreement, Executive shall serve as ________________________________ or such successor position as Executive voluntarily accepts, with such customary duties and responsibilities as may be assigned from time to time to Executive by CFB, provided that such duties and responsibilities are at all times consistent with the duties and responsibilities of such position. Executive shall devote exclusive attention and time during normal business hours to the business and affairs of CFB and, to the extent necessary to discharge the duties and responsibilities of Executive's position, shall perform faithfully and efficiently to the best of Executive's abilities such duties and responsibilities. 4. BASE COMPENSATION. For services rendered by Executive, CFB shall pay to Executive Base Compensation of $__________ per annum payable in accordance with CFB's customary payroll practice for its management personnel. Base Compensation shall be reviewed at least annually as of the close of each fiscal year of CFB and may be increased to reflect inflation or such other adjustments as CFB may deem appropriate, but original Base Compensation or Base Compensation as subsequently increased shall not be decreased thereafter, except for across-the-board percentage salary reductions similarly affecting all management personnel of CFB. 2 5. ADDITIONAL BENEFITS. In addition to Base Compensation, Executive shall be entitled to receive all fringe benefits customarily offered by CFB to its executives including, without limitation, participation in CFB's Annual Incentive Compensation Plan at the participation level established by CFB for Executive as of the date of this Agreement, other incentive plans and perquisites offered generally to key employees, the various employee benefit plans or programs provided to the employees of CFB in general subject to the eligibility requirements with respect to each of such benefit plans or programs, and such other benefits or perquisites as may be approved by the Board during the Term of this Agreement. Nothing in this Section 5 shall prohibit CFB from making any changes in any of the plans, programs or benefits described in this Section 5, provided the change similarly affects all management personnel of CFB. 6. CHANGE IN CONTROL. (a) For purposes of this Agreement, "Change in Control" shall mean the occurrence of one of the following events: (i) any "person" [as such term is used in Section 13(d) and 4(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")], other than a trustee or other fiduciary holding securities under an employee benefit plan of CFB is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities representing 25% or more of the combined voting power of CFB's then outstanding securities; (ii) during any period of two consecutive years (not including any period ending prior to the effective date of this Agreement), individuals who at the beginning of such period constitute the Board of Directors of CFB, and any new director [other than a director designated by a person who has entered into agreement with CFB to effect a transaction permitted by Section 6(a)(I), (iii) or (iv)] whose election by the Board of Directors of CFB or nomination for election by CFB's stockholders was approved by vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved ("Continuing Directors"), cease for any reason to constitute at least a majority of the Board of Directors of CFB; (iii) the stockholders of CFB approve a merger or consolidation of CFB with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of CFB outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the merged or consolidated entity) 50% or more of the combined voting power of the voting securities of CFB or such merged or consolidated entity outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a 3 recapitalization of CFB or similar transaction in which no "person" acquires more than 25% of the combined voting power of CFB's then outstanding securities; (iv) the stockholders of CFB approve a plan of complete liquidation or a sale or disposition by CFB of all or substantially all of CFB's assets. "The sale or disposition by CFB of all or substantially all of CFB's assets" shall mean a sale or other disposition transaction or series of related transactions involving assets of CFB or of any direct or indirect subsidiary of CFB (including the stock of any direct or indirect subsidiary of CFB) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board of Directors of CFB determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than 50% of the fair market value of CFB. For purposes of the preceding sentence, the "fair market value of CFB" shall be the aggregate market value of CFB's outstanding common stock (on a fully diluted basis) plus the aggregate market value of CFB's other outstanding equity securities. The aggregate market value of CFB's common stock shall be determined by multiplying the number of shares of CFB common stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement ("Transaction Date") with respect to the sale or disposition by CFB of all or substantially all of CFB's assets by the average closing price for CFB's common stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of CFB shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of CFB's common stock or by such other method as the Board of Directors of CFB shall determine is appropriate; and (v) the Board of Directors of CFB determines, by a vote of a majority of its entire membership, that a tender offer statement by any person (as defined above) indicates an intention on the part of such person to acquire control of CFB. (b) In the event of a Change in Control, any options granted to Executive that are not vested on the date of a Change in Control shall be immediately fully (100%) vested and shall be exercisable in accordance with their respective terms and conditions. 7. TERMINATION. This Agreement may be terminated prior to the end of the Term of this Agreement subject to the provisions of this Section 7. (a) RESIGNATION. 4 (i) Executive may resign, including by reason of retirement, at any time and thereby terminate this Agreement. In the event of such resignation, except in the case of resignation for Good Reason following a Change in Control, all rights and obligations of CFB and Executive under this Agreement shall cease on the date of resignation. (ii) If Executive resigns for Good Reason following a Change in Control, Executive shall be entitled to the compensation and benefits provided in Section 7(c)(I). "Good Reason" shall mean (A) the material breach of any of CFB's obligations under this Agreement without Executive's written consent or (B) the occurrence of any of the following circumstances without Executive's express written consent unless such circumstances are fully corrected prior to the Date of Termination specified in Executive's Notice of Termination: (1) the assignment to Executive of any duties and responsibilities inconsistent with the position that Executive held immediately prior to the Change in Control, relocation of the Executive to an office or site more than 50 miles from the Executive's job location prior to the Change in Control, or a significant adverse alteration in the nature or status of Executive's duties and responsibilities or the conditions of Executive's employment from those in effect immediately prior to the Change in Control; (2) a reduction by CFB in Executive's Base Compensation; (3) the failure by CFB to pay to Executive any portion of Executive's current compensation or any portion of an installment of deferred compensation under any deferred compensation program of CFB within seven days of the date such compensation is due; (4) the failure by CFB to continue in effect any compensation plan in which Executive participated immediately prior to a Change in Control if that compensation plan is material to Executive's total compensation unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by CFB to continue Executive's participation in such compensation plan (or in such substitute or alternative plan) on a basis at least as favorable, both in terms of the amount of benefits provided and the level of Executive's participation relative to other participants, as existed prior to the Change in Control; (5) the failure by CFB to continue to provide Executive with benefits substantially similar to those enjoyed by Executive under any of 5 CFB's pension, savings, life insurance, medical, health, accident, or disability plans in which Executive was participating at the time of the Change in Control, the taking of any action by CFB which would materially reduce, directly or indirectly, any of such benefits or deprive Executive of any material fringe benefit or policy or program for the benefit of the management personnel of CFB enjoyed by Executive at the time of the Change in Control; (6) the failure by CFB to provide Executive with the number of paid vacation days to which Executive is entitled in accordance with CFB's normal vacation policy in effect at the time of the Change in Control; (7) the failure of CFB to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 12; or (8) any purported termination of Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7(e). (iii) Executive's rights to resign pursuant to this Section 7(a) shall not be affected by incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason. (b) DEATH. Upon Executive's death, this Agreement shall terminate and CFB shall have no obligations to Executive or Executive's legal representatives with respect to this Agreement. Executive's death prior to the Date of Termination stated in any Notice of Termination given by CFB or Executive shall invalidate and supersede the Notice of Termination. Termination of this Agreement shall not affect any of the death benefits payable to Executive's dependents, survivors or beneficiaries under any plan or program under which Executive was covered at the time of death. (c) DISCHARGE. (i) CFB may terminate, without any liability to Executive under this Agreement, this Agreement and Executive's employment by discharging Executive for any reason deemed sufficient by CFB if the Date of Termination associated with such discharge occurs prior to a Change in Control. In the event that this Agreement and Executive's employment are terminated by discharge during the Term of this Agreement following a Change in Control by CFB for any reason other than Cause [as defined in Section 7(c)(ii)] or Disability 6 [as defined in Section 7(d)(I)], then, subject to Sections 7(c)(iii), 7(g) and 7(h): (A) CFB shall pay to Executive, within 15 days of the Date of Termination, an amount in cash equal to the sum of: (1) the higher of (a) the Executive's annual Base Compensation as in effect immediately prior to the Notice of Termination, or (b) Executive's highest annual Base Compensation over the 24-month period preceding the Notice of Termination; and (2) the maximum annual incentive award payable Executive (without giving any effect to any reduction that would constitute Good Reason under Section 7(a)(ii)(4) of this Agreement) CFB's Annual Incentive Compensation Plan (or any substitute or alternative plan) for such year in lieu of any other payment thereunder; and (3) the average percentage of employer matching contributions to the CFB Retirement Savings Plan and Trust (as a percent of Compensation as defined in the Plan) and employer contributions to the CFB Employee Stock Ownership Plan and Trust on behalf of Executive for the three most recent Plan Years ending immediately prior to the Date of Termination. (B) for the 12-month period after Date of Termination, CFB, at its cost, shall provide or arrange to provide Executive and Executive's dependents with life, disability, accident and group health insurance benefits substantially similar to those which Executive and Executive's dependents were receiving immediately prior to the Notice of Termination; benefits otherwise receivable by Executive pursuant to this Section 7(c)(I)(B) shall be reduced to the extent comparable benefits are actually received by Executive and Executive's dependents during the 12-month period following Executive's Date of Termination from another employer or employer's plan or program, and any such benefits actually received by Executive and Executive's dependents shall be reported to CFB; (C) in lieu of shares of restricted stock granted to Executive by CFB upon which the restricted period does not lapse upon Date of Termination, CFB shall pay to Executive within 30 days of the Date of Termination a lump-sum cash payment equal to the greater of (1) the highest quoted per share sales price for common shares on the New 7 York Stock Exchange during the ten-day period commencing on the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume of the common shares is highest), or (2) the fixed or formula price for the acquisition of common shares specified in an agreement in connection with any Change in Control; (D) in lieu of shares of common stock of CFB ("Common Shares") issuable upon exercise of outstanding options ("Options"), if any, granted to Executive under a CFB Option Plan (which Options shall be canceled upon the making of the payment referred to below), within 15 days of the Date of Termination CFB shall pay to Executive a lump-sum amount in cash equal to the product of: (1) the excess of, in the case of an "incentive stock option" [as defined in Section 422A of the Internal Revenue Code of 1986, as amended (the "Code")], the closing price of common shares as reported on the New York Stock Exchange on or nearest the Date of Termination (or, if not listed on such exchange, on a nationally recognized or quotation system on which trading volume in the common shares is highest) and, in the case of all other Options, the greater of (a) the highest quoted per share sales price for common shares on the New York Stock Exchange during the ten-day period commencing on the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume of the common shares is highest), or (b) the fixed or formula price for the acquisition of common shares specified in an agreement in connection with any Change in Control, over the per share option price of each Option held by Executive (whether or not then fully exercisable); and (2) the number of common shares of CFB covered by each such Option; (E) for a period of 12 months following Date of Termination, CFB shall pay the expenses for such outplacement services as Executive may require, with such services to be performed by an agency CFB shall designate; (F) CFB shall pay to Executive all legal fees and expenses incurred by Executive as a result of termination of employment (including, but not limited to, all such fees and expenses, if any, incurred in 8 contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder); and (G) in the event any additional or new incentive compensation, deferred compensation or other type of bonus program is instituted by CFB ("New Incentive Program"), the maximum award payable to Executive under the New Incentive Program for such year in lieu of any other payment thereunder, assuming for purposes hereof that Executive had been employed for all of such year, that all performance objectives for such year had been met at the maximum levels and that Executive had been entitled to a full award thereunder. (ii) None of the obligations imposed on CFB by Sections 7(c) (I) (A) through (G) shall apply in the event Executive is discharged for Cause, in which event this Agreement shall terminate on the Date of Termination without further rights or obligations on the part of Executive or CFB under this Agreement. "Cause" shall mean: (A) the willful and continued failure by Executive (other than any such failure resulting from (1) Executive's incapacity due to physical or mental illness, (2) any such actual or anticipated failure after the issuance of a Notice of Termination by Executive for Good Reason or (3) CFB's active or passive obstruction of the performance of Executive's duties and responsibilities) to perform substantially the duties and responsibilities of Executive's position with CFB after a written demand for substantial performance is delivered to Executive by the Board, which demand specifically identifies the manner in which the Board believes that Executive has not substantially performed the duties or responsibilities; (B) the conviction of Executive by a court of competent jurisdiction for felony criminal conduct; (C) the willful engaging by Executive in fraud or dishonesty which is demonstrably and materially injurious to CFB, monetarily or otherwise; No act, or failure to act, on Executive's part shall be deemed "willful" unless committed, or omitted by Executive in bad faith and without reasonable belief that Executive's act or failure to act was in the best interest of CFB. Executive shall not be terminated for Cause unless and until CFB shall have delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), 9 finding that, in the good faith opinion of the Board, Executive's conduct was Cause and specifying the particulars thereof in detail. (d) DISABILITY. If, following a Change in Control, Executive shall have been absent from the substantial performance of Executive's duties and responsibilities with CFB for six consecutive months as a result of Executive's incapacity due to physical or mental illness, as determined by Executive's physician and within 30 days after written notice to return is given by CFB, Executive shall not have returned to the substantial performance of the duties and responsibilities, of Executive's position, CFB may terminate this Agreement as of the end of the 30-day period, after which termination neither CFB nor the Executive shall have rights or obligations under this Agreement and Executive shall not be entitled to any compensation or benefits pursuant to this Agreement. The termination of this Agreement shall not terminate Executive's employment of itself and without further express action by CFB or affect in any way Executive's rights or benefits under CFB Long Term Disability Plan. (e) NOTICE OF TERMINATION. Any purported termination of this Agreement by CFB or by Executive shall be communicated by written Notice of Termination to the other party in accordance with Section 10. Notice of Termination shall mean a notice given not less than 30 days prior to the Date of Termination stated in the notice which shall set forth in reasonable detail the basis for termination of this Agreement by CFB, or, in the case of resignation by Executive for Good Reason, the basis for such resignation. No purported termination which is not affected pursuant to this Section 7(e) shall be valid or effective. (f) DATE OF TERMINATION. Date of Termination shall mean the date specified in the Notice of Termination. Following a Change in Control, either party may, within 15 days after any Notice of Termination is given, provide notice to the other party pursuant to Section 10 that a dispute exists concerning the termination of this Agreement. Notwithstanding the pendency of any such dispute, CFB shall continue to perform CFB's obligations to Executive under this Agreement, pay Executive full compensation in effect when the Notice of Termination giving rise to the dispute was given (including, but not limited to, Base Compensation) and continue Executive as a participant in all compensation, benefit and insurance plans in which Executive was participating when the Notice of Termination giving rise to the dispute was given, and Executive shall continue to perform Executive's duties and responsibilities with CFB unless prevented or relieved by CFB from so performing, until the dispute is finally resolved in accordance with Section 16, but in no event after the expiration of the Term of this Agreement. (g) MITIGATION. Executive shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer, 10 by retirement benefits, by offset against any amount claimed to be owing by Executive to CFB, or otherwise. In the event that, following a Notice of Termination given to Executive by CFB, Executive elects to receive all payments and benefits provided by CFB's severance plan or policy for employees in general in lieu of any payments and benefits under this Agreement, Executive shall receive no payments or benefits under this Agreement as a result of Severance of the Executive by CFB. (h) POTENTIAL EXCISE TAX. Should any payments hereunder or contemplated hereby be subject to excise tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as may be amended, or any successor or similar provision thereto, or comparable state or local tax laws, CFB shall pay to Executive such additional compensation as is necessary (after taking into account all federal, state and local income taxes payable by Executive as a result of the receipt of such compensation) to place Executive in the same after-tax position he would have been in had no such excise tax (or any interest or penalties thereon) been paid or incurred. CFB shall pay such additional compensation upon the earlier of (i) the time at which CFB withholds such excise tax from any payments to Executive; or (ii) 30 days after Executive notifies CFB that Executive has paid such excise tax pursuant to a tax return filed by Executive which takes the position that such excise tax is due and payable in reliance on a written opinion of Executive's tax counsel that it is more likely than not that such excise tax is due and payable, or, if later, the date the IRS notifies Executive that such amount is due and payable. Without limiting the obligation of CFB hereunder, Executive agrees, in the event Executive makes any payment pursuant to the preceding sentence, to negotiate with CFB in good faith with respect to procedures reasonably requested by CFB which would afford CFB the ability to contest the imposition of such excise tax; provided, however, that Executive will not be required to afford CFB any right to contest the applicability of any such excise tax to the extent that Executive reasonably determines that such contest is inconsistent with the overall tax interests of Executive. CFB agrees to hold in confidence and not to disclose, without Executive's prior written consent, any information with regard to Executive's tax position which CFB obtains pursuant to this subsection. 8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by CFB or any of its affiliated companies except as provided in Section 7 (g) with respect to CFB's severance plan or policy and for which Executive may qualify. Nothing 11 in this Agreement shall limit or otherwise adversely affect such rights as Executive may have under any stock option or other agreements with CFB or any of its affiliated corporations. 9. ASSIGNMENT AND DELEGATION. The obligations of Executive under this Agreement are personal and may not be delegated by Executive or transferred in any manner whatsoever, nor are such obligations subject to involuntary alienation, assignment, delegation or transfer. CFB may assign CFB's rights under this Agreement and delegate all obligations under this Agreement, either in whole or in part, to any parent, affiliate, or subsidiary organization or company of CFB, provided that the obligations of CFB under this Agreement shall remain the obligations of CFB for which CFB shall be primarily liable notwithstanding the assignment and delegation. 10. NOTICES. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or when mailed by United States registered mail, return receipt requested, postage prepaid, addressed to CFB as its principal office address, directed to the attention of the Board, and to Executive at Executive's residence address on the records of CFB or to such other address as either party may have furnished to the other in writing in accordance herewith except that notice of change of address shall be effective only upon receipt. 11. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which other provisions shall remain in full force and effect. 12. SUCCESSORS; BINDING AGREEMENT. (a) CFB shall require any successor (whether direct or indirect, by purchase, merger, consolidation, contract or otherwise) to all or substantially all of the business or assets of CFB expressly to assume and agree to perform this Agreement in the same manner and to the same extent that CFB would be required to perform it if no such succession had taken place. Failure of CFB to obtain such agreement prior to the effective date of any such succession shall be a breach of this Agreement and shall also entitle Executive to resign for Good Reason. CFB shall include any successor to its business or assets which executes and delivers the Agreement required by this Section 12 or which otherwise becomes bound by all terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of Executive hereunder shall inure to the benefit of, and be enforceable by, Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devises and legatees. If Executive should die while any amounts would be payable to Executive if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's devisee, legatee, or other designee or, if none of the foregoing, to Executive's estate. 12 13. INDEMNIFICATION. (a) CFB shall pay, on behalf of Executive and Executive's executors, administrators or assigns, any amount which Executive is or becomes legally obligated to pay as a result of any claim or claims made against Executive by reason of Executive's service as an employee, Director or Officer of CFB. The payments that CFB will be obligated to make shall include (without limitation) damages, judgments, settlements, costs and expenses of investigation, costs and expenses of defense of legal actions, claims and proceedings and appeals therefrom, and costs of attachment and similar bonds; provided, however, that CFB shall not be obligated to pay fines or other obligations or fees imposed by law or otherwise that CFB is prohibited by applicable law from paying as indemnity or for any other reason. (b) Costs and expenses (including, without limitation, attorney fees) incurred by Executive in defending or investigating any action, suit, proceeding or claim shall be paid by CFB in advance of the disposition of such matter upon receipt of a written undertaking by or on behalf of Executive to repay any such amounts if it is ultimately determined that Executive is not entitled to indemnification under this Agreement. (c) If a claim under this Agreement is not paid by or on behalf of CFB within ninety days after a written claim has been received by CFB, Executive may at any time thereafter bring suit or proceed under Section 16 against CFB to recover the unpaid amount of the claim and, if successful in whole or in part, Executive shall also be entitled to be paid the expenses, including attorneys' fees, of prosecuting such claim. (d) In the event of payment under this Agreement, CFB shall be subrogated to the extent of such payment to all of the rights of recovery of Executive, who shall execute all documents required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable CFB effectively to bring suit to enforce such rights. (e) CFB shall not be liable under this Agreement to make any payment in connection with any claim made against Executive: (i) for which payment is actually made to Executive under an insurance policy maintained by CFB, except in respect of any excess beyond the amount of payment under such insurance; (ii) for which Executive is indemnified by CFB otherwise than pursuant to this Agreement; (iii) based upon or attributable to Executive's gaining in fact any personal profit or advantage to which Executive was not legally entitled; 13 (iv) for an accounting of profits made from the purchase or sale by Executive of securities of CFB within the meaning of Section 16(b) of the Exchange Act; or (v) brought about or contributed to by the dishonesty of Executive; provided, however, that notwithstanding the foregoing, Executive shall be protected under this Agreement as to any claims upon which suit may be brought alleging dishonesty on the part of Executive, unless a judgment or other final adjudication thereof adverse to Executive shall establish that Executive committed acts of active and deliberate dishonesty with actual dishonest purpose and intent, which acts were material to the cause of action so adjudicated. (f) Executive, as a condition precedent to his right to be indemnified under this Agreement, shall give to CFB notice in accordance with Section 10 as soon as practicable of any claim made against Executive for which indemnity will or could be sought under this Agreement. Executive shall give CFB such information and cooperation as it may reasonably require and as shall be within Executive's power. (g) Nothing herein shall be deemed to diminish or otherwise restrict Executive's right to indemnification under any provision of the Certificate of Incorporation or Bylaws of CFB or under State of Delaware law. 14. MISCELLANEOUS. No provision of this Agreement may be modified or waived unless such waiver or modification is agreed to in writing and signed by Executive and such officer of CFB as may be specifically authorized by the Board. No waiver by either party at any time of any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement is an integration of the parties' agreement; no agreement or representation, oral or otherwise, express or implied, with respect to the subject matter of this Agreement have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Dakota. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be an original document but all of which together will constitute one instrument. 16. DISPUTE RESOLUTION. Executive shall be permitted (but not required) to elect that any dispute or controversy arising under or in connection with this Agreement be resolved in Fargo, North Dakota, by any recognized method of alternative dispute resolution or by arbitration in accordance with the rules of the American Arbitration Association then in effect. The parties shall select a mutually acceptable single arbitrator to resolve the dispute or if they fail or are unable to do so, each side shall within the following ten business days select a single 14 arbitrator and the two so selected shall select a third arbitrator within the following ten business days. The arbitrator shall have no power to award any punitive or exemplary damages. The arbitrator may construe or interpret, but shall not ignore or vary the terms of this Agreement, and shall be bound by controlling law. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party bay any court of competent jurisdiction in North Dakota or elsewhere. All legal fees and costs incurred by Executive in connection with the resolution of any dispute or controversy under or in connection with this Agreement shall be reimbursed by CFB as bills for such services are presented by Executive to CFB. 16. AUTHORITY. The authority of CFB to execute and perform this Agreement is contained in a resolution of the Board of Directors of CFB dated December 1, 1998. IN WITNESS WHEREOF, Community First Bankshares, Inc. and Executive have executed this Agreement on December 1, 1998, to be effective for all purposes. COMMUNITY FIRST BANKSHARES, INC. By /s/ Mark A. Anderson -------------------------------- Its Vice Chairman and CFO --------------------------------- EXECUTIVE: /s/ Donald Mengedoth --------------------------------- Donald Mengedoth 15 EX-13.1 10 EXHIBIT 13.1 TABLE OF CONTENTS Introduction 1 Letter to Shareholders 2 Financial Review 10 Affiliated Banks 43 Board of Directors 50 Senior Officers 51 Corporate Information 52 FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE DATA) 1998(1) 1997(1) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- (restated) (restated) (restated) (restated) EARNINGS - ---------------------------------------------------------------------------------------------------------------------------- Total interest income .......................................... $ 449,244 $ 326,519 $ 270,198 $ 228,294 $ 170,994 Total interest expense ......................................... 188,484 134,540 108,761 94,424 60,671 Net interest income ............................................ 260,760 191,979 161,437 133,870 110,323 Net income ..................................................... 43,063 59,013 41,522 37,950 28,767 PER COMMON AND COMMON EQUIVALENT SHARE - ---------------------------------------------------------------------------------------------------------------------------- Basic earnings per share ....................................... $ 0.91 $ 1.36 $ 1.01 $ 0.98 $ 0.75 Diluted earnings per share ..................................... 0.90 1.32 0.97 0.93 0.71 Net book value ................................................. 8.60 8.20 6.99 6.20 5.26 Dividends paid ................................................. 0.44 0.35 0.29 0.24 0.22 AT YEAR-END - ---------------------------------------------------------------------------------------------------------------------------- Total assets ................................................... $6,002,972 $5,454,135 $3,606,406 $3,210,017 $2,494,917 Total loans .................................................... 3,386,142 3,024,322 2,395,165 2,058,152 1,575,271 Allowance for loan losses ...................................... 50,173 40,045 30,165 25,906 20,414 Total deposits ................................................. 4,884,672 4,152,918 2,972,744 2,749,665 2,114,479 Common equity .................................................. 405,246 388,013 261,405 216,394 165,868 KEY PERFORMANCE RATIOS - ---------------------------------------------------------------------------------------------------------------------------- Return on average common equity ................................ 10.93% 19.44% 16.85% 18.90% 17.43% Return on average assets ....................................... 0.74% 1.44% 1.25% 1.34% 1.22% Net interest margin ............................................ 5.09% 5.32% 5.49% 5.06% 4.95% Dividend payout ratio .......................................... 48.94% 26.50% 29.85% 25.70% 30.69% Average common equity to average assets ........................ 6.78% 7.40% 7.12% 6.81% 6.74% Nonperforming assets to period-end loans and OREO .............. 0.78% 0.63% 0.72% 0.31% 0.35% Allowance for loan losses to period-end loans .................. 1.48% 1.32% 1.26% 1.26% 1.30% Allowance for loan losses to nonperforming loans ............... 221.23% 268.02% 193.99% 648.30% 487.91% Net charge-offs to average loans ............................... 0.44% 0.24% 0.18% 0.19% 0.03% Tier 1 capital ................................................. 9.35% 11.53% 9.18% 8.88% 11.02% Total risk-based capital ....................................... 12.08% 14.98% 11.18% 11.26% 13.60% Leverage ratio ................................................. 6.40% 7.51% 6.84% 6.37% 7.35%
(1)INCLUSIVE OF THE EFFECT OF DISCONTINUED OPERATIONS AS FOLLOWS: NET INCOME (LOSS) - $(3.9 MILLION) AND $967,000, IN 1998 AND 1997 RESPECTIVELY; DILUTED EARNINGS PER SHARE - $(0.08) AND $0.02, IN 1998 AND 1997, RESPECTIVELY. TABLE OF CONTENTS Management's Discussion and Analysis 11 Consolidated Statements of Financial Condition 23 Consolidated Statements of Income 24 Consolidated Statements of Comprehensive Income 25 Consolidated Statements of Shareholders' Equity 25 Consolidated Statements of Cash Flows 26 Notes to Consolidated Financial Statements 27 Independent Auditor's Letter 39 Five-Year Summary 40 Quarterly Results of Operations 42
MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. BASIS OF PRESENTATION The following represents management's discussion and analysis of Community First Bankshares, Inc.'s (the "Company") financial condition as of December 31, 1998 and 1997, and its results of operations for the years ended December 31, 1998, 1997, and 1996. This discussion should be read in conjunction with the consolidated financial statements and related footnotes and the five year summary of selected financial data. The information has been restated to reflect significant mergers accounted for as a pooling-of-interests as if they had occurred at the beginning of the first period presented. Purchases have been reflected in the Company's results of operations for all periods following the acquisition and are reflected in the Company's financial condition at all dates subsequent to the acquisition. MERGER AND ACQUISITION ACTIVITY The Company has made a number of acquisitions during these periods. Each of these acquisitions has had an effect upon the Company's results of operations and financial condition. POOLING OF INTERESTS TRANSACTIONS. In the following transactions during the periods presented, the Company accounted for the acquisition using the pooling of interests method.
- ------------------------------------------------------------------------------------------------ POOLING OF INTERESTS TRANSACTIONS - ------------------------------------------------------------------------------------------------ LOCATION AND/OR NUMBER OF TOTAL ASSETS AT DATE OF NAME OF MAIN OFFICE LOCATIONS AT DATE OF ACQUISITION ACQUISITION OF ACQUIRED ENTITY DATE OF ACQUISITION (IN MILLIONS) - ------------------------------------------------------------------------------------------------ August 1998 Salt Lake City, Utah 2 $ 99 July 1998 Las Cruces, New Mexico 3 159 May 1998 FNB, Inc., Colorado 2 120 April 1998 Longmont, Colorado 4 138 April 1998 Thornton, Colorado 4 78 December 1997 Gunnison, Colorado 4 90 November 1997 Phoenix, Arizona 1 54 December 1996 Mountain Parks, Denver, Colorado 17 600 October 1996 Trinidad, Colorado 1 70
With respect to certain acquisitions listed above, the Company's results of operations and financial condition have been restated for all historical periods: On August 7, 1998, the Company issued approximately 1,526,000 shares of common stock to acquire Guardian Bancorp ("Guardian"), a one-bank holding company headquartered in Salt Lake City, Utah. At acquisition, Guardian had approximately $99 million in assets at two offices in Utah. On July 1, 1998, the Company issued approximately 1,932,000 shares of common stock to acquire Western Bancshares of Las Cruces, Inc. ("Western"), a one-bank holding company headquartered in Las Cruces, New Mexico. At acquisition, Western had approximately $159 million in assets at three offices in New Mexico. On May 7, 1998, the Company issued approximately 1,135,000 shares of common stock to acquire FNB Inc. ("FNB"), a two-bank holding company with banks in Greeley and Fort Collins, Colorado. At acquisition, FNB had approximately $120 million in assets. On April 30, 1998, the Company issued approximately 1,432,000 shares of common stock to acquire Pioneer Bank of Longmont ("Pioneer"). At acquisition, Pioneer had approximately $138 million in assets at four offices in Colorado. On April 3, 1998, the Company issued approximately 853,000 shares of common stock to acquire Community Bancorp, Inc. ("CBI"), a one-bank holding company headquartered in Thornton, Colorado. At acquisition, CBI had approximately $78 million in assets at one bank in Colorado. On December 18, 1996, the Company issued approximately 10.4 million shares of common stock to acquire Mountain Parks Financial Corporation ("Mountain Parks"), a one-bank holding company headquartered in Denver, Colorado. At acquisition, Mountain Parks had approximately $600 million in assets at seventeen banking offices located in Colorado. The acquisitions in Trinidad, Phoenix and Gunnison listed in the table were accounted for as a pooling of interests; however, because the acquisitions were not material to the Company's financial condition or operating results, the Company's financial information has not been restated to reflect these mergers. PURCHASE TRANSACTIONS. The following transactions during the periods presented were accounted for as a purchase:
- ------------------------------------------------------------------------------------------ PURCHASE TRANSACTIONS - ------------------------------------------------------------------------------------------ LOCATION AND/OR NUMBER OF TOTAL ASSETS AT DATE OF NAME OF MAIN OFFICE LOCATIONS AT DATE OF ACQUISITION ACQUISITION OF ACQUIRED ENTITY DATE OF ACQUISITION (IN MILLIONS) - ------------------------------------------------------------------------------------------ January 1998 Banc One, Phoenix, Arizona (1) 37 $ 730 July 1997 Cheyenne, Wyoming 24 1,100 July 1996 Kiowa, Colorado (2) 3 58 July 1996 Englewood, Colorado (2) 1 19
(1) ACCOUNTED FOR AS A PURCHASE OF CERTAIN ASSETS AND ASSUMPTION OF CERTAIN LIABILITIES. (2) ACQUIRED BY MOUNTAIN PARKS PRIOR TO COMPANY'S ACQUISITION OF MOUNTAIN PARKS. On July 14, 1997, the Company completed the purchase of KeyBank N.A. (Wyoming), ("KeyBank") from KeyCorp of Cleveland, Ohio. At the time of acquisition, KeyBank had total assets of $1.1 billion in banking offices in 24 Wyoming communities. The purchase price of the transaction, which was accounted for as a purchase, was $135 million and resulted in the recognition of goodwill of approximately $60 million. The purchase price was funded through a combination of proceeds from the issuance of $60 million 8.875% Cumulative Capital Securities by a business subsidiary of the Company in February 1997, partial proceeds from the Company's issuance of $60 million 7.30% Subordinated Notes, and retained earnings of the Company. On January 23, 1998, the Company completed the purchase and assumption of approximately $730 million in assets and liabilities of 37 offices of Banc One Corporation located in Arizona, Colorado, and Utah. The transaction was accounted for as a purchase of certain assets and assumption of certain liabilities and resulted in the recognition of approximately $44 million of deposit premium. The purchase was funded through a combination of net proceeds from the issuance of 2,000,000 shares of common stock in December 1997 and the proceeds of the issuance of $60 million 8.20% Cumulative Capital Securities by a business trust subsidiary in December 1997. The Englewood and Kiowa transactions listed in the table were also accounted for as purchases. OVERVIEW For the year ended December 31, 1998, the Company reported net income of $43.1 million, a decrease of $15.9 million, or 26.9% from the $59.0 million earned during 1997. Diluted earnings per share were $0.90, compared to $1.32 in 1997. Return on average assets was .74% for 1998, compared with 1.44% for 1997. Return on average common shareholders' 11 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. equity for 1998 and 1997 was 10.93% and 19.44%, respectively. Factors contributing to these changes included a loss of $3.9 million on the operation and disposal of discontinued operations, a $10 million one-time charge related to the Company's decision to liquidate its specialty lending portfolio, and a $5.5 million one-time charge associated with the Company's earnings improvement initiative. For the year ended December 31, 1997, the Company reported net income of $59.0 million, an increase of $19.1 million, or 47.9%, from the $39.9 million earned during 1996. Diluted earnings per share were $1.32, compared to $0.97 in 1996. Return on average assets was 1.44% for 1997, compared with 1.25% for 1996. Return on average common shareholders' equity for 1997 and 1996 was 19.44% and 16.85%, respectively. Factors contributing to these changes included approximately $6.3 million of net income provided by entities acquired during 1997 and 1996. Total assets were $6,003 million and $5,454 million at December 31, 1998 and 1997, respectively. The increase of $549 million, or 10.1%, during 1998 was principally due to the 1998 purchase of assets and assumption of liabilities of Banc One Corporation offices located in Arizona, Colorado, and Utah, and loan growth in the Company's subsidiary banks. SALE OF SUB-PRIME LENDING BUSINESS In December 1996, the Company acquired two sub-prime lending affiliates, Mountain Parks Financial Services, Inc. ("MPFS") and Equity Lending, Inc. ("ELI"), through its merger with Mountain Parks Financial Corporation. The Company subsequently decided to sell MPFS and ELI and accounted for these entities as discontinued operations during 1997 and the first two quarters of 1998. At December 31, 1997, the net balance sheet effect of $72 million from these entities was included as an Other Asset. The Company recognized income of $967,000, net of tax, from these discontinued operations during 1997. During the first two quarters of 1998, the Company recognized a charge of $1.7 million, which reflected the expected loss on disposition of the subsidiaries, and realized a $2.2 million operating loss, consisting of $707,000 attributed to quarterly operations and $1.4 million associated with one-time operating expenses related to preparing the subsidiaries for sale. As of June 30, 1998, in anticipation of the disposition of certain operating assets, the Company changed the status of MPFS and ELI from discontinued operations and reflected the relat ed assets expected to be retained as loans. In July 1998, the Company sold the operating assets, excluding loans retained of MPFS and ELI in cash transactions. The Company retained approximately $50 million in sub-prime mortgage loans originated by ELI, approximately $50 million in automobile installment contracts originated by MPFS and servicing rights on an additional $100 million in ELI loans sold to other parties. In late 1998, the Company sold a portion of the loans retained from MPFS and ELI. The Company recorded another charge of $10 million in the fourth quarter in connection with further expected losses upon liquidation of these assets, including direct losses, increased reserves, termination fees on certain servicing contracts and severance costs for loan servicing personnel. At December 31, 1998, the Company had approximately $25 million in performing sub-prime mortgages and $40 million in automobile installment contracts. The Company expects to sell these assets in the first half of 1999, and the Company anticipates that after the sale, it will not pursue further sub-prime lending activities. RESTRUCTURING CHARGE During the fourth quarter of 1998, the Company recorded a $5.5 million, non-recurring charge as a result of the Company's initiative to improve future core profitability principally through a reduction in work force. As part of the plan, approximately 200 positions were eliminated throughout the organization. The charge included severance and other personnel related costs, as well as, the disposal of redundant computer equipment acquired in conjunction with recent acquisitions. These actions respond to recent changes in the financial markets which have placed additional pressure on margins, slowed the pace of acquisitions, and slowed the growth of sales of financial service products. As of December 31, 1998, all expected expenditures associated with the restructuring have been recognized and recorded, including the identification of specific personnel affected by the reduction in work force. Certain severance related payments to affected individuals will occur during 1999. RESULTS OF OPERATIONS NET INTEREST INCOME The principal source of the Company's earnings is net interest income, the difference between total interest income on earning assets such as loans and investments and interest paid on deposits and other interest-bearing liabilities. The net interest margin is net interest income, on a tax-equivalent basis, expressed as a percentage of average earning assets. The margin is affected by volume and mix of earning assets and interest-bearing liabilities, the level of interest free funding sources, interest rate environment, and income tax rates. As discussed later, management actively monitors its interest rate sensitivity and seeks to balance assets and liabilities to minimize the impact of changes in the interest rate environment. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. The following table presents the Company's average balance sheets, interest earned or paid and the related yields and rates on major categories of the Company's earning assets and interest-bearing liabilities on a tax equivalent basis for the periods indicated:
YEARS ENDED DECEMBER 31 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST INTEREST INTEREST YIELDS YIELDS YIELDS AVERAGE AND AVERAGE AND AVERAGE AND (DOLLARS IN THOUSANDS) BALANCE INTEREST RATES BALANCE INTEREST RATES BALANCE INTEREST RATES - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Loans(1)(2) .................... $3,243,167 $ 325,712 10.04% $2,625,203 $ 260,086 9.91% $2,184,839 $ 219,786 10.06% Investment securities(2) ....... 1,964,741 127,486 6.49% 1,022,616 68,681 6.72% 792,046 52,874 6.68% Other earning assets ........... 68,743 3,756 5.46% 68,542 3,426 5.00% 57,422 2,814 4.90% ------------------------------------------------------------------------------------------------ Total earning assets.......... 5,276,651 456,954 8.66% 3,716,361 332,193 8.94% 3,034,307 275,474 9.08% Noninterest-earning assets ..... 532,818 383,408 291,851 ------------------------------------------------------------------------------------------------ Total assets ................. $5,809,469 $4,099,769 $3,326,158 ------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing checking ...... 800,468 14,286 1.78% 497,864 10,437 2.10% 560,315 12,029 2.15% Savings deposits ............... 1,055,424 31,296 2.97% 792,995 21,683 2.73% 500,899 13,039 2.60% Time deposits .................. 2,114,498 114,994 5.44% 1,569,304 86,904 5.54% 1,257,078 69,454 5.53% Short-term borrowings .......... 345,060 19,576 5.67% 177,917 9,465 5.32% 169,583 9,359 5.52% Long-term borrowings ........... 122,050 8,332 6.83% 85,991 6,051 7.04% 69,169 4,880 7.06% ------------------------------------------------------------------------------------------------ Total interest-bearing liabilities ................ 4,437,500 188,484 4.25% 3,124,071 134,540 4.31% 2,557,044 108,761 4.25% Demand deposits ................ 799,477 561,985 468,612 Noninterest-bearing liabilities ................. 58,582 47,981 40,588 Trust Owned Preferred Securities .................. 120,000 57,699 -- Preferred shareholders' equity....................... -- 4,506 22,999 Common shareholders' equity ...................... 393,910 303,527 236,915 ------------------------------------------------------------------------------------------------ 1,371,969 975,698 769,114 ------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity.......... $5,809,469 $4,099,769 $3,326,158 ------------------------------------------------------------------------------------------------ Net interest income ............ $ 268,470 $ 197,653 $ 166,713 ------------------------------------------------------------------------------------------------ Net interest spread ............ 4.41% 4.63% 4.83% ------------------------------------------------------------------------------------------------ Net interest margin ............ 5.09% 5.32% 5.49% ------------------------------------------------------------------------------------------------
(1) INCLUDES NONACCRUAL LOANS AND LOAN FEES. (2) INTEREST YIELDS ON LOANS AND INVESTMENTS ARE PRESENTED ON A TAX-EQUIVALENT BASIS TO REFLECT THE TAX EXEMPT NATURE OF CERTAIN ASSETS. THE INCREMENTAL TAX RATE APPLIED WAS 35%. The following table presents the components of changes in net interest income by volume and rate on a tax-equivalent basis. The net change attributable to the combined impact of volume and rate has been allocated solely to the change in volume:
1998 COMPARED TO 1997 1997 COMPARED TO 1996 -------------------------------------------------------------------- (IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL - ------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans (1) (2) ......................................... $ 61,223 $ 4,403 $ 65,626 $ 44,299 $ (3,999) $ 40,300 Investment securities (2) ............................. 63,275 (4,470) 58,805 15,392 415 15,807 Other earning assets .................................. 10 320 330 545 67 612 -------------------------------------------------------------------- Total interest income .................................... 124,508 253 124,761 60,236 (3,517) 56,719 -------------------------------------------------------------------- Interest expense: Savings deposits and interest-bearing checking ........ 13,519 (58) 13,461 6,263 789 7,052 Time deposits ......................................... 30,192 (2,101) 28,091 17,251 199 17,450 Short-term borrowings ................................. 8,892 1,219 10,111 460 (354) 106 Long-term borrowings .................................. 2,537 (256) 2,281 1,187 (16) 1,171 -------------------------------------------------------------------- Total interest expense .................................. 55,140 (1,196) 53,944 25,161 618 25,779 -------------------------------------------------------------------- Increase (decrease) in net interest income ............... $ 69,368 $ 1,449 $ 70,817 $ 35,075 $ (4,135) $ 30,940 --------------------------------------------------------------------
(1) INCLUDES LOAN FEES. (2) INTEREST INCOME IS PRESENTED ON A TAX EQUIVALENT BASIS. Net interest income on a tax equivalent basis in 1998 was $268.5 million, a $70.8 million increase from 1997. The increase was primarily due to a 42.0% increase in earning assets partially offset by a 23 basis point reduction in the net interest margin. The increase in earning assets was due to three bank acquisitions completed by the Company during 1998 and 1997, the purchase of assets and assumption of liabilities of Banc One Corporation offices in Arizona, Colorado, and Utah, and loan growth in existing markets. Net interest income on a tax equivalent basis in 13 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. 1997 was $197.7 million, a $30.9 million increase from 1996. The increase was primarily due to a 22.5% increase in earning assets partially offset by a 17 basis point reduction in the net interest margin. The increase in earning assets was due to the six bank acquisitions completed by the Company between the third quarter of 1996 and December 1997 and loan growth in the existing markets. The net interest margin was 5.09%, 5.32%, and 5.49% in 1998, 1997 and 1996, respectively. This decrease in margin was due to a 22 basis point decrease in the yield spread between 1997 and 1998, and a change in the mix of earning assets to lower-yielding assets. Average loans to average earning assets changed from 72.0% in 1996, to 70.6% in 1997, and 61.5% in 1998. PROVISION FOR LOAN LOSSES Annual fluctuations in the provision for loan losses result from management's regular assessment of the adequacy of the allowance for loan losses. The provision for loan losses for 1998 was $22.5 million, an increase of $16.4 million or 268.9%, from the $6.1 million provision during 1997. The increase in the loan loss provision was principally due to the Company's credit experience in the operation and disposal of its sub-prime lending affiliates, which totaled $11.9 million in 1998. The amount of the loan loss provision to be recorded in future periods will depend on management's assessment of the adequacy of the allowance for loan losses in relation to the entire loan portfolio. The provision for loan losses for 1997 was $6.1 million, a decrease of $1.4 million, or 18.7% from the 1996 provision of $7.5 million. NONINTEREST INCOME The Company continues to expand noninterest income associated with the Company's community banking operations. The primary sources of noninterest income consist of service charges on deposit accounts, service fees on checking accounts, insurance commission, fees from the sale of investment products, and fees for trust services. Management is working to increase noninterest income by increasing the delivery of financial products and services, including trust services, insurance policy sales and security sales through a third party provider of standardized securities products. Noninterest income for 1998 was $60.3 million, an increase of $13.1 million, or 27.8%, from the $47.2 million earned in 1997. The increase was principally due to an increase in service charges on deposit accounts in 1998 from $21.1 million earned during 1997 to $30.3 million earned in 1998, an increase of $9.2 million, or 43.6%. Of the increase, $8.5 million was attributed to banks acquired in 1998 and 1997. Net investment security gains were $1.8 million in 1998. Noninterest income for 1997 was $47.2 million, an increase of $10.3 million, or 27.9%, from the $36.9 million earned in 1996. The increase was principally due to an increase in service charges on deposit accounts in 1997 to $21.1 million from the $16.0 million in 1996, an increase of $5.1 million, or 31.9%. The increase is attributed to $2.7 million in service charges on deposit accounts at banks acquired during 1997 and $494,000 at banks acquired during 1996. NONINTEREST EXPENSE Noninterest expenses consist of salaries and benefits, occupancy, equipment and other expenses such as legal and postage necessary for the operation of the Company. Management is committed to improving the quality of service while controlling such costs through improved efficiency and consolidation of certain activities to achieve economies of scale anticipated in its acquisition strategy. The following table presents the components of noninterest expense for the periods indicated:
- -------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Salaries and employee benefits .......................... $114,014 $ 78,380 $ 66,298 Net occupancy ........................................... 32,110 23,285 18,852 FDIC insurance .......................................... 686 381 675 Legal and accounting .................................... 4,073 2,269 2,481 Other professional services ............................. 5,447 2,892 2,305 Acquisition, integration and conforming ................. 3,721 398 2,928 Data processing and loan servicing fees ................. 4,640 1,782 1,842 Impairment of equity method investment .................. -- -- 940 Minority interest ....................................... -- 80 222 Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II ........... 10,218 5,108 -- Amortization of Intangibles ............................. 10,366 5,550 3,433 Other ................................................... 44,817 29,828 26,004 ----------------------------------------------- Total noninterest expense ............................ $230,092 $149,953 $125,980 -----------------------------------------------
Noninterest expense increased $80.1 million to $230.1 million in 1998. The increase was principally due to an increase in salaries and employee benefits, net occupancy expense, and acquisition and related expenses. The $35.6 million increase in salaries and employee benefits includes $18.7 million in additional expenses related to acquisitions completed by the Company in 1998 and 1997. The $8.8 million increase in net occupancy is also due primarily to acquisitions completed by the Company. Legal and accounting fees increased $1.8 million, or 78.3%, from $2.3 million to $4.1 million during 1998. The Company incurred acquisition expenses of $3.7 million in 1998 in connection with the 1998 acquisitions. Company-obligated mandatorily redeemable preferred stock expense increased by $5.1 million, or 100%, to $10.2 million in 1998 compared to $5.1 million in 1997, which reflects the increase in the average underlying securities from $58 million in 1997 to $120 million in 1998. Amortization of intangibles increased $4.8 million, or 86.8%, due to intangible assets, such as goodwill, noncompete agreements and insurance agency customer policy expirations recorded in connection with the Company's acquisitions. Other noninterest expense was $44.8 million, an increase of $15.0 million, or 50.3%, from $29.8 million in 1997. Noninterest expense for 1997 was $150.0 million, an increase of $24.0 million, or 19.0%, from the level of $126 million during 1996. The increase was principally due to an increase of $12.1 million, or 18.3%, in salaries and employee benefits, of which $5.8 million was due to the 1997 acquisitions and $1.7 million was due to the banks acquired during 1996. Net occupancy expense increased $4.4 million to $23.3 million, $2.1 million due to 1997 and 1996 acquisitions. Acquisition expenses of $398,000 were incurred in 1997 in conjunction with the acquisitions of Republic and Summit. Intangibles expense increased $2.2 million, or 61.7%, due to the additional intangible assets recognized in connection with the Company's acquisitions. Other noninterest expense was $29.8 million, an increase of $3.8 million, or 14.6%, from $26.0 million during 1996. PROVISION FOR INCOME TAXES The Company records a provision for income taxes currently payable and for taxes payable in the future because of differences in the timing of recognition of certain items for financial statement and income tax purposes. The effective income tax rate differs from the statutory rate primarily due to tax-exempt income from loans, and investments and state income taxes. As a result of effective tax strategies, the Company's effective tax rate during 1998 and 1997 were lower than historical effective rates. It 14 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. is anticipated that the effective tax rate will increase in future periods. The effective tax rate was 31.3%, 29.8%, and 36.0% for 1998, 1997, and 1996, respectively. YEAR 2000 ISSUE The Company is evaluating the potential impact of what is commonly referred to as the "Year 2000" issue. This issue addresses the potential inability of certain information systems to properly recognize and process dates containing the year 2000 and beyond. If not corrected, these systems could fail or create erroneous results. The Company has established a dedicated Year 2000 Team to focus on all significant operational areas throughout the Company. This team has worked with management to commence the following steps: (i) implementing a Year 2000 Assessment and Testing Plan for all items that may be affected by the Year 2000 date change; (ii) working with loan customers to help them understand the impact of the Year 2000 on their business; (iii) communicating with third parties that interact with the Company to ensure they are addressing the Year 2000 issue; (iv) communicating with hardware and software suppliers to ensure Year 2000 compliance among their products; and (v) contingency and disaster recovery planning to ensure Year 2000 problem resolution. The Company has identified and tested the applications it believes are mission critical, and the initial test results indicated that these systems are Year 2000 compliant. The Company completed testing and established compliance with respect to its applications, subject to equipment upgrades during 1999, ongoing communi cations with third parties, and compliance of any entities acquired in 1999. Regardless of the Year 2000 compliance of the Company's systems, there can be no assurance that the Company will not be adversely affected by the failure of others to become Year 2000 compliant. Such risks may include potential losses related to loans made to third parties whose businesses are adversely affected by the Year 2000 issue, the disruption or inaccuracy of data provided by non-Year 2000 compliant third parties and business disruption caused by the failure of service providers, such as security and data processing companies, to become Year 2000 compliant. Another pervasive banking risk associated with the Year 2000 issue is the risk of banking customers withdrawing and retaining large amounts of cash during late 1999, thus reducing the Company's deposits and needed working capital. Because of these uncertainties, there can be no assurance that the Year 2000 issue will not have a material financial impact in any future period. The Company incurred operating costs of $400,000 during 1998, which included $100,000 in labor cost associated with dedicated staff, $200,000 of labor cost related to other staff time devoted to Year 2000 compliance and $100,000 in costs related to the write off of non-compliant equipment. The Company also incurred $1.0 million in capital expenditures for equipment upgrades related to the compliance effort. During 1999, the Company expects to incur an additional $400,000 in operating costs, which represents 4% of the Company's information technology operating budget and an additional $1 million in capital expenditures, which represents 34% of the Company's information technology capital expenditure budget for 1999. The costs incurred in 1998 were funded from operating income. Costs incurred in 1999 will be funded from operating income as well. The Company has not delayed any information technology projects as a result of their Year 2000 compliance effort. The Company has identified contingency plans for all mission critical applications and the affiliate bank environment. The verification and validation of these plans are expected to be completed during the first six months of 1999. The Company's Year 2000 compliance effort has been reviewed on five occasions by regulatory authorities during 1998, with additional reviews expected in 1999. FINANCIAL CONDITION INVESTMENT OF FUNDS LOANS At December 31, 1998, total loans were $3.4 billion, an increase of $362 million, or 12.0%, from the December 31, 1997, level of $3.0 billion. A significant portion of this increase is attributable to in-market loan growth in the Company's existing markets. The Company has continued to purchase commercial loan assets to enhance earning asset yield performance. Many of such loan assets have been originated by selected midwestern regional banks and national leasing and finance companies with whom the Company has ongoing relationships. The Company's portfolio of purchased loan assets was $322 million at December 31, 1998, compared to $208 million at December 31, 1997. Banks acquired in 1998 and 1997 accounted for $108 million of the increase. These assets are subject to the Company's standard credit guidelines, as well as specific requirements for such assets, and bear the credit risks attendant to commercial loans. It is anticipated that the purchased loan asset volume will increase during 1999. The following table presents the Company's balance of each major category of loans at the dates indicated:
- ------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL (DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS - ------------------------------------------------------------------------------------------------------------------------ Loan category: Real estate .................... $ 1,225,255 36.19% $ 1,152,918 38.13% $ 900,055 37.57% Real estate construction ....... 358,317 10.58% 247,486 8.18% 178,331 7.45% Commercial ..................... 904,063 26.70% 778,176 25.73% 685,648 28.63% Consumer and other ............. 603,468 17.82% 552,384 18.26% 391,313 16.34% Agricultural ................... 295,039 8.71% 293,358 9.70% 239,818 10.01% ------------------------------------------------------------------------------------- Total loans ...................... 3,386,142 100.00% 3,024,322 100.00% 2,395,165 100.00% ------------------------------------------------------------------------------------- Less allowance for loan losses ... (50,173) (40,045) (30,165) ------------------------------------------------------------------------------------- Total ............................ $ 3,335,969 $ 2,984,277 $ 2,365,000 -------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------ 1995 1994 - ------------------------------------------------------------------------------------------------ PERCENT PERCENT OF TOTAL OF TOTAL (DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS - ------------------------------------------------------------------------------------------------ Loan category: Real estate .................... $ 783,474 38.08% $ 598,248 37.98% Real estate construction ....... 138,180 6.71% 93,735 5.95% Commercial ..................... 577,737 28.07% 439,717 27.91% Consumer and other ............. 315,403 15.32% 264,630 16.80% Agricultural ................... 243,358 11.82% 178,941 11.36% ------------------------------------------------------------- Total loans ...................... 2,058,152 100.00% 1,575,271 100.00% ------------------------------------------------------------- Less allowance for loan losses ... (25,906) (20,414) ------------------------------------------------------------- Total ............................ $ 2,032,246 $ 1,554,857 -------------------------------------------------------------
15 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. GENERAL. The Company's loan mix remained relatively constant from 1997 to 1998. Real estate loans continued to be the largest category of loans, representing 46.8% of the total loan portfolio. REAL ESTATE LOANS. A significant portion of the Company's real estate loan portfolio consists of residential real estate first mortgages that have been underwritten and documented to meet secondary mortgage requirements. Substantially all of the Company's real estate loans are based in the Company's primary market area. As of December 31, 1998, $524 million, or 33.1%, of the Company's real estate loan portfolio consisted of residential real estate loans, $144 million, or 9.1%, were secured by farmland, $558 million, or 35.2%, represented commercial and other real estate loans and $358 million, or 22.6%, represented construction loans. COMMERCIAL LOANS. Loans in this category include loans to retail, wholesale, manufacturing and service businesses, including agricultural service businesses and the Company's purchased loan asset portfolio. Commercial loans are underwritten based on the financial strength and repayment ability of the borrower, as well as the collateral securing the loans. CONSUMER AND OTHER LOANS. Loans classified as consumer and other loans include automobile, personal loans, consumer lines of credit and overdrafts. The consumer loan portfolio also includes dealer-generated installment contracts for consumer goods, including automobiles and major home appliances. The majority of these indirect loans are installment loans with fixed interest rates. AGRICULTURAL LOANS. Agricultural loans are made principally to farmers and ranchers. The Company provides short-term credit for operating loans and intermediate-term loans for machinery purchases and other improvements. INVESTMENTS Management maintains a high quality investment portfolio oriented toward U.S. Treasury, U.S. Government agency and government guaranteed mortgage-backed securities. The investment portfolio also provides the opportunity to structure maturities and repricing timetables in a flexible manner and to meet applicable requirements for pledging securities, which are principally adjustable rate, and collateralized mortgage obligations, which are primarily floating rate securities, as tools in managing its interest rate exposure and enhancing its net interest margin. The following table sets forth the composition of the Company's held-to-maturity securities portfolio at amortized cost as of the dates indicated:
- ------------------------------------------------------------------------------ BOOK VALUE AT DECEMBER 31, (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------ U.S. Treasury ....................... $ -- $ 1,536 $ 2,537 U.S. Government agencies ............ -- 19,780 16,690 Mortgage-backed securities .......... -- 82,357 103,027 State and political securities ...... -- 52,702 59,641 Other securities .................... 69,906 65,616 79,551 ---------------------------------------- Total ............................... $ 69,906 $ 221,991 $ 261,446 ----------------------------------------
The following table sets forth the composition of the Company's available-for-sale securities portfolio at estimated fair value as of the dates indicated:
- ------------------------------------------------------------------------------- BOOK VALUE AT DECEMBER 31, (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------- U.S. Treasury ....................... $ 131,924 $ 147,126 $ 138,987 U.S. Government agencies ............ 352,958 287,747 85,561 Mortgage-backed securities .......... 1,219,056 840,357 247,408 Collateralized mortgage obligations . 62,050 108,103 43,259 State and political securities ...... 137,205 71,862 17,165 Other ............................... 77,337 84,727 13,794 ---------------------------------------- Total ............................... $ 1,980,530 $ 1,539,922 $ 546,174 ----------------------------------------
HELD-TO-MATURITY SECURITIES AT DECEMBER 31, 1998, MATURING IN - -------------------------------------------------------------------------------------------------------------------------------- OVER ONE YEAR OVER 5 YEARS ONE YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS OVER 10 YEARS TOTAL - -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED (DOLLARS IN THOUSANDS) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) - -------------------------------------------------------------------------------------------------------------------------------- Municipal Bonds ..... $ 45 10.09% $ 122 12.20% -- -- $ -- -- $ 167 11.63% Other ............... -- -- -- -- -- -- 69,739 7.46% 69,739 7.46% ---------------------------------------------------------------------------------------------------------- Total ............... $ 45 10.09% $ 122 12.20% -- -- $69,739 7.46% $69,906 7.47% ----------------------------------------------------------------------------------------------------------
(1) INTEREST YIELDS ON INVESTMENTS ARE PRESENTED ON A TAX EQUIVALENT BASIS TO REFLECT THE TAX EXEMPT NATURE OF CURRENT ASSETS. YIELDS ARE BASED ON A 35% INCREMENTAL TAX RATE AND A 3.39% COST OF FUNDS.
AVAILABLE-FOR-SALE-SECURITIES AT DECEMBER 31, 1998, MATURING IN - ----------------------------------------------------------------------------------------------------------------- OVER ONE YEAR OVER 5 YEARS ONE YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS - ----------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED (DOLLARS IN THOUSANDS) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) - ---------------------------------------------------------------------------------------------------------------- U.S. Treasury ......................... $ 63,567 6.33% $ 68,357 6.25% $ -- -- U.S. Government agencies .............. 4,088 5.85% 206,730 5.93% 141,526 6.33% Mortgage-backed Securities (2) ........ 2,414 6.71% 26,059 6.71% 26,539 7.13% Collateralized mortgage obligations ... 297 7.14% 550 7.40% 9,716 6.20% Municipal Bonds ....................... 11,217 7.29% 28,230 7.50% 27,153 8.13% Other ................................. 761 6.81% 358 6.71% 4,558 4.35% ------------------------------------------------------------------------- Total ................................. $ 82,344 6.46% $ 330,284 6.20% $ 209,492 6.61% -------------------------------------------------------------------------
AVAILABLE-FOR-SALE-SECURITIES AT DECEMBER 31, 1998, MATURING IN - ----------------------------------------------------------------------------------------- OVER 10 YEARS TOTAL - ----------------------------------------------------------------------------------------- WEIGHTED WEIGHTED (DOLLARS IN THOUSANDS) AMOUNT YIELD(1) AMOUNT YIELD(1) - ----------------------------------------------------------------------------------------- U.S. Treasury ......................... $ -- -- $ 131,924 6.29% U.S. Government agencies .............. 614 7.62% 352,958 6.09% Mortgage-backed Securities (2) ........ 1,164,044 6.54% 1,219,056 6.56% Collateralized mortgage obligations ... 51,487 6.30% 62,050 6.30% Municipal Bonds ....................... 70,605 7.34% 137,205 7.52% Other ................................. 71,660 6.99% 77,337 6.83% ------------------------------------------------ Total ................................. $1,358,410 6.60% $1,980,530 6.53% ------------------------------------------------
(1) INTEREST YIELDS ON INVESTMENTS ARE PRESENTED ON A TAX EQUIVALENT BASIS TO REFLECT THE TAX EXEMPT NATURE OF CURRENT ASSETS. YIELDS ARE BASED ON A 35% INCREMENTAL TAX RATE AND A 3.39% COST OF FUNDS. (2) MORTGAGE-BACKED SECURITIES MATURITY IS BASED ON ESTIMATED REMAINING LIFE. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. The Company's investments, including available-for-sale and held-to-maturity securities, increased $288 million, or 16.3%, to $2,050 million at December 31, 1998, from $1,762 million at December 31, 1997. This increase was due to the purchase of additional securities in connection with the Banc One Corporation transaction. At December 31, 1998, the Company's investments represented 34.2% of total assets, compared to 32.3% at December 31, 1997. CREDIT POLICY The Company's lending activities are guided by the general loan policies established by the Board of Directors. The Senior Credit Committee of the Company has established loan approval limits for each region of the Company and each subsidiary bank. The limits established for each bank range from $50,000 to $300,000 per borrower (except for the Fargo bank, which has a $750,000 limit per borrower). However, renewals of any criticized or classified loans have a limit of $25,000. Amounts in excess of the individual bank lending authority are presented to the regional credit officers. The regional credit officers for Arizona, Colorado, Iowa, Minnesota, Nebraska, New Mexico, Utah, Wisconsin, Wyoming and the Dakotas have lending authority up to $750,000 per nonclassified borrower at which time a second regional credit officer or the respective regional managing officer must concur. Loans above $1,500,000 per nonclassified borrower and $250,000 per classified borrower are presented to the Senior Credit Committee for approval. Although the Company has a diversified loan portfolio, the economic health of significant portions of the Company's primary trade area and the ability of many of the bank's borrowers to repay their loans (including real estate and commercial loans, as well as agricultural loans) is dependent to a large extent on the health of the agricultural sector of the economy. The Company has identified and implemented strategies to deal with these factors, including an emphasis on quality local loan growth and the diversification and performance of its earning asset portfolios. NONPERFORMING ASSETS The Company follows regulatory guidelines with respect to classifying loans on a nonaccrual basis. Loans are placed on nonaccrual when they become past due over 90 days or when the collection of interest or principal is considered unlikely. The Company does not return a loan to accrual status until it is brought current with respect to both principal and interest and future principal payments are no longer in doubt. When a loan is placed on nonaccrual status, any previously accrued and uncollected interest is reversed. Interest income of $3,645,000 on nonaccrual loans would have been recorded during 1998 if the loans had been current in accordance with their original terms. During 1998, the Company recorded interest income of $1,489,000 related to loans that were on nonaccrual status as of December 31, 1998. The Company considers nonperforming assets to include all nonaccrual loans, restructured loans defined as troubled debt restructurings under SFAS No. 15 and other real estate owned ("OREO"). Nonperforming assets of the Company are summarized in the following table:
DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Loans: Nonaccrual loans ............................................. $ 22,517 $ 14,801 $ 15,283 $ 3,511 $ 4,029 Restructured loans ........................................... 162 140 267 485 155 --------------------------------------------------------------- Nonperforming loans .......................................... 22,679 14,941 15,550 3,996 4,184 OREO ............................................................. 3,660 4,184 1,677 2,309 1,265 --------------------------------------------------------------- Nonperforming assets ......................................... $ 26,339 $ 19,125 $ 17,227 $ 6,305 $ 5,449 --------------------------------------------------------------- Loans 90 days or more past due but still accruing ................ $ 3,088 $ 3,748 $ 2,678 $ 1,050 $ 796 --------------------------------------------------------------- Nonperforming loans as a percentage of total loans ............... 0.67% 0.49% 0.65% 0.19% 0.27% Nonperforming assets as a percentage of total assets ............. 0.44% 0.35% 0.48% 0.20% 0.22% Nonperforming assets as a percentage of total loans and OREO ..... 0.78% 0.63% 0.72% 0.31% 0.35% Total loans ...................................................... $3,386,142 $3,024,322 $2,395,165 $2,058,152 $1,575,271 Total assets ..................................................... $6,002,972 $5,454,135 $3,606,406 $3,210,017 $2,494,917
Nonperforming assets were $26.3 million at December 31, 1998, an increase of $7.2 million, or 37.7% from $19.1 million at December 31, 1997. Nonperforming loans increased by $7.7 million due principally to an increase in nonaccrual loans in the specialty lending area, primarily automobile loans. The Company has announced its intent to sell the remaining loans of this subsidiary. Nonperforming assets were $19.1 million at December 31, 1997, an increase of $1.9 million, or 11.0%, from $17.2 million at December 31, 1996. Nonperforming loans decreased by $609,000. OREO increased $2.5 million, or 147.1%, from $1.7 million at December 31, 1996 to $4.2 million at December 31, 1997. The ratio of nonperforming assets to total assets at December 31, 1997, was .35%, compared to .48% at December 31, 1996. ALLOWANCE FOR LOAN LOSSES The current level of the allowance for loan losses is the result of management's assessment of the risks within the portfolio based on the information revealed in credit reporting processes. The Company utilizes a risk-rating system on all loans, including purchased loans, and a monthly credit review and reporting process that results in the calculation of the guidelines reserves based on the risk within the portfolio. This assessment of risk takes into account the composition of the loan portfolio, previous loan experience, current economic conditions and other factors that, in management's judgment, deserve recognition. The allowance is allocated to individual loan categories based on the relative risk characteristics of the loan portfolios. Commercial and agricultural allocations are based on a quarterly review of the individual loans outstanding, including outstanding commitments to lend. Real estate and consumer allocations are based on a quarterly analysis of the performance of the respective portfolios, including historical and expected delinquency and charge-off statistics. The allowance allocated to real estate loans, including real estate construction, increased $2.3 million from $7.3 million at December 31, 1997 to $9.6 million at December 31, 1998, due principally to the loans retained at ELI, the Company's sub-prime real estate lending subsidiary. The allowance allocated to the consumer loan portfolio 17 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. increased $4.1 million, from $4.0 million to $8.1 million at December 31, 1997 and 1998 respectively. This increase was due principally to the loans retained at MPFS, the Company's sub-prime consumer lending subsidiary. The Company also routinely maintains an unallocated allowance to recognize its exposure to unanticipated losses within the loan portfolio. This exposure is caused by inherent delays in obtaining information regarding an individual borrower's financial condition or change in their specific business condition; the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends; the volatility of general economic or specific customer conditions affecting the identification and quantification of losses for large individual credits; and the sensitivity of assumptions used in establishing allocated allowances for general categories of loans. The unallocated allowance also addresses risk in concentration of credit to specific borrowers, products, or industries. The unallocated portion of the allowance increased from $20.1 million at December 31, 1997 to $22.2 million at December 31, 1998. The increase was principally due to growth in the overall loan portfolio. While the allocated allowance as a percentage of loans outstanding increased from .66% at December 31, 1997 to .83% at December 31, 1998, the unallocated portion decreased from .66% to .65% at December 31, 1997 and 1998, respectively. The accompanying table shows the allocated and unallocated portions of the allowance for the various loan classifications. The Company's experience in the consumer loan and real estate loan portfolios of its sub-prime lending subsidiaries during 1998 and 1997 resulted in negative variances from the allowance levels in these loan classifications. In other periods, the Company has experienced a positive variance, and management believes the Company's estimates have been conservative but consistent with actual experience. Management has reviewed the allocations in the various classifications of loans and believes the allowance was adequate at all times during the five-year period ended December 31, 1998. The analysis methodology has been consistently applied during this five-year period. The following table sets forth the Company's allowance for loan losses as of the dates indicated:
DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year .................... $ 40,045 $ 30,165 $ 25,906 $ 20,414 $ 17,205 Allowance of acquired companies ................. 1,950 10,065 784 5,230 1,153 Charge-offs: Real estate .................................. 2,237 673 1,102 789 138 Real estate construction ..................... 36 635 -- 45 -- Commercial ................................... 2,674 1,652 1,310 1,355 823 Consumer and other ........................... 11,638 5,217 2,657 1,849 826 Agricultural ................................. 1,381 726 443 373 38 ----------------------------------------------------------------------------- Total charge-offs ............................... 17,966 8,903 5,512 4,411 1,825 Recoveries: Real estate .................................. 237 249 276 67 589 Real estate construction ..................... -- -- 4 -- -- Commercial ................................... 901 610 655 309 310 Consumer and other ........................... 2,098 1,105 491 612 314 Agricultural ................................. 399 647 78 57 210 ----------------------------------------------------------------------------- Total recoveries ................................ 3,635 2,611 1,504 1,045 1,423 ----------------------------------------------------------------------------- Net charge-offs ................................. 14,331 6,292 4,008 3,366 402 Provision charged to operations ................. 22,509 6,107 7,483 3,628 2,458 ----------------------------------------------------------------------------- Balance at end of year .......................... $ 50,173 $ 40,045 $ 30,165 $ 25,906 $ 20,414 ----------------------------------------------------------------------------- Allowance as a percentage of total loans ........ 1.48% 1.32% 1.26% 1.26% 1.30% Net charge-offs to average loans outstanding .... 0.44% 0.24% 0.18% 0.19% 0.03% Total loans ..................................... $3,386,142 $3,024,322 $2,395,165 $2,058,152 $1,575,271 Average loans ................................... $3,243,167 $2,625,203 $2,184,839 $1,816,712 $1,421,903
At December 31, 1998, the allowance for loan losses was $50.2 million, an increase of $10.2 million from the December 31, 1997, level of $40.0 million. At December 31, 1998, the allowance for loan losses as a percentage of total loans was 1.48%, as compared to 1.32% at December 31, 1997. This increase was attributed to the Company's analysis of the loan portfolio credit quality at the Company's bank subsidiaries, specifically its sub-prime lending portfolio. At December 31, 1997, the allowance for loan losses was $40.0 million, an increase of $9.8 million from the December 31, 1996, level of $30.2 million. The Company's 1997 acquisitions accounted for $10.1 million of the change, with the remaining change due to maintaining an adequate reserve in recognition of the Company's loan growth and the increase in net charge-offs during 1997. At December 31, 1997, the allowance for loan losses as a percentage of total loans was 1.32%, as compared to 1.26% at December 31, 1996. During 1998, net charge-offs were $14.3 million, an increase of $8.0 million from the $6.3 million during 1997. The increase is principally attributed to losses recorded in the Company's sub-prime specialty lending portfolio. Net charge-offs in the sub-prime specialty lending portfolio during 1998 totaled $9.8 million, including $4.4 million during the period in which these activities were reported as discontinued operations. The Company's provision for loan losses increased from $6.1 million in 1997 to $22.5 million in 1998. During 1997, net charge-offs were $6.3 million, an increase of $2.3 million from the net charge-offs of $4.0 million in 1996. The principal causes for the increase were the increase of real estate loan net charge-offs of $237,000; an increase in commercial loan net charge-offs of $387,000; the decrease in agricultural loan net charge-offs of $286,000; and an increase in consumer loan and other loan net charge-offs of $1,946,000. The Company's provision for loan losses was $6.1 million in 1997 and $7.5 million in 1996. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. The following table sets forth the allocation of the allowance for loan losses to various loan categories, as well as the allocation as a percentage of loans outstanding in each category, as of the dates indicated:
ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31, - ------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------ Real estate .................... $ 9,380 $ 7,205 $ 5,278 $ 5,270 $ 4,148 Real estate construction ....... 179 124 89 69 47 Commercial ..................... 7,222 6,097 5,211 4,755 3,897 Consumer and other ............. 8,080 3,992 2,269 1,961 1,852 Agricultural ................... 3,077 2,487 2,312 1,869 2,006 --------------------------------------------------- Total Allocated Allowance ...... 27,938 19,905 15,159 13,924 11,950 Total Unallocated Allowance .... 22,235 20,140 15,006 11,982 8,464 --------------------------------------------------- Total Allowance ................ $50,173 $40,045 $30,165 $25,906 $20,414 ---------------------------------------------------
ALLOWANCE AS A PERCENT OF LOANS OUTSTANDING BY CATEGORY AT DECEMBER 31, - ------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------ Real estate .................... 0.77% 0.62% 0.59% 0.67% 0.69% Real estate construction ....... 0.05% 0.05% 0.05% 0.05% 0.05% Commercial ..................... 0.80% 0.78% 0.76% 0.82% 0.89% Consumer and other ............. 1.34% 0.72% 0.58% 0.62% 0.70% Agricultural ................... 1.04% 0.85% 0.96% 0.77% 1.12% --------------------------------------------- Total Allocated Allowance ...... 0.83% 0.66% 0.63% 0.68% 0.76% Total Unallocated Allowance .... 0.65% 0.66% 0.63% 0.58% 0.54% --------------------------------------------- Total Allowance ................ 1.48% 1.32% 1.26% 1.26% 1.30% ---------------------------------------------
SOURCE OF FUNDS DEPOSITS The Company's major source of funds is provided by core deposits from individuals, businesses, and local government units. Core deposits consist of all noninterest-bearing deposits, interest-bearing savings and checking accounts and time deposits of less than $100,000. The following table sets forth a summary of the deposits of the Company at the dates indicated:
DECEMBER 31, (IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------------------------- Noninterest-bearing ........................ $ 547,703 $ 705,315 $ 531,245 Interest-bearing: Savings and checking accounts ........... 2,254,005 1,586,777 1,151,499 Time accounts less than $100,000 ........ 1,478,105 1,386,735 999,864 Time accounts greater than $100,000 ..... 604,859 474,091 290,136 --------------------------------------------- Total deposits ............................. $4,884,672 $4,152,918 $2,972,744 ---------------------------------------------
Total deposits at December 31, 1998, were $4.9 billion, an increase of $732 million, or 17.6%, from $4.2 billion at December 31, 1997. The Company's core deposits as a percentage of total deposits were 87.6% and 88.6% as of December 31, 1998 and December 31, 1997, respectively. The increase in total deposits was primarily due to the 1998 Banc One Corporation transaction, with aggregate total deposits of $730 million as of the acquisition date. At December 31, 1998, $605 million, or 12.4% of total deposits were in time accounts greater than $100,000. The increase of $131 million, or 27.6%, from $474 million at December 31, 1997, was due in part to $73 million of deposits obtained through the institutions acquired during 1998. Management believes virtually all the deposits in excess of $100,000 are with persons or entities that hold other deposit relationships with the banks. Maturities of deposits in excess of $100,000 at December 31, 1998 were (in thousands): - --------------------------------------------------------------------- Maturing in less than three months ....................... $ 217,689 Maturing in three to six months .......................... 125,938 Maturing in six to twelve months ......................... 172,803 Maturing in over twelve months ........................... 88,429 - --------------------------------------------------------------------- Total deposits in excess of $100,000 ..................... $ 604,859 - ---------------------------------------------------------------------
In addition to the availability of core deposits, management has determined it may, in the future employ a brokered deposit program in an effort to attract lower cost sources of funds. The Company intends to continue to expand its core deposit base through acquisitions. SHORT-TERM BORROWINGS Short-term borrowings include securities sold under agreements to repurchase, commercial paper, Federal Home Loan Bank advances and federal funds purchased. These funds are used to fund the growth in loans and securities and manage the Company's rate sensitivity risk. They are subject to short-term price swings as the Company's needs change or the overall market rates for short-term investment funds change. The Company's subsidiary banks had arrangements with the Federal Home Loan Bank that provide for borrowing up to $685 million. As of December 31, 1998, $210 million advances were outstanding. The Company also had a $14.3 million balance outstanding on its $35 million short-term commercial paper arrangement at December 31, 1998. The $161 million increase in short-term borrowings from December 31, 1997 is due to strong loan demand at the Company's bank subsidiaries. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. The following table sets forth a summary of the short-term borrowings of the Company during 1998, 1997, and 1996, and as of the end of each such period:
- ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE MAXIMUM WEIGHTED AVERAGE DAILY OUTSTANDING AVERAGE INTEREST OUTSTANDING AMOUNT AT ANY INTEREST RATE AT (DOLLARS IN THOUSANDS) AT YEAR-END OUTSTANDING MONTH-END RATE YEAR-END - ---------------------------------------------------------------------------------------------------------------------------------- 1998 Federal funds purchased and securities sold under agreements to repurchase ..................................... $143,057 $ 87,094 $152,748 4.92% 4.13% Commercial paper ................................................ 14,310 23,998 34,570 5.87% 5.87% FHLB advances ................................................... 210,000 200,902 304,000 5.95% 5.18% Other ........................................................... 68,359 33,066 68,359 5.70% 5.29% ----------------------- Total ........................................................ $435,726 $345,060 $466,763 5.67% 4.87% ----------------------- 1997 Federal funds purchased and securities sold under agreements to repurchase ...................................... $ 44,462 $ 67,871 $ 57,287 5.34% 4.11% Commercial paper ................................................ 11,167 8,812 23,346 5.91% 5.78% FHLB advances ................................................... 216,506 98,774 267,326 5.06% 5.70% Other ........................................................... 3,104 2,460 4,731 5.24% 6.02% ----------------------- Total ........................................................ $275,239 $177,917 $275,848 5.32% 5.31% ----------------------- 1996 Federal funds purchased and securities sold under agreements to repurchase ..................................... $ 78,369 $ 56,356 $ 83,451 4.76% 5.55% Commercial paper ................................................ 14,062 12,643 14,965 5.72% 5.63% FHLB advances ................................................... 153,272 97,402 183,272 5.94% 6.32% Other ........................................................... 3,203 3,182 4,140 5.58% 5.95% ----------------------- Total ........................................................ $248,906 $169,583 $274,167 5.52% 6.02% -----------------------
LONG TERM DEBT Long-term debt of the Company was $93 million as of December 31, 1998, and $125 million as of December 31, 1997. The decrease is due in part to the Company's October 1998 redemption of all $11.5 million of its 9.00% Exchangeable Subordinated Notes due August 15, 2005 at a redemption price of 103% of the principal amount. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES Company-obligated mandatorily redeemable preferred securities of the Company was $120 million as of December 31, 1998, which consisted of $60 million of 8.20% Cumulative Capital Securities issued December 10, 1997 through CFB Capital II and $60 million of 8.875% Cumulative Capital Securities issued February 5, 1997 through CFB Capital I. The proceeds of both offerings were invested by CFB Capital II and CFB Capital I, respectively, in Junior Subordinated Debentures of the Company. The debentures mature no earlier than February 1, 2002 and no later than December 15, 2027. SHAREHOLDERS' EQUITY Total shareholders' equity increased $17.2 million, or 4.4%, to $405.2 million at December 31, 1998, from $388.0 million at December 31, 1997, as a result of the retention of a majority of earnings and the issuance of common stock. During 1998 the equivalent of 320,090 shares of common stock were issued, resulting in an increase in shareholders' equity of $1.4 million. In April 1998, in conjunction with the Company's shareholder approval of a charter amendment that facilitated a two-for-one split of the Company's common stock in the form of a 100 percent dividend paid to holders of record as of May 1, 1998, the Company increased the number of authorized com mon shares from 30,000,000 to 80,000,000. The number of authorized preferred shares remained at 2,000,000. The increases are expected to provide the Company greater ability to utilize common and preferred stock in connection with raising additional capital, expanding its business through acquisitions and other general purposes. On February 28, 1997, the Company issued notice of redemption to the holders of its Depositary Shares, which represent ownership of one-quarter share of 7% Cumulative Convertible Preferred Stock (approximately $23 million in stated value). The redemption price was $26.40 (plus accrued and unpaid dividends) for each Depositary Share with a stated value of $25.00 per share. Holders of the Depositary Shares have the right to convert their investment into Common Stock, prior to redemption, at a rate of 3.138 shares of Common Stock for each Depositary Share. Virtually all of such holders elected to convert prior to redemption, which resulted in the issuance of approximately 2,886,000 shares of Common Stock. The Company maintains a Board-approved stock repurchase plan under which it regularly repurchases shares of its common stock in open market transactions to support the needs of employee benefit and other compensation plans. During 1998, the Company purchased 731,000 shares in accordance with the plan. At December 31, 1998, the Company believes the amount of treasury shares does not exceed its estimated needs for such employee benefit and compensation plans over the next two years. ASSET/LIABILITY MANAGEMENT LIQUIDITY MANAGEMENT Liquidity management is an effort of management to provide a continuing flow of funds to meet its financial commitments, customer borrowings needs and deposit withdrawal requirements. The liquidity position of the Company and its subsidiary banks is monitored by the Asset/Liability Management Committee of the Company. The largest category of assets representing a ready source of liquidity for the Company is its short-term financial instruments, which include federal funds sold, interest-bearing deposits at other financial institutions, U.S. Treasury securities and other securities maturing within one year. Liquidity is also provided through the regularly scheduled maturities of assets. The investment portfolio contains a number of high quality issues with varying maturities and regular principal payments. Maturities in the loan portfolio also provide a steady flow of 20 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. funds, and strict adherence to the credit policies of the Company helps ensure the collectibility of these loans. The liquidity position of the Company is also greatly enhanced by its significant base of core deposits. The liquidity ratio is one measure of a bank's ability to meet its current obligations and is defined as the percentage of liquid assets to deposits. Liquid assets include cash and due from banks, unpledged investment securities with maturities of less than one year and federal funds sold. At year-end 1998, 1997 and 1996, the liquidity ratio was 5.65%, 10.00%, and 8.59%, respectively. The decrease in liquidity ratio from year-end 1997 to year-end 1998 is due principally to a high level of short-term funds at December 31, 1997, in preparation for the January 1998 Banc One Corporation transaction. The level of loans maturing within one year greatly added to the Company's liquidity position in 1998. Including loans maturing within one year, the liquidity ratio was 25.58%, 31.07%, and 33.97%, respectively, for the same periods. The Company has revolving lines of credit with its primary lenders, which provide for borrowing up to $50 million. This line would be utilized to finance acquisitions which may be completed in 1999. There was an outstanding balance of $21 million on this line of credit at December 31, 1998. The Company also maintains available lines of federal funds borrowings, as well as seasonal borrowing privileges, at the Federal Reserve Bank of Minneapolis. The Company's subsidiary banks have the ability to borrow an aggregate of $147.6 million in federal funds from 9 nonaffiliated financial institutions. Additionally, most of the Company's subsidiary banks have joined the Federal Home Loan Bank ("FHLB") System. As part of membership, the Company's subsidiary banks purchased a modest amount of stock of FHLB and obtained advance lines of credit which represent an aggregate of $685 million in additional funding capacity. INTEREST RATE SENSITIVITY Interest rate sensitivity indicates the exposure of a financial institution's earnings to future fluctuations in interest rates. Management of interest rate sensitivity is accomplished through the composition of loans and investments and by adjusting the maturities on earning assets and interest-bearing liabilities. Rate sensitivity and liquidity are related since both are affected by maturing assets and liabilities. However, interest rate sensitivity also takes into consideration those assets and liabilities with interest rates that are subject to change prior to maturity. The Company's Asset and Liability Management Committee ("ALCO") attempts to structure the Company's balance sheet to provide for an approximately equal amount of rate sensitive assets and rate sensitive liabilities. In addition to facilitating liquidity needs, this strategy assists management in maintaining relative stability in net interest income despite unexpected fluctuations in interest rates. ALCO uses three methods for measuring and managing interest rate risk: Repricing Mismatch Analysis, Balance Sheet Simulation Modeling, and Equity Fair Value Modeling. REPRICING MISMATCH ANALYSIS -- Management performs a Repricing Mismatch ("Gap Analysis") analysis which represents a point in time net position of assets, liabilities and off-balance sheet instruments subject to repricing in specified time periods. Guidelines established by ALCO, and approved by the Company's Board of Directors, limit the impact on net interest income to five percent given a 100 basis point change in interest rates over one year. However, Management believes Gap Analysis alone does not accurately measure the magnitude of changes in net interest income since changes in interest rate do not impact all categories of assets, liabilities and off-balance sheet instruments equally or simultaneously. A summary of the Gap Analysis is presented on page 22. BALANCE SHEET SIMULATION MODELING -- Balance Sheet Simulation Modeling allows management to analyze the impact of short-term (less than 12 months) interest rate fluctuations using projected balance sheet information. The balance sheet changes are based on forecasted repayments of loans and securities, growth in loans and deposits, and historical pricing spreads. Management uses the model to simulate the impact of immediate and longer-term shifts in the yield curve. The results of these models are reviewed by ALCO and used to develop the Company's strategies. Guidelines established by ALCO limit the impact on net interest income to five percent given a 100 basis point change in interest rates. As of December 31, 1998, the impact of such a change in interest rates would be approximately .52 percent, of net interest income. EQUITY FAIR VALUE MODELING -- Because Balance Sheet Simulation Modeling is dependent on accurate forecasts, its usefulness is limited to periods of one year or less. As a result, the Company uses the Equity Fair Value Modeling to measure long-term interest rate exposure. The method estimates the impact of interest rate changes on the estimated discounted future cash flows of the Company's current assets, liabilities, and off-balance sheet instruments. Guidelines established by ALCO limit the change in fair value to 15 percent given a 100 basis point change in interest rates. As of December 31, 1998, the impact of such a change in interest rates would be approximately 8.18 percent, of equity fair value. Based on each of these methods of measuring interest rate risk, management believes the Company is slightly asset sensitive as of December 31, 1998 for periods beyond one year. The Company does not engage in the speculative use of derivative financial instruments. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS COMMUNITY FIRST BANKSHARES, INC. The following table sets forth the Company's interest rate sensitivity analysis by contractual repricing or maturity at December 31, 1998:
- ----------------------------------------------------------------------------------------------------------- REPRICING OR MATURING IN - ----------------------------------------------------------------------------------------------------------- 1 YEAR OVER 1 OVER 5 (DOLLARS IN THOUSANDS) OR LESS TO 5 YEARS YEARS TOTAL - ----------------------------------------------------------------------------------------------------------- Rate sensitive assets: Loans ................................ $ 1,682,869 $ 1,316,023 $ 387,250 $ 3,386,142 Held to maturity securities .......... 45 122 69,739 69,906 Available-for-sale securities ........ 286,121 545,789 1,148,620 1,980,530 Other interest-bearing assets ........ 5,167 -- -- 5,167 ------------------------------------------------------------------- Total rate sensitive assets .......... $ 1,974,202 $ 1,861,934 $ 1,605,609 $ 5,441,745 ------------------------------------------------------------------- Rate sensitive liabilities: Savings deposits and interest- bearing checking ................... $ -- $ -- $ 2,254,005 $ 2,254,005 Time deposits ........................ 1,691,402 388,748 2,814 2,082,964 Short-term borrowings ................ 435,615 111 -- 435,726 Long-term borrowings ................. 1,596 30,328 66,786 98,710 ------------------------------------------------------------------- Total rate sensitive liabilities ..... $ 2,128,613 $ 419,187 $ 2,323,605 $ 4,871,405 ------------------------------------------------------------------- Rate sensitive gap ..................... $ (154,411) $ 1,442,747 $ (717,996) $ 570,340 Cumulative rate sensitive gap .......... $ (154,411) $ 1,288,336 $ 570,340 $ 570,340
The following sets forth the Company's interest rate sensitivity analysis at December 31, 1998, with respect to the individual categories of loans and provides separate analyses with respect to fixed interest rate loans and floating interest rate loans:
REPRICING OR MATURING IN - ------------------------------------------------------------------------------------------------ 1 YEAR OVER 1 OVER 5 (DOLLARS IN THOUSANDS) OR LESS TO 5 YEARS YEARS TOTAL - ------------------------------------------------------------------------------------------------ Loan category: Real estate .................... $ 479,133 $ 521,767 $ 224,355 $1,225,255 Real estate construction ....... 358,317 -- -- 358,317 Agricultural ................... 234,944 52,199 7,896 295,039 Commercial ..................... 495,768 324,463 83,832 904,063 Consumer and other ............. 114,707 417,594 71,167 603,468 -------------------------------------------------------------- Total loans .................... $1,682,869 $1,316,023 $ 387,250 $3,386,142 -------------------------------------------------------------- Fixed interest rate loans ........ $ 446,944 $1,165,329 $ 378,230 $1,990,503 Floating interest rate loans ..... 1,235,925 150,694 9,020 1,395,639 -------------------------------------------------------------- Total loans .................... $1,682,869 $1,316,023 $ 387,250 $3,386,142 --------------------------------------------------------------
CAPITAL MANAGEMENT Risk-based guidelines established by regulatory agencies require the Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 1998, the Company is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table.
- ----------------------------------------------------------------------------------------- REGULATORY CAPITAL REQUIREMENTS - ----------------------------------------------------------------------------------------- TIER I TOTAL RISK- TOTAL RISK- (DOLLARS IN THOUSANDS) CAPITAL BASED CAPITAL LEVERAGE BASED ASSETS - ----------------------------------------------------------------------------------------- Minimum ................................ 4.00% 8.00% 3.00% N/A Well-Capitalized ....................... 6.00% 10.00% 5.00% N/A - ----------------------------------------------------------------------------------------- Community First Bankshares, Inc. December 31, 1998 ...................... 9.35% 12.08% 6.40% $4,045,169 December 31, 1997 ...................... 11.53% 14.98% 7.51% $3,502,962
Due to the Company's level of Tier 1 capital and substantial level of earning assets invested in low risk government agency and mortgage-backed securities, the Company's risk-based capital ratios significantly exceed the regulatory minimums. The Company conducts an ongoing assessment of its capital needs in order to maintain an adequate level of capital to support business growth, to ensure depositor protection and to facilitate corporate expansion. Management continues to explore steps to increase its capital levels to permit it to make future acquisitions. Portions of the subordinated debt financing referred to under "Borrowings," above, are treated as Tier 2 capital. This Annual Report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: risks related to the Company's acquisition strategy, including risks of adversely changing results of operations and possible factors affecting the Company's ability to consummate and profitably integrate operations of institutions acquired in the future; risks of loans and investments, including dependence on local economic conditions; competition for the Company's customers from other providers of financial services; possible adverse effects of changes in interest rates; possible risks associated with the Year 2000 issue, and other risks detailed in the Company's filings with the Securities and Exchange Commission, which risks are difficult to predict and many of which are beyond the control of the Company. 22 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION COMMUNITY FIRST BANKSHARES, INC.
- ------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- (RESTATED) ASSETS Cash and due from banks ....................................................................... $ 250,963 $ 254,676 Federal funds sold and securities purchased under agreements to resell ........................ 100 76,455 Interest-bearing deposits ..................................................................... 5,067 12,131 Available-for-sale securities ................................................................. 1,980,530 1,539,922 Held-to-maturity securities (Fair Value: 1998 - $69,906, 1997 - $223,829) ..................... 69,906 221,991 Loans ......................................................................................... 3,386,142 3,024,322 Less: Allowance for Loan Losses ............................................................ (50,173) (40,045) ------------------------------ Net Loans ..................................................................................... 3,335,969 2,984,277 Bank premises and equipment, net .............................................................. 123,254 116,637 Accrued interest receivable ................................................................... 51,429 45,221 Intangible assets ............................................................................. 133,231 97,563 Other assets .................................................................................. 52,523 105,262 ------------------------------ Total assets .................................................................................. $ 6,002,972 $ 5,454,135 ------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing ......................................................................... $ 547,703 705,315 Interest-bearing: Savings and NOW accounts ............................................................. 2,254,005 1,586,777 Time accounts over $100,000 .......................................................... 604,859 474,091 Other time accounts .................................................................. 1,478,105 1,386,735 ------------------------------ Total deposits ................................................................................ 4,884,672 4,152,918 Federal funds purchased and securities sold under agreements to repurchase .................... 143,057 44,462 Other short-term borrowings ................................................................... 292,669 230,777 Long-term debt ................................................................................ 93,472 124,529 Accrued interest payable ...................................................................... 26,650 22,704 Due to brokers ................................................................................ -- 340,457 Other liabilities ............................................................................. 37,206 30,275 ------------------------------ Total liabilities ............................................................................. 5,477,726 4,946,122 Company-obligated mandatorily redeemable preferred securities of CFB Capital I and II ......... 120,000 120,000 Shareholders' equity: Common stock, par value $.01 per share: Authorized Shares - 80,000,000 Issued Shares - 47,683,452 .............................................................. 477 474 Capital surplus ............................................................................. 172,043 170,662 Retained earnings ........................................................................... 231,689 212,638 Accumulated other comprehensive income ...................................................... 13,146 5,622 Less: Cost of common stock in treasury - 1998 - 564,588 shares; 1997 - 72,510 shares ........ (12,109) (1,383) ------------------------------ Total shareholders' equity .................................................................... 405,246 388,013 ------------------------------ Total liabilities and shareholders' equity .................................................... $ 6,002,972 $ 5,454,135 ------------------------------
SEE ACCOMPANYING NOTES. 23 CONSOLIDATED STATEMENTS OF INCOME COMMUNITY FIRST BANKSHARES, INC.
- ---------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- (RESTATED) (RESTATED) INTEREST INCOME: Loans .......................................................................... $ 323,315 $ 258,859 $ 218,307 Investment securities .......................................................... 122,173 64,234 49,077 Interest-bearing deposits ...................................................... 721 767 794 Federal funds sold and resale agreements ....................................... 3,035 2,659 2,020 -------------------------------------------- Total interest income ............................................................... 449,244 326,519 270,198 Interest expense: Deposits ....................................................................... 160,576 119,024 94,522 Short-term and other borrowings ................................................ 19,576 9,465 9,359 Long-term debt ................................................................. 8,332 6,051 4,880 -------------------------------------------- Total interest expense .............................................................. 188,484 134,540 108,761 -------------------------------------------- Net interest income ................................................................. 260,760 191,979 161,437 Provision for loan losses ........................................................... 22,509 6,107 7,483 -------------------------------------------- Net interest income after provision for loan losses ................................. 238,251 185,872 153,954 NONINTEREST INCOME: Service charges on deposit accounts ............................................ 30,266 21,059 16,031 Insurance commissions .......................................................... 7,197 5,375 5,213 Fees from fiduciary activities ................................................. 4,944 3,805 3,332 Net gains on sales of securities ............................................... 1,801 466 93 Other .......................................................................... 16,052 16,498 12,277 -------------------------------------------- Total noninterest income ............................................................ 60,260 47,203 36,946 NONINTEREST EXPENSE: Salaries and employee benefits ................................................. 114,014 78,380 66,298 Net occupancy .................................................................. 32,110 23,285 18,852 FDIC insurance ................................................................. 686 381 675 Legal and accounting ........................................................... 4,073 2,269 2,481 Other professional service ..................................................... 5,447 2,892 2,305 Acquisition expense ............................................................ 3,721 398 2,928 Data processing ................................................................ 4,640 1,782 1,842 Company-obligated mandatorily redeemable preferred securities of CFB Capital I & II............................................................... 10,218 5,108 -- Amortization of intangibles .................................................... 10,366 5,550 3,433 Impairment of equity method investment ......................................... -- -- 940 Other .......................................................................... 44,817 29,908 26,226 -------------------------------------------- Total noninterest expense ........................................................... 230,092 149,953 125,980 Income from continuing operations before income taxes and extraordinary item ........ 68,419 83,122 64,920 Provision for income taxes .......................................................... 21,448 24,811 23,398 -------------------------------------------- Income from continuing operations before extraordinary item ......................... 46,971 58,311 41,522 Discontinued Operations: Loss/income from operations of discontinued operations (Less applicable income taxes) ............................................................... (2,232) 967 -- Loss on disposal of discontinued operations, including provision for operating losses during phase-out period (less applicable income taxes) ..... (1,676) -- -- -------------------------------------------- Income before extraordinary item .................................................... $ 43,063 $ 59,278 $ 41,522 Extraordinary item: Loss on early extinguishment of debt, net of taxes .................................. -- (265) -- -------------------------------------------- Net Income .......................................................................... 43,063 59,013 41,522 -------------------------------------------- Preferred stock dividend ............................................................ -- -- 1,610 -------------------------------------------- Net income applicable to common equity .............................................. $ 43,063 $ 59,013 $ 39,912 -------------------------------------------- Earnings per common and common equivalent share: Basic income per share from continuing operations before extraordinary item ......... $ 0.99 $ 1.35 $ 1.01 Discontinued operations ............................................................. (.08) 0.02 -- Extraordinary item .................................................................. -- (0.01) -- -------------------------------------------- Basic net income .................................................................... $ 0.91 $ 1.36 $ 1.01 -------------------------------------------- Diluted income per share from continuing operations before extraordinary item ....... $ 0.98 $ 1.31 $ 0.97 Discontinued operations ............................................................. (.08) 0.02 -- Extraordinary item .................................................................. -- (0.01) -- -------------------------------------------- Diluted net income .................................................................. $ 0.90 $ 1.32 $ 0.97 -------------------------------------------- Average common and common equivalent shares outstanding: Basic .......................................................................... 47,280,245 43,461,264 39,429,607 Diluted ........................................................................ 47,881,575 44,649,922 42,695,783
SEE ACCOMPANYING NOTES. 24 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME COMMUNITY FIRST BANKSHARES, INC.
- ------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Net Income .................................................................... $ 43,063 $ 59,013 $ 39,912 Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized holding gains arising during period .................... 7,524 4,444 (762) Less: Reclassified adjustment for gains Included in net income .... (864) (294) (52) ----------------------------------------- Other comprehensive income .................................................... 6,660 4,150 (814) ----------------------------------------- Comprehensive income .......................................................... $ 49,723 $ 63,163 $ 39,098 -----------------------------------------
SEE ACCOMPANYING NOTES. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY COMMUNITY FIRST BANKSHARES, INC.
- --------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK COMMON STOCK YEARS ENDED DECEMBER 31, 1998, 1997, 1996 --------------------- ---------------- CAPITAL RETAINED (DOLLARS IN THOUSANDS) SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 ............................. 230,000 $ 23,000 38,773,036 $ 388 $ 75,904 $139,226 Net income ............................................... -- -- -- -- -- 41,522 Preferred stock dividends ($7.00 per share) .............. -- -- -- -- -- (1,610) Common stock dividends ($0.29 per share) ................. -- -- -- -- -- (9,728) Issuance of common stock ................................. -- -- 1,765,169 17 10,015 4,920 Retirement of common stock ............................... -- -- (184,834) (2) (729) (1,139) Purchases of common stock for treasury, at cost .......... -- -- -- -- -- -- Sales of treasury stock to employee benefit plans ........ -- -- -- -- 162 -- Exercise of options, net of stock tendered in payment .................................. -- -- 430,398 5 2,827 (321) Conversion of convertible preferred stock ................ (125) (12) -- -- -- (5) Change in unrealized loss on available-for-sale securities, net of income tax benefit of $661 ........ -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 ............................. 229,875 $ 22,988 40,783,769 $ 408 $ 88,179 $172,865 Net income ............................................... -- -- -- -- -- 59,013 Common stock dividends ($0.35 per share) ................. -- -- -- -- -- (19,034) Purchases of common stock for treasury, at cost .......... -- -- -- -- -- -- Sales of common stock to employee benefit plans ............................... -- -- 68,486 2 1,066 -- Issuance of common stock ................................. -- -- 6,512,888 64 79,029 1,315 Retirement of common stock ............................... -- -- (1,781) -- -- -- Exercise of options, net of stock tendered in payment .................................. -- -- -- -- 2,388 (1,521) Conversion of convertible preferred stock ................ (229,875) (22,988) -- -- -- -- Change in unrealized loss on available-for-sale securities, net of income taxes of $2,168 ............ -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 ............................. -- -- 47,363,362 $ 474 $170,662 $212,638 Net income ............................................... -- -- -- -- -- 43,063 Common stock dividends ($0.44 per share) ................. -- -- -- -- -- (19,705) Purchases of common stock for treasury, at cost .......... -- -- -- -- -- -- Issuance of common stock ................................. -- -- 320,090 3 1,381 -- Exercise of options, net of stock tendered in payment ............................. -- -- -- -- -- (4,307) Change in unrealized loss on available-for-sale securities, net of income taxes of $4,742 ............ -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 ............................. -- -- 47,683,452 $ 477 $172,043 $231,689 - ---------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK YEARS ENDED DECEMBER 31, 1998, 1997, 1996 UNREALIZED ---------------------- (DOLLARS IN THOUSANDS) GAIN(LOSS) SHARES AMOUNT TOTAL - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 ............................. $ 1,940 157,248 $ (1,064) $239,394 Net income ............................................... -- -- -- 41,522 Preferred stock dividends ($7.00 per share) .............. -- -- -- (1,610) Common stock dividends ($0.29 per share) ................. -- -- -- (9,728) Issuance of common stock ................................. -- -- -- 14,952 Retirement of common stock ............................... -- -- -- (1,870) Purchases of common stock for treasury, at cost .......... -- 129,800 (1,535) (1,535) Sales of treasury stock to employee benefit plans ........ -- (45,164) 307 469 Exercise of options, net of stock tendered in payment .................................. -- (138,698) 1,050 3,561 Conversion of convertible preferred stock ................ -- (1,566) 17 -- Change in unrealized loss on available-for-sale securities, net of income tax benefit of $661 ........ (762) -- -- (762) - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 ............................. $ 1,178 101,620 $ (1,225) $284,393 Net income ............................................... -- -- -- 59,013 Common stock dividends ($0.35 per share) ................. -- -- -- (19,034) Purchases of common stock for treasury, at cost .......... -- 157,000 (2,777) (2,777) Sales of common stock to employee benefit plans ............................... -- -- -- 1,068 Issuance of common stock ................................. -- -- -- 80,408 Retirement of common stock ............................... -- -- -- -- Exercise of options, net of stock tendered in payment .................................. -- (186,110) 2,619 3,486 Conversion of convertible preferred stock ................ -- -- -- (22,988) Change in unrealized loss on available-for-sale securities, net of income taxes of $2,168 ............ 4,444 -- -- 4,444 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 ............................. $ 5,622 72,510 $ (1,383) $388,013 Net income ............................................... -- -- -- 43,063 Common stock dividends ($0.44 per share) ................. -- -- -- (19,705) Purchases of common stock for treasury, at cost .......... -- 731,000 (16,314) (16,314) Issuance of common stock ................................. -- -- -- 1,384 Exercise of options, net of stock tendered in payment ............................. -- (238,922) 5,588 1,281 Change in unrealized loss on available-for-sale securities, net of income taxes of $4,742 ............ 7,524 -- -- 7,524 BALANCE AT DECEMBER 31, 1998 ............................. $13,146 564,588 $(12,109) $405,246 - ---------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 25 STATEMENTS OF CONSOLIDATED CASH FLOWS COMMUNITY FIRST BANKSHARES, INC.
- ------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31(IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- (RESTATED) (RESTATED) CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations .......................................... $ 46,971 $ 58,046 $ 41,522 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ............................................... 22,509 6,107 7,483 Depreciation ............................................................ 15,450 10,468 8,122 Amortization of intangibles ............................................. 10,366 5,550 3,433 Net amortization of premiums and discounts on securities ................ (813) (68) 1,867 Deferred income tax benefit ............................................. (6,585) (3,500) (4,084) Decrease in interest receivable ......................................... (6,208) (5,154) (3) Increase in interest payable ............................................ 3,946 1,744 323 Other, net .............................................................. (59,965) 8,042 (4,372) --------------------------------------------------- Net cash provided by operating activities .................................. 25,671 81,235 54,291 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions, net of cash acquired ......................................... -- 145,351 14,026 Net decrease (increase) in interest-bearing deposits ....................... 7,064 (4,639) (1,733) Purchases of available-for-sale securities ................................. (2,952,170) (739,549) (233,826) Maturities of available-for-sale securities ................................ 2,193,292 367,211 219,778 Sales of securities, net of gains .......................................... 145,125 75,136 30,461 Purchases of held-to-maturity securities ................................... (11,425) (35,542) (31,213) Maturities of held-to-maturity securities .................................. 9,277 31,466 34,648 Net increase in loans ...................................................... (302,665) (171,794) (277,870) Net increase in bank premises and equipment ................................ (22,067) (20,935) (19,735) Net decrease (increase) in minority interest ............................... -- (2,946) 468 --------------------------------------------------- Net cash used in investing activities ...................................... (933,569) (356,241) (264,996) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts and savings accounts ........................................................ 509,616 48,010 85,393 Net increase in time accounts .............................................. 222,138 68,960 6,107 Net increase in short-term and other borrowings ............................ 160,218 23,358 157,696 Net decrease (increase) in long-term debt .................................. (30,788) 68,587 (34,594) Net proceeds from issuance of Company-obligated mandatorily redeemable preferred securities of CFB Capital I and II ........................................................ -- 120,000 -- Net proceeds from issuance of common stock ................................. 1,384 80,408 14,952 Conversion of preferred stock to common stock .............................. -- (22,988) -- Purchase of common stock held in treasury .................................. (16,314) (2,777) (1,535) Sale of common stock held in treasury ...................................... 1,281 4,554 4,030 Retirement of common stock ................................................. -- -- (1,870) Preferred stock dividends paid ............................................. -- -- (1,610) Common stock dividends paid ................................................ (19,705) (19,034) (9,728) --------------------------------------------------- Net cash provided by financing activities .................................. 827,830 369,078 218,841 --------------------------------------------------- Net (decrease) increase in cash and cash equivalents ....................... (80,068) 94,072 8,136 Cash and cash equivalents at beginning of year ............................. 331,131 237,059 228,923 --------------------------------------------------- Cash and cash equivalents at end of year ................................... $ 251,063 $ 331,131 $ 237,059 ---------------------------------------------------
SEE ACCOMPANYING NOTES. 26 DECEMBER 31, 1998, 1997 AND 1996 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. 1. SIGNIFICANT ACCOUNTING POLICIES Community First Bankshares, Inc. (the "Company") is a multi-bank holding company which, at the end of 1998, served 154 communities in Arizona, Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsin, and Wyoming. The Company's community banks provide a full range of banking services, primarily in small and medium-sized communities and the surrounding communities. In addition to its primary emphasis on commercial and consumer banking services, the Company offers trust, insurance and nondeposit investment products and services. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Community First Bankshares, Inc., its wholly owned data processing, credit origination and insurance agency subsidiaries and its eleven wholly owned subsidiary banks. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation. As discussed in Note 2, the Company acquired Community Bancorp, Inc. ("CBI") on April 3, 1998, Pioneer Bank of Longmont ("Longmont") on April 30, 1998, FNB, Inc. ("FNB") on May 7, 1998, Western Bancshares of Las Cruces ("Western") on July 1, 1998 and Guardian Bancorp ("Guardian") on August 7, 1998. These acquisitions were accounted for using the pooling of interests method. While none of these transactions, individually, was material to the Company's financial condition or operating results, the aggregation of these business combinations does have a material affect on the Company's financial condition and operating results. In addition, also discussed in Note 2, the Company acquired Mountain Parks Financial Corporation ("Mountain Parks") on December 18, 1996. This acquisition was accounted for using the pooling of interests method. Accordingly, the consolidated financial information has been restated to reflect the results of operations of the seven companies on a combined basis for all periods presented. 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 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. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. HELD-TO-MATURITY AND AVAILABLE-FOR-SALE SECURITIES Management determines the classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of retained earnings in shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included as an adjustment to interest income from investments. Realized gains and losses and declines in value judged to be other-than-temporary are included in net securities gains (losses). The cost of securities sold is based on the specific identification method. LOANS Loans are stated at their principal balance outstanding, less the allowance for loan losses. Interest on loans is recognized on an accrual basis. Loans are placed on nonaccrual when they become past due over 90 days, or earlier, if the collection of interest or principal is considered unlikely. Thereafter, no interest income is recognized unless received in cash and until such time as the borrower demonstrates the ability to pay interest and principal. LOAN FEE INCOME The Company recognizes loan fees and certain direct origination costs as a yield adjustment over the estimated life of the loan, utilizing a method that results in a constant rate of return. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained through charges to expense at an amount that will provide for estimated loan losses. These estimates are based principally on a continual review of the loan portfolio, loan charge-off experience, economic conditions and industry guidelines. Ultimate losses may vary from current estimates, and as adjustments become necessary, the allowance for loan losses is adjusted in the periods in which such losses become known or fail to occur. Actual loan charge-offs and subsequent recoveries are deducted from and added to the allowance, respectively. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is provided on the straight-line method over the estimated lives of the assets and includes amortization of assets recorded under capital leases. Estimated lives range from three to twenty and twenty-five to forty years for equipment and premises, respectively. Accelerated depreciation methods are used for income tax reporting purposes. INTANGIBLE ASSETS Goodwill, the excess cost over net assets acquired, of banking subsidiaries is amortized over a period of fifteen years. At December 31, 1998, goodwill totaled $82,002,000, net of accumulated amortization of $17,162,000. Other intangible assets, principally deposit base intangibles, unexpired premium lists and noncompetition agreements, totaled $51,229,000, net of accumulated amortization of $6,788,000, and are amortized over their estimated useful lives ranging from three to twenty-five years. INCOME TAXES The Company provides for income taxes based on income reported for financial statement purposes, rather than amounts currently payable under statutory tax laws. Deferred taxes are recorded to reflect the tax consequences on future years differences between the tax bases of assets and liabilities and the financial reporting of amounts at each year-end. EARNINGS PER SHARE Basic earnings per common share is calculated by dividing net income applicable to common equity by the weighted average number of shares of common stock outstanding. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. Diluted earnings per common share is based on net income before considering the preferred stock dividends declared. The weighted average number of shares of common stock outstanding is increased by the assumed conversion of convertible preferred stock outstanding and the number of shares of common stock that would be issued assuming the exercise of stock options and warrants during each period. Such adjustments to the weighted average number of shares of common stock outstanding are made only when such adjustments dilute earnings per share. CASH AND CASH EQUIVALENTS Cash and cash equivalents is defined as cash and due from banks, federal funds sold and securities purchased under agreements to resell. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. See Footnote 14. 2. 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. The Company's consolidated financial information has been restated to reflect this merger. The operating results are included in the Company's consolidated statements for all periods presented. 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. The Company's consolidated financial information has been restated to reflect this merger. The operating results are included in the Company's consolidated statements for all periods presented. On May 7, 1998, the Company issued approximately 1,135,000 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. The Company's consolidated financial information has been restated to reflect this merger. The operating results are included in the Company's consolidated statements for all periods presented. 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. The Company's consolidated financial information has been restated to reflect this merger. The operating results are included in the Company's consolidated statements for all periods presented. On April 3, 1998, the Company issued approximately 853,000 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 Company's consolidated financial information has been restated to reflect this merger. The operating results are included in the Company's consolidated statements for all periods presented. The operating results of the Company and Guardian, Western, FNB, Pioneer, and CBI, ("Acquired Banks") for the years ended December 31, 1997 and 1996 prior to restatement were:
THE ACQUIRED (IN THOUSANDS, EXCEPT PER SHARE DATA) COMPANY BANKS COMBINED - ------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1997: Net interest income ............ $161,344 $ 30,635 $191,979 Net income applicable to common equity ................ 46,552 12,461 59,013 Earnings per share: Basic ........................ $ 1.26 $ 1.91 $ 1.36 Diluted ...................... $ 1.22 $ 1.91 $ 1.32 YEAR ENDED DECEMBER 31, 1996: Net interest income ............ $134,192 $ 27,245 $161,437 Net Income ..................... 32,510 9,012 41,522 Net income applicable to common equity ................ 30,900 9,012 39,912 Earnings per share: Basic ........................ $ 0.94 $ 1.41 $ 1.01 Diluted ...................... $ 0.90 $ 1.41 $ 0.97
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. ("MPFS") were acquired by Cygnet Financial Services, Inc. on July 31, 1998. At December 31, 1998, the Company retained $25 million in loans originated by Equity Lending and servicing rights on an additional $100 million in Equity Lending loans sold to other parties. At December 31, 1998, the Company also retained $40 million in auto installment contracts originated by MPFS. In addition to a fourth quarter charge of $10 million in anticipation of liquidating these companies, the Company recorded a $3.9 million loss on these companies during the first and second quarter of 1998, when the companies were classified as discontinued operations. Losses on the discontinued operations included a $2.2 million operating loss and a $1.7 million expected loss on disposal. Equity Lending, which originates residential non-conforming mortgages and MPFS, 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 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 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 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. assumption of certain liabilities and resulted in the recognition of a deposit based intangible of approximately $44 million. On December 1, 1997, the Company issued approximately 630,000 shares of common stock to acquire First National Summit Bankshares, Inc. ("Summit"), a one-bank holding company headquartered in Gunnison, Colorado. At acquisition, Summit had approximately $90 million in assets and $82 million in deposits at banking offices located in Crested Butte, Fruitvale, Grand Junction, Gunnison, and Mt. Crested Butte, Colorado. The Company used the pooling of interests method to account for the transaction. This merger was not material to the Company's financial condition or operating results. Accordingly, the Company's consolidated financial information has not been restated to reflect this merger. The operating results are included in the Company's consolidated financial statement from the date of merger. On November 24, 1997, the Company issued approximately 737,000 shares of common stock to acquire Republic National Bancorp, Inc. ("Republic"), a holding company with one bank in Phoenix, Arizona. At acquisition, Republic had approximately $54 million in assets and $49 million in deposits. The Company used the pooling of interests method to account for the transaction. This merger was not material to the Company's consolidated financial information or operating results. Accordingly, the Company's consolidated financial information has not been restated to reflect this merger. The operating results are included in the Company's consolidated financial statements from the date of the merger. On July 14, 1997, the Company completed the acquisition of KeyBank National Association, Cheyenne, Wyoming ("KeyBank Wyoming") with 28 banking offices located in 24 communities throughout the state of Wyoming. The transaction, which was accounted for as a purchase, resulted in the addition of approximately $1.1 billion in assets and $900 million in deposits and the recognition of goodwill of approximately $60 million. The operating results of KeyBank Wyoming, subsequent to the date of acquisition, are included in the Company's consolidated financial statements from the date of acquisition. The following unaudited proforma consolidated financial information for the year ended December 31, 1997, reflects the results of operations as if the acquisition of KeyBank Wyoming had occurred on January 1, 1997. In addition to combining the historical results of operations of the two companies, the proforma operating results include adjustments for the estimated effect of purchase accounting on the Company's results, principally amortization of intangibles, adjustments to reflect the estimated impact on income and expense related to the assets and liabilities retained by KeyCorp and assumes the following were completed at the beginning of the period presented: (i) the $60 million offering of 8.875% Cumulative Capital Securities of CFB Capital I completed in February 1997; (ii) the redemption on March 31, 1997 of the Company's 7.75% Subordinated Notes due 2000 in the principal amount of $23 million; and (iii) the conversion during March 1997 of substantially all of the Company's 7% Cumulative Convertible Preferred Stock.
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) - ------------------------------------------------------------------------------ Net Interest Income ............................................ $ 209,649 Income from continuing operations .............................. 60,826 Income before extraordinary item ............................... 61,793 Net Income ..................................................... 61,528 Earnings per common share Basic ....................................................... $ 1.40 Diluted ..................................................... $ 1.38
The proforma information may not be indicative of the results that actually would have occurred if the combination had been in effect on the date indicated or that may be obtained in the future. On April 30, 1997, the Company sold its 24.36% minority interest in Vail Banks, Inc., the parent company of WestStar Bank, Vail, Colorado for approximately $3 million. The sale was completed in response to regulatory requirements with regard to competitive factors resulting from the Company's December 1996 acquisition of Mountain Parks. On April 4, 1997, the Company, through its Colorado subsidiary, completed the sale of its offices in Grandby and Grand Lake, Colorado in response to regulatory requirements with regard to competitive factors resulting from the Company's merger with Mountain Parks. The transaction included approximately $24 million in deposits and resulted in the recognition of a gain of approximately $2.8 million. The operating results subsequent to the date of acquisition of all of the companies acquired in purchase transactions are included in the Company's consolidated financial statements for the years ended December 31, 1998, 1997 and 1996. 3. ACCOUNTING CHANGES SFAS No. 130 - Reporting Comprehensive Income - In June 1997, the FASB issued Statement 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed as prominently as other financial statements. The Statement requires the classification of items of other comprehensive income separately from retained earnings and capital surplus in the equity section of the statement of financial position. SFAS 130 was effective January 1, 1998, with all prior periods presented restated to conform to the provisions of this statement. Accumulated other comprehensive income consists of unrealized gains and losses on available-for-sale securities. Ending accumulated comprehensive income balances and the income tax expense allocated to amounts of unrealized gains and losses on available-for-sale securities are disclosed in the Consolidated Statements of Shareholders' Equity. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. 4. SECURITIES The following is a summary of available-for-sale securities and held-to-maturity securities at December 31, 1998 (in thousands):
- ------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES - ------------------------------------------------------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------- United States Treasury ................. $ 129,820 $ 2,105 $ 1 $ 131,924 United States Government agencies ...... 351,122 2,416 580 352,958 Mortgage-backed securities ............. 1,205,771 14,621 1,336 1,219,056 Collateralized mortgage obligations .... 61,760 391 101 62,050 State and political securities ......... 134,198 3,321 314 137,205 Other securities ....................... 76,870 1,520 1,053 77,337 ------------------------------------------------------------- Total .................................. $1,959,541 $ 24,374 $ 3,385 $1,980,530 -------------------------------------------------------------
- ------------------------------------------------------------------------ HELD-TO-MATURITY SECURITIES - ------------------------------------------------------------------------ GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------ Other securities ....... $69,906 $ -- $ -- $69,906 ---------------------------------------------- Total .................. $69,906 $ -- $ -- $69,906 ----------------------------------------------
The following is a summary of available-for-sale securities and held-to-maturity securities at December 31, 1997 (in thousands):
AVAILABLE-FOR-SALE SECURITIES GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - ------------------------------------------------------------------------------------------------------- United States Treasury .................. $ 146,228 $ 1,048 $ 150 $ 147,126 United States Government agencies ....... 286,976 1,137 366 287,747 Mortgage-backed securities .............. 834,110 6,755 508 840,357 Collateralized mortgage obligations ..... 107,799 403 99 108,103 State and political securities .......... 71,055 912 105 71,862 Other securities ........................ 85,032 37 342 84,727 -------------------------------------------------------------- Total ................................... $1,531,200 $ 10,292 $ 1,570 $1,539,922 --------------------------------------------------------------
HELD-TO-MATURITY SECURITIES GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------- United States Treasury ................ $ 1,536 $ 3 $ -- $ 1,539 United States Government agencies ..... 19,780 87 34 19,833 Mortgage-backed securities ............ 82,357 567 672 82,252 State and political securities ........ 52,702 1,915 19 54,598 Other securities ...................... 65,616 -- 9 65,607 ------------------------------------------------------ Total ................................. $221,991 $ 2,572 $ 734 $223,829 ------------------------------------------------------
Proceeds from the sale of available-for-sale securities during the years ended December 31, 1998, 1997 and 1996, were $146,926,000, $75,600,000, and $30,558,000, respectively. Gross gains of $1,870,000, $550,000, and $200,000 and gross losses of $69,000, $86,000, and $103,000 were realized on those sales during 1998, 1997 and 1996, respectively. The tax effect on the net gains during 1998, 1997 and 1996 was approximately $630,000, $162,000, and $34,000, respectively. Transfers of held-to-maturity securities to available-for-sale were completed to conform certain portions of the investment portfolio to designations made in connection with business combinations. There were no sales of held-to-maturity securities during 1998, 1997 or 1996. The amortized cost and estimated fair value of debt securities at December 31, 1998, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
- ------------------------------------------------------------------------------ AMORTIZED ESTIMATED AVAILABLE-FOR-SALE (IN THOUSANDS) COST FAIR VALUE - ------------------------------------------------------------------------------ Due in one year or less ....................... $ 79,152 $ 79,633 Due after one year through five years ......... 299,545 303,675 Due after five years through ten years ........ 172,492 173,237 Due after ten years ........................... 140,821 142,879 ----------------------------- 692,010 699,424 Mortgage-backed securities .................... 1,205,771 1,219,056 Collateralized mortgage obligations ........... 61,760 62,050 ----------------------------- Total ......................................... $ 1,959,541 $ 1,980,530 -----------------------------
AMORTIZED ESTIMATED HELD-TO-MATURITY (IN THOUSANDS) COST FAIR VALUE - ------------------------------------------------------------------------------ Due in one year or less ....................... $ 45 $ 45 Due after one year through five years ......... 122 122 Due after five years through ten years ........ -- -- Due after ten years ........................... 69,739 69,739 ----------------------------- 69,906 69,906 Mortgage-backed securities .................... -- -- ----------------------------- Total ......................................... $ 69,906 $ 69,906 -----------------------------
At December 31, 1998, available-for-sale securities included $1,529,000 in commitments to purchase specific investment securities at a future date. Available-for-sale and held-to-maturity securities carried at $993,734,000 and $826,043,000 at December 31, 1998 and 1997, respectively, were pledged to secure borrowings, public and trust deposits and for other purposes required by law. Securities sold under agreement to repurchase were collateralized by available-for-sale and held-to-maturity securities with an aggregate carrying value of $134,557,000 and $61,749,000 at December 31, 1998 and 1997, respectively. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. 5. LOANS The composition of the loan portfolio at December 31 was as follows (in thousands):
- ------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------- Real estate ........................ $ 1,225,255 $ 1,152,918 Real estate construction ........... 358,317 247,486 Commercial ......................... 904,063 778,176 Consumer and other ................. 603,468 552,384 Agriculture ........................ 295,039 293,358 ------------------------------ 3,386,142 3,024,322 Less allowance for loan losses ..... (50,173) (40,045) ------------------------------ Net Loans .......................... $ 3,335,969 $ 2,984,277 ------------------------------
At December 31, 1998, real estate loans totaling $360,000,000 were pledged to secure borrowings. At December 31, 1998, loans held for sale totaled $65,000,000, and consisted of consumer loans and real estate loans at the Company's specialty lending subsidiaries. The Company's policy for valuing loans held for sale is to carry the balances at fair market value. 6. ALLOWANCE FOR LOAN LOSSES Activity in the allowance was as follows (in thousands):
1998 1997 1996 - ------------------------------------------------------------------------------------- Balance at beginning of year .............. $ 40,045 $ 30,165 $ 25,906 Allowance of acquired companies (1) ....... 1,950 10,065 784 Provision charged to operating expense .... 22,509 6,107 7,483 Loans charged off ......................... (17,966) (8,903) (5,512) Recoveries of loans charged off ........... 3,635 2,611 1,504 ----------------------------------------- Balance at end of year .................... $ 50,173 $ 40,045 $ 30,165 -----------------------------------------
(1) INCLUDES ONLY ACQUISITIONS OF COMPANIES ACCOUNTED FOR AS PURCHASES. Nonaccrual loans totaled $22,517,000, $14,801,000, and $15,283,000 at December 31, 1998, 1997, and 1996, respectively. The Company includes all loans considered impaired under SFAS No. 114 in nonaccrual loans. The amount of impaired loans was not material at December 31, 1998. Interest income of $3,645,000 on nonaccrual loans would have been recorded during 1998 if the loans had been current in accordance with their original terms. During 1998, the Company recorded interest income of $1,489,000 related to loans that were on nonaccrual status as of December 31, 1998. Management determines the adequacy of the allowance based on evaluations of the loan portfolio and related commitments, recent loss experience and other relevant factors, including economic conditions. This evaluation is inherently subjective as it requires estimates, including amounts of future cash collections expected on nonaccrual loans that may be susceptible to significant change. The allowance for credit losses relating to impaired loans is based on the loans observable market price, the collateral for certain collateral dependent loans or discounted cash flows. The Company allocates the allowance to specific cate gories based on relative risk characteristics of the loan portfolio and other financial instruments with credit exposure. Commercial and agricultural allocations are based on quarterly reviews of individual loans outstanding, including commitments to lend and an analysis of the portfolio's recent performance. The real estate, including real estate construction, and consumer allocations are based on the quarterly analysis of the respective portfolio performance, including historical and expected delinquency and charge-off statistics. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Due to the nature of its business and the financing needs of its customers, the Company is involved with a large number of financial instruments, the majority for which an active market does not exist. Accordingly, the Company has used various valuation techniques to estimate the fair value of its financial instruments. These techniques are significantly affected by the assumptions used, including the discount rate, the estimated timing and amount of cash flows and the aggregation methods used to value similar instruments. In this regard, the resulting fair value estimates cannot be substantiated by comparison to independent markets and, in a majority of cases, could not be realized by the immediate sale or settlement of the instrument. Also, the estimates reflect a point in time valuation that could change significantly based on changes in outside economic factors, such as the general level of interest rates. The required disclosures exclude the estimated values of nonfinancial instrument cash flows and are not intended to provide or estimate a market value of the Company. The following assumptions were used by the Company in estimating the fair value of the specific financial instruments. CASH AND CASH EQUIVALENTS The carrying amounts reported in the statement of financial condition approximate fair values for these items that have no interest rate or credit risk. FEDERAL FUNDS PURCHASED AND SHORT-TERM BORROWED FUNDS The carrying amount approximates fair value due to the short maturity of the instruments and floating interest rates which are tied to market conditions. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES Fair values for these items are based on available market quotes. If market quotes are not available, fair values are based on market quotes of comparable securities. INTEREST-BEARING DEPOSITS The fair value of interest-bearing deposits is estimated using a discounted cash flow analysis using current market rates of interest-bearing deposits with similar maturities to discount the future cash flows. LOANS The loan portfolio consists of both variable and fixed rate loans. The carrying amounts of variable rate loans, a majority of which reprice within the next three months and for which there has been no significant change in credit risk, are assumed to approximate fair values. The fair values for fixed rate loans are estimated using discounted cash flow analyses. The discount rates applied are based on the current interest rates for loans with similar terms to borrowers of similar credit quality. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts and certain money market deposits is defined by SFAS No. 107 to be equal to the amount payable on demand at the date of the financial statements. Fair values for fixed rate certificates of deposits are estimated using a discounted cash flow analysis that used the interest rates currently being offered on certificates of deposit to discount the aggregated expected monthly maturities. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. SHORT-TERM BORROWINGS Federal funds purchased, borrowings under repurchase agreements and other short-term borrowings are at variable rates or have short-term maturities and their fair value is assumed to approximate their carrying amount. LONG-TERM DEBT The fair value of long-term debt is estimated using a discounted cash flow analysis using current market rates of debt with similar maturities to discount the future cash flows. LOAN COMMITMENTS AND LETTERS OF CREDIT The majority of the Company's commitments have variable rates and do not expose the Company to interest rate risk. The Company's commitments for fixed rate loans are evaluated and it is estimated the probability of additional loans being issued under these commitments is not significant and there is not a fair value liability. The estimated fair values of the Company's financial instruments at December 31 are shown in the table below (in thousands):
- ---------------------------------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------- Financial assets: Cash and due from banks .......... $ 250,963 $ 250,963 $ 254,676 $ 254,676 Federal funds sold and resale agreements .............. 100 100 76,455 76,455 Interest-bearing deposits ........ 5,067 5,070 12,131 12,131 Available-for-sale securities .... 1,980,530 1,980,530 1,539,922 1,539,922 Held-to-maturity securities ...... 69,906 69,906 221,991 223,829 Loans ............................ 3,386,142 3,378,230 3,024,322 3,017,771 Allowance for loan losses ........ (50,173) (50,173) (40,045) (40,045) -------------------------------------------------------------------- Net loans ........................ 3,335,969 3,328,057 2,984,277 2,977,726 Financial liabilities: Deposits: Noninterest-bearing ............ $ 547,703 $ 547,703 $ 705,315 $ 705,315 Interest-bearing: Savings and NOW ............... 2,254,005 2,254,005 1,586,777 1,586,777 Time accounts over $100,000 ... 604,859 605,290 474,091 474,575 Other time accounts ........... 1,478,105 1,478,453 1,386,735 1,385,616 -------------------------------------------------------------------- Total deposits ..................... 4,884,672 4,885,451 4,152,918 4,152,283 Federal funds purchased and repurchase agreements ............ 143,057 143,057 44,462 44,462 Other short-term borrowings ........ 292,669 292,669 230,777 230,777 Long-term debt ..................... 93,472 96,031 124,529 124,529
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk. These transactions enable customers to meet their financing needs and enable the Company to manage its interest rate risk. These financial instruments include commitments to extend credit and letters of credit. The contract or notional amounts of these financial instruments at December 31, 1998 and 1997, were as follows (in thousands):
- ---------------------------------------------------------- 1998 1997 - ---------------------------------------------------------- Commitments to extend credit ..... $627,919 $516,577 Standby letters of credit ........ 21,799 19,604 Commercial letters of credit ..... 4,354 1,816
Commitments to extend credit are legally binding and have fixed expiration dates or other termination clauses. The Company's exposure to credit loss on commitments to extend credit, in the event of nonperformance by the counterparty, is represented by the contractual amounts of the commitments. The Company monitors its credit risk for commitments to extend credit by applying the same credit policies in making commitments as it does for loans and by obtaining collateral to secure commitments based on management's credit assessment of the counterparty. Collateral held varies, but may include marketable securities, receivables, inventory, agricultural commodities, equipment and real estate. Because many of the commitments are expected to expire without being drawn upon, total commitment amounts do not necessarily represent the Company's future liquidity requirements. In addition, the Company also offers various consumer credit line products to its customers that are cancelable upon notification by the Company, which are included above in commitments to extend credit. Standby letters of credit are conditional commitments issued by the Company to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Commercial letters of credit are issued by the Company on behalf of customers to ensure payments of amounts owed or collection of amounts receivable in connection with trade transactions. The Company's exposure to credit loss in the event of nonperformance by the counterparty is the contractual amount of the letter of credit and represents the same exposure as that involved in extending loans. The amount of collateral obtained to support letters of credit is based on a credit assessment of the counterparty. Collateral held may include marketable securities, receivables, inventory, agricultural commodities, equipment and real estate. Because the conditions under which the Company is required to fund letters of credit may not materialize, the liquidity requirements of letters of credit are expected to be less than the total outstanding commitments. The Company's bank subsidiaries grant real estate, agricultural, commercial, consumer and other loans and commitments and letters of credit to customers throughout Arizona, Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsin and Wyoming. Although the Company has a diversified loan portfolio, the ability of a significant portion of its debtors to honor their contracts is dependent upon the agricultural economic sector. The maximum exposure to accounting loss that could occur, if the borrowers fail to perform according to the loan agreements and the underlying collateral proved to be of no value, is the total loan portfolio balances and commitments and letters of credit. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. 9. BANK PREMISES AND EQUIPMENT Bank premises and equipment at December 31 consisted of the following (in thousands):
- ----------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------- Land ............................................... $ 18,977 $ 17,976 Buildings .......................................... 121,514 106,554 Furniture, fixtures and equipment .................. 83,841 78,905 Leased property under capital lease obligations .... 9,638 11,454 ------------------------- 233,970 214,889 Less accumulated depreciation ...................... 110,716 98,252 ------------------------- $123,254 $116,637 -------------------------
10. SHORT-TERM BORROWINGS As of December 31, 1998, the Company's subsidiary banks had $210,000,000 in Federal Home Loan Bank ("FHLB") borrowings, which are collateralized by various investment securities and real estate loans. The interest rates on FHLB borrowings are variable rates based on short-term market conditions and the term of the advance, ranging from 4.89% to 5.27% at December 31, 1998. The Company's subsidiaries had additional short-term borrowings of $68,359,000 outstanding at December 31, 1998. The Company has a short-term line of credit bearing interest at the Federal Funds rate plus 1.25% that provides for borrowing up to $25,000,000 through December 31, 1998, with no commitment fee. As of December 31, 1998, the Company had a balance of $4,725,000 outstanding under this line of credit. The Company also has a short-term line of credit bearing interest at a variable rate of LIBOR plus .30% that provides for borrowing up to $25,000,000 through October 29, 1999, with a commitment fee of .15% of the revolving commitment amount. As of December 31, 1998, the Company had a balance of $16,500,000 outstanding under this line of credit. The Company has entered into an agreement that allows for its designated agent to underwrite up to $35,000,000 in commercial paper and has obtained lines of credit to support these borrowings. As of December 31, 1998, there was a $14,310,000 commercial paper balance outstanding with a blended rate of 5.87%. The terms of the lines of credit include certain covenants with which the Company must comply. At December 31, 1998, the Company was in compliance with all covenants pertaining to the lines of credit. 11. LONG-TERM DEBT Long-term debt consisted of the following at December 31 (in thousands):
- -------------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------- Parent Company: Subordinated notes payable, interest at 7.30%, payable semi-annually, maturing June 30, 2004, unsecured $ 60,000 $ 60,000 Term note payable to bank, interest at 6.19% until February 1, 2008, then at .50% over One Year, Three Year, or Five Year U.S. Treasury rate, payable semi-annually, maturing February 1, 2013, secured by real property 3,200 -- Exchangeable subordinated notes payable, interest at 9.00% payable quarterly, maturing August 15, 2005, unsecured -- 11,500 Term note payable to bank, interest at bank's base rate (8.50% at December 31, 1997), payable quarterly, principal payments of $100,000 due annually through October 1, 1999, unsecured -- 400 Term note payable to bank, interest at bank's prime rate, maturing April 1, 1998, secured by bank stock -- 475 Subsidiaries: Federal Home Loan Bank advances, interest rates ranging from 5.32% to 8.33%, payable quarterly, with maturities ranging from November 18, 2002 to March 10, 2010 27,787 49,112 Term Note payable to bank, interest at 5.19% payable monthly, principal payments ranging from $38,700 to $54,600, per schedule due monthly through March 31, 2003 2,356 2,800 Other Notes Payable 129 242 ---------------------------- $ 93,472 $124,529 ----------------------------
The 7.30% subordinated notes payable are not redeemable, in whole or in part, by the Company. These notes, of which 100% of the balance qualifies as Tier II capital under the Federal Reserve Board guidelines, are direct obligations of the Company and are subordinated to all other indebtedness of the Company. The terms of the subordinated notes payable include certain covenants with which the Company must comply. At December 31, 1998, the Company was in compliance with all covenants pertaining to the subordinated notes payable. 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 redemption date. The total outstanding principal amount of the notes, which were issued on July 1995, was $11.5 million. The early redemption resulted in a one-time pre-tax charge of $345,000. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. Maturities of long-term debt outstanding, primarily of the parent company, at December 31, 1998, were (in thousands): - -------------------------------------- 1999 ..........................$ 695 2000 .......................... 736 2001 .......................... 782 2002 .......................... 21,959 2003 .......................... 5,040 Thereafter .................... 64,260 ------- $93,472 ------- - --------------------------------------
During March 1997, the Company redeemed its $23 million in aggregate principal amount of 7.75% Subordinated Notes (the "7.75% Notes"). The 7.75% Notes were redeemed at par plus accrued interest and resulted in an extraordinary loss of $265,000, net of taxes, on the early extinguishment of debt. 12. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES On December 10, 1997, the Company issued $60 million of 8.20% Cumulative Capital Securities, through CFB Capital II, a business trust subsidiary organized in December 1997. The proceeds of the offering were invested by CFB Capital II in Junior Subordinated Debentures of the Company. The Company used the net proceeds in part to capitalize its bank subsidiaries in Colorado and Arizona, which acquired branches of Banc One Corporation, in their respective states. The debentures will mature not earlier than December 15, 2002, and not later than December 15, 2027. On February 5, 1997, the Company issued $60 million of 8.875% Cumulative Capital Securities, through CFB Capital I, a business trust subsidiary organized in January 1997. The proceeds of the offering were invested by CFB Capital I in Junior Subordinated Debentures of the Company. The Company used a portion of the net proceeds to redeem $23 million in aggregate principal amount of 7.75% Subordinated Notes. The remainder of the proceeds of the offering were used for general corporate purposes, including in part, the purchase of KeyBank Wyoming. The debentures will mature not earlier than February 1, 2002 and not later than February 1, 2027. At December 31, 1998, the combined $120 million in Capital Securities qualified as Tier I capital under capital guidelines of the Federal Reserve. 13. SHAREHOLDERS' EQUITY COMMON STOCK On April 3, 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission for the purpose of issuing up to 3,500,000 shares of its common stock. The shares may be offered in acquisition transactions in exchange for shares of capital stock, partnership interests or other assets representing an interest, direct or indirect, in other companies or entities, or in exchange for assets used in or related to the business of such entities. Amendment No. 1, effective June 11, 1998, increased the shares under this registration statement to 7,000,000 shares, to reflect the effect of the shares remaining as of May 15, 1998, when the shareholders approved a charter amendment to facilitate a two-for-one split of the Company's common stock, in the form of a 100 percent stock dividend. Subsequently, two additional acquisitions, totaling 1,609,906 shares, were completed under this registration statement. At December 31, 1998, there remain 5,390,094 shares to be issued under the registration statement. On December 31, 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission for the purpose of issuing up to 3,000,000 shares of its common stock. The shares may be offered in acquisition transactions in exchange for shares of capital stock, partnership interests or other assets representing an interest, direct or indirect, in other companies or entities, or in exchange for assets used in or related to the business of such entities. Amendment No. 2, effective June 22, 1998 increased the shares under this registration statement to 4,438,207 shares, to reflect the effect of the shares remaining as of May 15, 1998, when the shareholders approved a charter amendment to facilitate a two-for-one split of the Company's common stock, in the form of a 100 percent stock dividend. As of June 22, 1998, two acquisitions were completed under the registration statement, totaling 1,561,793 shares. Subsequently, one additional acquisition, totaling 1,932,284 shares, was completed under this registration statement. At December 31, 1998, there remain 944,130 shares to be issued under the registration statement. On December 15, 1997, the Company completed the issuance of 2,000,000 shares of common stock pursuant to the shelf registration described below. The issuance of these shares occurred at a selling price of $24.75 per share with an underwriting discount of $.87 per share paid by the Company. The Company used the proceeds, in combination with the $60 million Capital Securities issue to capitalize its bank subsidiaries in Colorado and Arizona which acquired branches of Banc One Corporation. On October 9, 1997, the Company filed a shelf registration with the Securities and Exchange Commission for the offering for cash, from time to time, of up to $150 million in any combination of common stock, preferred stock or debt securities. Proceeds from the sale of Securities offered under this shelf registration will be used to finance acquisitions by the Company and for general corporate purposes. In 1995, the Company extended the common stock repurchase program established in 1992, which provided for the systematic acquisition of up to 1,200,000 shares of the Company's common stock. In addition, the Company adopted a new common stock repurchase program providing for a systematic repurchase of up to 1,200,000 additional shares. The shares acquired are used primarily for the issuance of common stock upon exercise of stock options, issuance of common stock under compensation plans, which might include contributions directly to employees or to an employee stock ownership plan, for preferred stock conversion, and issuance of common stock for purposes that do not include business combinations. PREFERRED STOCK SHAREHOLDERS' RIGHTS PLAN The Company adopted a shareholders' rights plan in January 1995 that attached one right to each share of common stock outstanding on January 19, 1995. Each right entitles the holder to purchase one one-hundredth of a share of a new series of junior participating preferred stock of the Company, which has an initial exercise price of $31.50. The rights become exercisable only upon the acquisition of 15% or more of the Company's voting stock, or an announcement of a tender offer or exchange offer to acquire an interest of 15% or more by a person or group, without the prior consent of the Company. If exercised, or if the Company is acquired, each right entitles the holder to purchase, at the exercise price, common stock with a market value equal to two times the exercise price. The rights, which may be redeemed by the Company in certain circumstances, expire January 5, 2005. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. CAPITAL REQUIREMENTS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. As of December 31, 1998, the Company is considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table.
- --------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1998 - --------------------------------------------------------------------------------------------------------- TIER 1 TOTAL RISK- TOTAL RISK- REGULATORY CAPITAL REQUIREMENTS: (DOLLARS IN THOUSANDS) CAPITAL BASED CAPITAL LEVERAGE BASED ASSETS - --------------------------------------------------------------------------------------------------------- Minimum ............................................. 4.00% 8.00% 3.00% N/A Well-Capitalized .................................... 6.00% 10.00% 5.00% N/A - --------------------------------------------------------------------------------------------------------- BANK SUBSIDIARIES: Community First National Bank, Fergus Falls ......... 9.40% 10.54% 7.67% $ 665,856 Community First National Bank, Fargo ................ 9.91% 11.15% 7.39% 393,564 Community First State Bank, Vermillion .............. 10.29% 11.45% 7.79% 211,778 Community First National Bank, Decorah .............. 10.62% 11.88% 7.82% 117,703 Community First National Bank, Alliance ............. 9.84% 11.07% 8.06% 249,489 Community First National Bank, Spooner .............. 9.81% 10.94% 7.89% 83,539 Community First National Bank, Fort Morgan .......... 9.25% 10.50% 6.30% 1,225,378 Community First National Bank, Cheyenne ............. 13.96% 14.97% 8.56% 617,224 Community First National Bank, Phoenix .............. 17.28% 17.94% 6.45% 260,263 Community First National Bank, Las Cruces ........... 11.17% 12.42% 8.61% 117,690 Community First National Bank, Salt Lake City ....... 9.27% 10.52% 6.04% 77,678 Community First Bankshares, Inc. .................... 9.35% 12.08% 6.40% $4,045,169
AT DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------ TIER 1 TOTAL RISK- TOTAL RISK- REGULATORY CAPITAL REQUIREMENTS: (DOLLARS IN THOUSANDS) CAPITAL BASED CAPITAL LEVERAGE BASED ASSETS - ------------------------------------------------------------------------------------------------------------------ Minimum .................................................... 4.00% 8.00% 3.00% N/A Well-Capitalized ........................................... 6.00% 10.00% 5.00% N/A BANK SUBSIDIARIES: Community First National Bank, Fergus Falls ................ 9.93% 11.10% 7.75% $ 624,017 Community First National Bank, Fargo ....................... 10.03% 11.28% 7.46% 388,051 Community First State Bank, Vermillion ..................... 10.73% 11.90% 7.83% 211,897 Community First National Bank, Decorah ..................... 11.63% 12.89% 7.82% 108,761 Community First National Bank, Alliance .................... 10.40% 11.65% 8.48% 257,024 Community First National Bank, Spooner ..................... 11.16% 12.32% 8.26% 71,856 Colorado Community First National Bank, Fort Morgan ........ 10.11% 11.17% 7.26% 1,040,342 Colorado Community First National Bank, Gunnison ........... 11.18% 12.43% 7.20% 59,051 Community First National Bank, Cheyenne .................... 13.75% 14.79% 7.52% 606,471 Community First National Bank, Phoenix ..................... 9.37% 10.62% 7.95% 45,712 Community First National Bank, Las Cruces .................. 12.50% 12.60% 9.20% 120,689 Community First National Bank, Salt Lake City .............. 14.67% 15.80% 8.50% 61,783 Community First Bankshares, Inc. ........................... 11.53% 14.98% 7.51% $3,502,962 - ---------------------------------------------------------------------------------------------------------------
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. 14. EMPLOYEE BENEFIT PLANS STOCK OPTION PLAN - During 1996, the Company approved the 1996 Stock Option Plan under which an additional 4,000,000 shares of the Company's common stock were reserved for granting of future stock options. Similar to the 1987 Stock Option Plan, the Company may grant key employees incentive or nonqualified options to purchase common stock of the Company at fair market value on the date of the grant, as determined by the Company. The options vest ratably over a three-year period and are exercisable over a five-year term starting one year after the date of grant. Stock options outstanding under the plans are as follows:
- ------------------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE OPTIONS PRICE PER OPTIONS PRICE PER OUTSTANDING SHARE OUTSTANDING SHARE - ------------------------------------------------------------------------------------------- Beginning of Year .............. 1,344,892 $ 10.36 1,127,310 $ 8.01 Options Granted ............. 571,400 24.81 454,000 14.63 Options Exercised ........... (293,317) 8.44 (207,352) 6.87 Options Forfeited ........... (31,203) 18.62 (29,066) 9.11 ---------------------------------------------------------- End of Year .................... 1,591,772 $ 15.74 1,344,892 $ 10.36 ---------------------------------------------------------- Exercisable at end of year ..... 748,371 $ 10.38 675,542 $ 8.23
1998 1997 - -------------------------------------------------------------- Weighted average fair value of options granted ............. $ 4.54 $ 3.20
The range of exercise prices and the weighted average remaining contractual life of the options outstanding at December 31, 1998 were as follows:
OPTIONS WEIGHTED WEIGHTED OUTSTANDING AT AVERAGE AVERAGE RANGE OF EXERCISE DECEMBER 31 EXERCISE PRICE REMAINING PRICES PER SHARE 1998 PER SHARE CONTRACTUAL LIFE - ------------------------------------------------------------------------------------- $23.75 to $24.88 .................. 553,200 $24.86 0.92 Years $17.25 to $19.31 .................. 41,000 $17.72 2.99 Years $10.63 to $14.25 .................. 616,130 $12.72 2.64 Years $ 6.50 to $ 7.375 ................. 381,442 $ 7.19 0.64 Years
At December 31, 1998, a total of 4,653,451 shares of authorized common stock was reserved for exercise of options granted under the 1996 and 1987 Stock Option Plans. The Company has elected to measure compensation costs as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, does not recognize compensation expense. SFAS No. 123 requires the Company to disclose pro forma information reflecting net income and earnings per share had the Company elected to record compensation expense based on the fair market value method described in SFAS 123. The fair value of the options was estimated at the grant date using a Black-Scholes option pricing model. Option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in manage ment's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following weighted-average assumptions were used in the valuation model: risk-free interest rates of 5.35 percent and 6.15 percent in 1998 and 1997, respectively; dividend yield of 2.09 percent and 1.30 percent in 1998 and 1997, respectively; stock price volatility factors of .178 and .175 in 1998 and 1997, respectively; and expected life of options of four years in both 1998 and 1997. The pro forma disclosures include options granted in 1998 and 1997 and are not likely to be representative of the pro forma disclosures for future years. The estimated fair value of the options is amortized to expense over the options' vesting period.
- ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 - ------------------------------------------------------------------------------- Pro forma net income ........................... $ 42,144 $ 58,479 Pro forma net income (diluted) ................. 42,144 $ 58,479 Pro forma earnings per share: Basic ....................................... $ 0.89 $ 1.35 Diluted ..................................... $ 0.88 $ 1.31
EMPLOYEE STOCK OWNERSHIP PLAN - The Company has an employee stock ownership plan ("ESOP") that is a defined contribution plan covering all employees who are 21 years of age with more than one year of service. Contributions are calculated using a formula based on the Company's return on average assets on a yearly basis. The contribution expense was $1,735,000, $1,407,000, and $859,000 in 1998, 1997, and 1996, respectively. PROFIT-SHARING PLAN - The Company offers a contributory profit-sharing and thrift plan that qualifies under section 401(k) of the Internal Revenue Code. The plan covers all employees who are 21 years of age with more than one year of service. The plan provides for an employer-matching contribution of 50% based on each participant's eligible contribution for each plan year, subject to a limitation of the lesser of 6% of the participant's annual compensation or the maximum amount prescribed by the Internal Revenue Code. The Company's contribution was $1,587,000, $1,205,000, and $806,000 in 1998, 1997, and 1996, respectively. 15. RESTRICTIONS ON CASH AND DUE FROM BANKS Bank subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. Balances of $47,746,000 and $49,647,000 at December 31, 1998 and 1997, respectively, exceeded required amounts. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. 16. INCOME TAXES The components of the provision for income taxes were (in thousands):
- ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Federal: Current ....................... $ 25,580 $ 25,244 $ 23,238 Deferred ...................... (5,891) (2,850) (3,613) ---------------------------------------- 19,689 22,394 19,625 State: Current ....................... 2,453 3,067 4,244 Deferred ...................... (694) (650) (471) ---------------------------------------- 1,759 2,417 3,773 ---------------------------------------- Provision for income taxes ....... $ 21,448 $ 24,811 $ 23,398 ----------------------------------------
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):
- ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Tax at Statutory rate (35%) ...... $ 23,947 $ 29,093 $ 22,722 State income tax, net of federal tax benefit .... 1,034 1,575 2,318 Tax-exempt interest .............. (2,904) (2,425) (1,839) Amortization of goodwill ......... 892 923 822 Other ............................ (1,521) (4,355) (625) ---------------------------------------- Provision for income taxes ....... $ 21,448 $ 24,811 $ 23,398 ----------------------------------------
Deferred income tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1998 and 1997, are as follows (in thousands):
1998 1997 - ------------------------------------------------------------------------------ Deferred tax assets: Loan loss reserves ......................... $ 15,976 $ 8,609 Other reserves ............................. 2,548 246 Deferred compensation ...................... 1,807 1,097 Deferred loan fees ......................... 224 316 Other ...................................... 2,452 1,164 ----------------------------- 23,007 11,432 Deferred tax liabilities: Unrealized gains ........................... 7,842 3,211 Depreciation ............................... 588 1,168 Purchase accounting ........................ 124 349 Other ...................................... 272 58 ----------------------------- 8,826 4,786 ----------------------------- Net deferred tax assets ....................... $ 14,181 $ 6,646 -----------------------------
The realization of the Company's deferred tax assets is dependent upon the Company's ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized. 17. COMMITMENTS AND CONTINGENT LIABILITIES Total rent expense was $4,568,000, $3,308,000, and $1,757,000 in 1998, 1997, and 1996, respectively. Future minimum payments, by year and in the aggregate, under noncancelable leases with initial or remaining terms of one year or more, consisted of the following at December 31, 1998:
- ------------------------------------------------------------------------------ (IN THOUSANDS) OPERATING CAPITAL - ------------------------------------------------------------------------------ 1999 ........................................... $ 1,902 $ 2,296 2000 ........................................... 1,990 1,966 2001 ........................................... 1,807 1,141 2002 ........................................... 1,794 367 2003 ........................................... 1,767 9 ----------------------------- $ 9,260 $ 5,779 Executory costs (taxes) ........................ (102) ------------ Net minimum lease payments ..................... 5,677 Less: Amount representing interest ................ (439) ------------ Present value of net minimum lease payments . $ 5,238 ------------
In the normal course of business, there are various outstanding legal proceedings, claims, commitments and contingent liabilities. In the opinion of management, the Company and its subsidiaries will not be materially affected by the outcome of such matters. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. 18. COMMUNITY FIRST BANKSHARES, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------- DECEMBER 31 (IN THOUSANDS) 1998 1997 - --------------------------------------------------------------------------- ASSETS Cash and due from subsidiary banks ............ $ 4,944 $ 6,273 Interest-bearing deposits ..................... 110 505 Available-for-sale securities ................. 854 63,795 Investment in subsidiaries .................... 588,271 500,259 Furniture and equipment ....................... 7,044 6,210 Receivable from subsidiaries .................. 11,056 11,272 Other assets .................................. 23,608 16,962 --------------------------- Total assets .................................. $ 635,887 $ 605,276 --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings ......................... 35,535 11,167 Long-term debt ................................ 186,911 196,086 Other liabilities ............................. 8,195 10,010 Shareholders' equity .......................... 405,246 388,013 --------------------------- Total liabilities and shareholders' equity .... $ 635,887 $ 605,276 ---------------------------
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------- Income: Dividends from subsidiaries ............. $ 76,728 $ 35,967 $ 29,776 Service fees from subsidiaries .......... 5,647 3,505 2,948 Interest income ......................... 1,049 1,562 122 Other ................................... 1,641 662 487 ---------------------------------------- Total income ............................... 85,065 41,696 33,333 Expense: Interest expense ........................ 17,565 10,564 4,441 Other expense ........................... 29,511 18,327 17,816 ---------------------------------------- Total expense .............................. 47,076 28,891 22,257 ---------------------------------------- Income before income tax benefit, equity in undistributed income of subsidiaries and extraordinary item ..... 37,989 12,805 11,076 Income tax benefit ......................... 13,606 9,518 6,955 ---------------------------------------- Income before undistributed income of subsidiaries and extraordinary item ..... 51,595 22,323 18,031 Equity in undistributed income of subsidiaries ............................ (8,532) 36,955 23,491 ---------------------------------------- Income before cumulative effect of extraordinary item ................... 43,063 59,278 41,522 Extraordinary item, net of tax ............. -- (265) -- ---------------------------------------- Net Income ................................. $ 43,063 $ 59,013 $ 41,522 ---------------------------------------- Net income applicable to common equity ..... $ 43,063 $ 59,013 $ 39,912 ----------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations .............. $ 46,971 $ 58,046 $ 41,522 Adjustments to reconcile net income to net cash used in operating activities: Equity in income of subsidiaries ......... 8,532 (36,955) (23,491) Depreciation ............................. 1,076 1,448 (32) Increase in interest payable ............. -- -- 1,730 Other, net ............................... (12,369) 6,364 (4,275) -------------------------------------------- Net cash provided by operating activities ...... 44,210 28,903 15,454 CASH FLOWS FROM INVESTING ACTIVITIES: Dividends received from subsidiaries ........... 76,728 35,967 29,776 Purchases of stock in subsidiaries ............. (165,748) (180,320) (45,503) Net loans to subsidiaries ...................... 216 (8,691) (1,791) Sales of securities, net of gains .............. 62,941 -- -- Purchases of available-for-sale securities ..... -- (63,795) -- Net increase in furniture and equipment ........ (1,910) (6,001) (477) Net decrease in interest-bearing deposits ...... 395 (505) -- -------------------------------------------- Net cash used in investing activities .......... (27,378) (223,345) (17,995) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in short-term borrowings ....................... 24,368 (2,997) 4,164 Proceeds from issuance of long-term debt ....... 29,450 236,466 18,188 Preferred stock dividends paid ................. -- -- (1,610) Common stock dividends paid .................... (19,705) (19,034) (9,728) Repayment of long-term debt .................... (38,625) (80,464) (24,058) Net proceeds from the issuance of Company-obligated mandatorily redeemable preferred securities of CFB Capital I and II ........................ -- (22,988) -- Sale of common stock held in treasury .......... 1,281 4,554 4,030 Purchase of common stock held in treasury ................................. (16,314) (2,777) (1,535) Retirement of common stock ..................... -- -- (1,870) Net proceeds from issuance of common stock ................................ 1,384 80,408 14,952 -------------------------------------------- Net cash (used in) provided by financing activities ........................ (18,161) 193,168 2,533 -------------------------------------------- Net decrease in cash and cash equivalents ............................ (1,329) (1,274) (8) Cash and cash equivalents at beginning of year ........................... 6,273 7,547 7,555 -------------------------------------------- Cash and cash equivalents at end of year ....... $ 4,944 $ 6,273 $ 7,547 --------------------------------------------
Certain restrictions exist regarding the extent to which bank subsidiaries may transfer funds to the Company in the form of dividends, loans or advances. Federal law prevents the Company from borrowing from bank subsidiaries unless the loans are secured by specified U.S. obligations. Secured loans to the Company or any individual affiliate are generally limited in amount to 10% of the banks' equity. Further, loans to the Company and all affiliates in total are limited to 20% of the banks' equity. As of December 31, 1998 and 1997, $57,559,000 and $44,653,000, respectively, of individual subsidiary banks' capital was available for credit extension to the parent company. At December 31, 1998 and 1997, bank subsidiaries had no credit extended to the Company. Payment of dividends to the Company by its subsidiary banks is subject to various limitations by bank regulatory agencies. Undistributed earnings of the bank subsidiaries available for distribution as dividends under these limitations were $32,914,000 and $51,644,000 as of December 31, 1998 and 1997, respectively. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMUNITY FIRST BANKSHARES, INC. 19. RELATED PARTY TRANSACTIONS Certain directors and executive officers of the Company and its subsidiaries, including their immediate families, companies in which they are principal owners and trusts in which they are involved, are loan customers of the bank subsidiaries. The aggregate dollar amounts of these loans were $10,390,000 and $19,435,000 at December 31, 1998 and 1997, respectively. During 1998 and 1997, $9,892,000, and $6,250,000 of new loans were made and repayments totaled $18,937,000, and $4,414,000, respectively. 20. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: (Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 1998(1) 1997(1) 1996 - --------------------------------------------------------------------------------------------------- NUMERATOR: Income from continuing operations ....... $ 46,971 $ 58,311 $ 41,522 Preferred stock dividend ................ -- -- (1,610) ------------------------------------------------------ Numerator for basic earnings per share income available to common stockholders ................... 46,971 58,311 39,912 Effect of dilutive securities: Preferred stock dividends ............... -- -- 1,610 ------------------------------------------------------ Numerator for diluted earnings per share income available to common stockholders after assumed conversions ................... $ 46,971 $ 58,311 $ 41,522 ------------------------------------------------------ DENOMINATOR: Denominator for basic earnings per share weighted average share .......... 47,280,245 43,461,264 39,429,607 Effect of dilutive securities: Employee stock options ................ 601,330 631,480 379,464 Convertible preferred stock ........... -- 557,178 2,886,712 ------------------------------------------------------ Dilutive potential common shares ...... 601,330 1,188,658 3,266,176 Denominator for diluted earnings per share adjusted weighted average shares and assumed conversions ........ 47,881,575 44,649,922 42,695,783 ------------------------------------------------------ Basic earnings per share ................... $ 0.99 $ 1.35 $ 1.01 Diluted earnings per share ................. $ 0.98 $ 1.31 $ 0.97
(1) INCLUSIVE OF THE EFFECT OF DISCONTINUED OPERATIONS AS FOLLOWS: NET INCOME (LOSS) - $(3.9 MILLION) AND $967,000, IN 1998 AND 1997 RESPECTIVELY; DILUTED EARNINGS PER SHARE $(0.08) AND $0.02, IN 1998 AND 1997, RESPECTIVELY. 21. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 - --------------------------------------------------------------------------------------------- Noncash transfers of held-to-maturity securities to available-for-sale securities ..... $ 153,813 $ 92,738 $ 22,659 Unrealized (loss) gain on available-for-sale securities ................... 12,267 6,765 (1,184) Income taxes paid ................................. 18,683 26,425 29,145 Interest paid ..................................... 237,838 175,455 144,093 Commitments to purchase investment securities ........................... 1,529 340,457 --
INDEPENDENT AUDITOR'S LETTER THE BOARD OF DIRECTORS AND SHAREHOLDERS COMMUNITY FIRST BANKSHARES, INC. We have audited the accompanying consolidated statements of financial condition of Community First Bankshares, Inc., and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, consolidated statements of comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Guardian Bancorp, Western Bancshares of Las Cruces, Inc., and Community Bancorp, Inc., which statements, in aggregate, reflect total assets constituting 6% of the related consolidated financial statement totals as of December 31, 1997, and net income constituting 16% and 15% of the related consolidated financial statement totals for the years ended December 31, 1997 and 1996, respectively. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Guardian Bancorp, Western Bancshares of Las Cruces, Inc., and Community Bancorp, Inc. is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community First Bankshares, Inc., and subsidiaries at December 31, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst and Young LLP Minneapolis, Minnesota March 5, 1999 39 CONSOLIDATED STATEMENT OF CONDITION FIVE YEAR SUMMARY COMMUNITY FIRST BANKSHARES, INC.
- -------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) ASSETS Cash and due from banks ................................ $ 250,963 $ 254,676 $ 204,084 $ 163,528 $ 119,246 Federal funds sold and securities purchased under agreement to resell .................................. 100 76,455 32,975 65,395 25,660 Interest-bearing deposits .............................. 5,067 12,131 7,492 5,532 8,610 Available-for-sale securities .......................... 1,980,530 1,539,922 546,174 513,810 258,206 Held-to-maturity securities: U.S. Treasury ....................................... -- 1,536 2,537 2,942 73,947 U.S. Government agencies ............................ -- 19,780 16,690 12,777 61,362 Mortgage-backed securities .......................... -- 82,357 103,027 124,358 193,495 Collateralized mortgage-obligations ................. -- -- -- 1 22,811 State and political securities ...................... -- 52,702 59,641 58,615 48,136 Other ............................................... 69,906 65,616 79,551 67,018 14,082 ----------------------------------------------------------------------- Total securities ................................. 2,050,436 1,761,913 807,620 779,521 672,039 Loans .................................................. 3,386,142 3,024,322 2,395,165 2,058,152 1,575,271 Less: Allowance for Loan Losses ..................... (50,173) (40,045) (30,165) (25,906) (20,414) ----------------------------------------------------------------------- Net loans ........................................... 3,335,969 2,984,277 2,365,000 2,032,246 1,554,857 Other assets ........................................... 360,437 364,683 189,235 163,795 114,505 ----------------------------------------------------------------------- Total assets ........................................ $ 6,002,972 $ 5,454,135 $ 3,606,406 $ 3,210,017 $ 2,494,917 ----------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing ................................. $ 547,703 $ 705,315 $ 531,245 $ 492,943 $ 399,272 Interest-bearing .................................... 4,336,969 3,447,603 2,441,499 2,256,722 1,715,207 ----------------------------------------------------------------------- Total deposits ................................... 4,884,672 4,152,918 2,972,744 2,749,665 2,114,479 Short-term borrowings .................................. 435,726 275,239 248,906 90,881 113,469 Long-term debt ......................................... 93,472 124,529 54,758 89,681 46,523 Other liabilities ...................................... 63,856 393,436 45,605 40,396 33,599 ----------------------------------------------------------------------- Total liabilities ................................... 5,477,726 4,946,122 3,322,013 2,970,623 2,308,070 Company-obligated mandatorily redeemable preferred securities of CFB Capital I and II ........ 120,000 120,000 -- -- -- Shareholders' equity ................................... 405,246 388,013 284,393 239,394 186,847 ----------------------------------------------------------------------- Total liabilities and shareholders' equity .......... $ 6,002,972 $ 5,454,135 $ 3,606,406 $ 3,210,017 $ 2,494,917 -----------------------------------------------------------------------
40 CONSOLIDATED STATEMENT OF INCOME FIVE YEAR SUMMARY COMMUNITY FIRST BANKSHARES, INC.
- --------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 (IN THOUSANDS) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) INTEREST INCOME: Loans ............................................... $ 323,315 $ 258,859 $ 218,307 $ 180,987 $ 127,873 Investment securities ............................... 122,173 64,234 49,077 44,177 41,150 Other ............................................... 3,756 3,426 2,814 3,130 1,971 ------------------------------------------------------------------------- Total interest income ............................ 449,244 326,519 270,198 228,294 170,994 INTEREST EXPENSE: Deposits ............................................ 160,576 119,024 94,522 82,578 53,212 Short-term and other borrowings ..................... 19,576 9,465 9,359 6,398 4,219 Long-term debt ...................................... 8,332 6,051 4,880 5,448 3,240 ------------------------------------------------------------------------- Total interest expense ........................... 188,484 134,540 108,761 94,424 60,671 ------------------------------------------------------------------------- Net interest income .................................... 260,760 191,979 161,437 133,870 110,323 Provision for loan losses .............................. 22,509 6,107 7,483 3,628 2,458 ------------------------------------------------------------------------- Net interest income after provision for loan losses ......................................... 238,251 185,872 153,954 130,242 107,865 NONINTEREST INCOME: Service charges on deposit accounts ................. 30,266 21,059 16,031 13,785 12,156 Insurance commissions ............................... 7,197 5,375 5,213 4,283 3,777 Fees from fiduciary activities ...................... 4,944 3,805 3,332 2,718 2,157 Net gains on sales of securities .................... 1,801 466 93 25 89 Other ............................................... 16,052 16,498 12,277 11,318 9,504 ------------------------------------------------------------------------- Total noninterest income ......................... 60,260 47,203 36,946 32,129 27,683 NONINTEREST EXPENSE: Salaries and employee benefits ...................... 114,014 78,380 66,298 52,883 44,194 Net occupancy ....................................... 32,110 23,285 18,852 14,076 12,504 FDIC insurance ...................................... 686 381 675 2,736 3,953 Professional service fees ........................... 9,520 5,161 4,786 4,935 4,432 Amortization of intangibles ......................... 10,366 5,550 3,433 2,636 1,961 Data processing and loan servicing fees ............. 4,640 1,782 1,842 2,015 1,259 Company-obligated mandatorily redeemable preferred securities of CFB Cap I & II ........... 10,218 5,108 -- -- -- Other ............................................... 48,538 30,306 30,094 23,350 20,717 ------------------------------------------------------------------------- Total noninterest expense ........................ 230,092 149,953 125,980 102,631 89,020 ------------------------------------------------------------------------- Income from continuing operations before income taxes, cumulative effect of accounting change, and extraordinary item ........... 68,419 83,122 64,920 59,740 46,528 Provision for income taxes ............................. 21,448 24,811 23,398 21,790 17,761 ------------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting change, and extraordinary item .............................. 46,971 58,311 41,522 37,950 28,767 Discontinued operations ................................ (2,232) 967 -- -- -- Disposal of discontinued operations .................... (1,676) -- -- -- -- Extraordinary item ..................................... -- (265) -- -- -- ------------------------------------------------------------------------- Net income ............................................. $ 43,063 $ 59,013 $ 41,522 $ 37,950 $ 28,767 ------------------------------------------------------------------------- Preferred dividend ..................................... -- -- 1,610 1,610 1,091 Net income applicable to common equity ................. $ 43,063 $ 59,013 $ 39,912 $ 36,340 $ 27,676 ------------------------------------------------------------------------- Earnings per common and common equivalent share: Basic ............................................... $ 0.91 $ 1.36 $ 1.01 $ 0.98 $ 0.75 Diluted ............................................. $ 0.90 $ 1.32 $ 0.97 $ 0.93 $ 0.72 Average common shares outstanding: Basic ............................................... 47,280,245 43,461,264 39,429,607 37,113,098 37,009,450 Diluted ............................................. 47,881,575 44,649,922 42,695,783 40,725,658 40,622,010
41 QUARTERLY RESULTS OF OPERATIONS COMMUNITY FIRST BANKSHARES, INC. The following is a summary of the quarterly results of operations for the years ended December 31, 1998 and 1997 (in thousands, except per share and per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 Interest income ......................................................... $ 104,142 $ 112,005 $ 118,004 $ 115,093 Interest expense ........................................................ 44,010 47,526 50,423 46,525 ----------------------------------------------------- Net interest income ..................................................... 60,132 64,479 67,581 68,568 Provision for loan losses ............................................... 1,752 4,204 4,826 11,727 ----------------------------------------------------- Net interest income after provision for loan losses ..................... 58,380 60,275 62,755 56,841 Net gains on sales of securities ........................................ 481 504 354 462 Noninterest income ...................................................... 13,711 15,519 15,512 13,717 Noninterest expense ..................................................... 49,528 62,043 57,277 61,244 ----------------------------------------------------- Income before income taxes .............................................. 23,044 14,255 21,344 9,776 Provision for income taxes .............................................. 6,277 3,972 7,950 3,249 ----------------------------------------------------- Net income .............................................................. 16,767 10,283 13,394 6,527 ----------------------------------------------------- Discontinued Operations: Income from operations and disposal of discounted operations (Less applicable income taxes) ....................................... (68) (3,840) -- -- ----------------------------------------------------- Net income applicable to common equity .................................. $ 16,699 $ 6,443 $ 13,394 $ 6,527 ----------------------------------------------------- Earnings per common and common equivalent shares: Basic income from continuing operations before extraordinary items ...... $ 0.35 $ 0.22 $ 0.28 $ 0.14 Discontinued operations ................................................. 0.00 (0.08) 0.00 0.00 Extraordinary item ................................................... 0.00 0.00 0.00 0.00 ----------------------------------------------------- Basic net income ........................................................ $ 0.35 $ 0.14 $ 0.28 $ 0.14 ----------------------------------------------------- Diluted income from continuing operations before extraordinary items .... 0.35 0.21 0.28 0.14 Discontinued operations ................................................. 0.00 (0.08) 0.00 0.00 Extra ordinary item ..................................................... 0.00 0.00 0.00 0.00 ----------------------------------------------------- Diluted net income ...................................................... 0.35 0.13 0.28 0.14 ----------------------------------------------------- Average common and common equivalent shares: Basic ................................................................ 47,304,562 47,343,247 47,288,475 47,187,425 Diluted .............................................................. 48,041,294 47,981,284 47,830,937 47,675,516
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 (RESTATED) (RESTATED) (RESTATED) (RESTATED) Interest income ......................................................... 69,183 72,504 88,807 96,025 Interest expense ........................................................ 27,596 28,544 38,066 40,334 ----------------------------------------------------- Net interest income ..................................................... 41,587 43,960 50,741 55,691 Provision for loan losses ............................................... 1,372 2,643 1,913 179 ----------------------------------------------------- Net interest income after provision for loan losses ..................... 40,215 41,317 48,828 55,512 Net gains on sales of securities ........................................ (3) 70 59 340 Noninterest income ...................................................... 9,596 12,526 13,178 11,437 Noninterest expense ..................................................... 30,193 33,704 40,520 45,536 ----------------------------------------------------- Income before income taxes and extraordinary item ....................... 19,615 20,209 21,545 21,753 Provision for income taxes .............................................. 5,964 6,076 6,569 6,202 ----------------------------------------------------- Income from continuing operations before extraordinary item ............. 13,651 14,133 14,976 15,551 ----------------------------------------------------- Discontinued Operations: Income from operations of discontinued operations (Less applicable income taxes) ....................................... 681 611 229 (554) ----------------------------------------------------- Income before extraordinary item ........................................ 14,332 14,744 15,205 14,997 Extraordinary item: Loss on extinguishment of debt, net of taxes ......................... (265) -- -- -- ----------------------------------------------------- Net Income applicable to common equity .................................. 14,067 14,744 15,205 14,997 ----------------------------------------------------- Earnings per common and common equivalent share: Basic income from continuing operations before extraordinary items ...... $ 0.33 $ 0.32 $ 0.34 $ 0.35 Discontinued operations ................................................. 0.02 0.01 0.01 (0.01) Extraordinary item ...................................................... (0.01) 0.00 0.00 0.00 ----------------------------------------------------- Basic net income ........................................................ $ 0.34 $ 0.33 $ 0.35 $ 0.34 ----------------------------------------------------- Diluted income from continuing operations before extraordinary items .... $ 0.31 $ 0.32 $ 0.34 $ 0.34 Discontinued operations ................................................. 0.02 0.01 0.01 (0.01) Extraordinary item ...................................................... (0.01) 0.00 0.00 0.00 ----------------------------------------------------- Basic net income ........................................................ $ 0.32 $ 0.33 $ 0.35 $ 0.33 ----------------------------------------------------- Average common and common equivalent shares: Basic ................................................................ 41,497,922 43,852,978 43,797,110 44,658,624 Diluted .............................................................. 44,239,582 44,402,918 44,496,978 45,452,742
42 CORPORATE INFORMATION MARKET PRICE RANGE OF COMMON SHARES The Company's common stock trades on the Nasdaq Stock Market-Registered Trademark- under the symbol CFBX. The following table sets forth the high and low sales prices for the Company's common stock during the periods indicated:
- --------------------------------------------------------- 1998 1997 HIGH LOW High Low - --------------------------------------------------------- First Quarter .... 27 23 1/2 16 1/8 13 11/16 Second Quarter ... 26 3/16 23 9/16 19 3/16 14 1/2 Third Quarter .... 27 16 1/2 24 9/16 18 3/8 Fourth Quarter ... 22 11/16 14 1/8 27 9/16 22 3/4 - ---------------------------------------------------------
SHAREHOLDERS As of February 18, 1999, the Company had 1,600 shareholders of record and an estimated 9,000 additional beneficial holders whose stock was held in street name by brokerage houses. DIVIDEND POLICY The Board of Directors has adopted a policy of declaring regular quarterly dividends equal to approximately 25 percent of earnings. A dividend of eight cents per share was paid for the first two quarters in 1997 and increased to nine and one-half cents per share for the third and fourth quarters of 1997. A dividend of 11 cents per share was paid for each quarter of 1998. EX-21.1 11 EXHIBIT 21.1 EXHIBIT 21.1 COMMUNITY FIRST BANKSHARES, INC. SUBSIDIARIES
OWNERSHIP SUBSIDIARY BANK: LOCATION: PERCENTAGE Community First National Bank Fergus Falls, MN 100.000% Community First National Bank Fargo, ND 100.000% Community First State Bank Vermillion, SD 100.000% Community First National Bank Decorah, IA 100.000% Community First National Bank Alliance, NE 100.000% Community First National Bank Spooner, WI 100.000% Community First National Bank Ft. Morgan, CO 100.000% Community First National Bank Cheyenne, WY 100.000% Community First National Bank Phoenix, AZ 100.000% Community First National Bank Salt Lake City UT 100.000% Community First National Bank Las Cruces NM 100.000% NONBANK SUBSIDIARIES: Community First Financial, Inc. Fargo, ND 100.000% Community First Service Corporation Fargo, ND 100.000% Community Insurance, Inc. Fargo, ND 100.000% Community First Properties, Inc. Fargo, ND 100.000% CFB Capital I Fargo, ND 100.000% CFB Capital II Fargo, ND 100.000% SUBSIDIARIES OF SUBSIDIARIES (100% OWNED): Community First Insurance Agencies, Inc. Fargo,ND (Subsidiary of Community First State Bank [Vermillion, SD]) CFIN, Inc. Las Vegas, NV (Subsidiary of Community First National Bank [Spooner]) Equity Lending, Inc. Edina, MN (Subsidiary of Community First National Bank [Fort Morgan, CO]) Mountain Parks Financial Services, Inc. Denver, CO (Subsidiary of Community First National Bank [Fort Morgan, CO]) Community First Minnesota Holdings, Inc. Georgetown, British (Subsidiary of Cayman Islands Community First National Bank [Fergus Falls, MN])
OWNERSHIP SUBSIDIARIES OF SUBSIDIARIES: (CONTINUED) LOCATION: PERCENTAGE CFIRE, Inc. Fargo, ND (Subsidiary of Community First Minnesota Holdings, Inc.) Community First Holdings, Inc. Georgetown, British (Subsidiary of Cayman Islands Community First National Bank [Ft. Morgan, CO]) Colorado CFIRE, Inc. Fargo, ND (Subsidiary of Community First Colorado Holdings, Inc.)
EX-23.1 12 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Community First Bankshares, Inc. of our report dated March 5, 1999, included in the 1998 Annual Report to Shareholders of Community First Bankshares, Inc. We also consent to the incorporation by reference in the following Registration Statements and related Prospectuses of Community First Bankshares, Inc. of our report dated March 5, 1999, with respect to the consolidated financial statements of Community First Bankshares, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1998.
Registration Form Statement No. Purpose - ------------------------------------------------------------------------------- S-8 33-44921 1987 Stock Option Plan S-8 33-48160 401(k) Retirement Plan S-8 333-52071 1996 Stock Option Plan and 401(k) Plan S-3 333-37527 Registration of $150,000,000 of Common Stock, Preferred Stock and Debt Securities S-4 333-40071 Shelf registration of 4,438,207 shares of Common Stock S-4 333-49367 Shelf registration of 7,000,000 shares of Common Stock
/s/ ERNST & YOUNG LLP Minneapolis, Minnesota March 22, 1999 EX-23.2 13 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We hereby consent to the use in this Form 10-K of our report dated January 23, 1998, relating to the financial Statements of Community Bancorp, Inc. as of and for each of the two years in the period ended December 31, 1997. We also consent to the incorporation by reference of said report in the following Registration Statements.
Registration Form Statement No. Purpose - ------------------------------------------------------------------------------- S-8 33-44921 1987 Stock Option Plan S-8 33-48160 401(k) Retirement Plan S-8 333-52071 1996 Stock Option Plan and 401(k) Plan S-3 333-37527 Registration of $150,000,000 of Common Stock, Preferred Stock and Debt Securities S-4 333-40071 Shelf registration of 4,438,207 shares of Common Stock S-4 333-49367 Shelf registration of 7,000,000 shares of Common Stock
/s/ BAIRD, KURTZ & DOBSON Denver, Colorado March 22, 1999 EX-23.3 14 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the use of our report dated March 25, 1998, included in this Annual Report (Form 10-K) of Community First Bankshares, Inc. We also consent to the incorporation by reference in the following Registration Statements and related Prospectuses of Community First Bankshares, Inc. of our report dated March 25, 1998, with respect to the consolidated financial statements of Western Bancshares of Las Cruces, Inc. as of and for each of the two years in the period ended December 31, 1997, included in this Form 10-K.
Registration Form Statement No. Purpose - ------------------------------------------------------------------------------- S-8 33-44921 1987 Stock Option Plan S-8 33-48160 401(k) Retirement Plan S-8 333-52071 1996 Stock Option Plan and 401(k) Plan S-3 333-37527 Registration of $150,000,000 of Common Stock, Preferred Stock and Debt Securities S-4 333-40071 Shelf registration of 4,438,207 shares of Common Stock S-4 333-49367 Shelf registration of 7,000,000 shares of Common Stock
/s/ STARR COLTON PENA VOGEL & CO. El Paso, Texas March 22, 1999 EX-23.4 15 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the use of our report dated February 6, 1998, included in this Annual Report (Form 10-K) of Community First Bankshares, Inc. We also consent to the incorporation by reference in the following Registration Statements and related Prospectuses of Community First Bankshares, Inc. of our report dated February 6, 1998, with respect to the consolidated financial statements of Guardian Bancorp as of and for each of the two years in the period ended December 31, 1997, included in this Form 10-K.
Registration Form Statement No. Purpose - ------------------------------------------------------------------------------- S-8 33-44921 1987 Stock Option Plan S-8 33-48160 401(k) Retirement Plan S-8 333-52071 1996 Stock Option Plan and 401(k) Plan S-3 333-37527 Registration of $150,000,000 of Common Stock, Preferred Stock and Debt Securities S-4 333-40071 Shelf registration of 4,438,207 shares of Common Stock S-4 333-49367 Shelf registration of 7,000,000 shares of Common Stock
/s/ SIMPSON & COMPANY Salt Lake City, Utah March 22, 1999 EX-27.1 16 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT IN FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 250,963 5,067 100 0 1,980,530 69,906 69,906 3,386,142 50,173 6,002,972 4,884,672 292,669 206,913 93,472 120,000 0 477 404,769 6,002,972 323,315 122,173 3,756 449,244 160,576 188,484 260,760 22,509 1,801 230,092 68,419 46,971 (3,908) 0 43,063 .91 .90 0 22,517 3,088 162 0 40,045 17,966 3,635 50,173 27,938 0 22,235
EX-27.2 17 EXHIBIT 27.2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT IN FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 254,676 204,084 12,131 7,492 76,455 32,975 0 0 1,539,922 546,174 221,991 261,446 223,829 262,077 3,024,322 2,395,165 40,045 30,165 5,454,135 3,606,406 4,152,918 2,972,744 230,777 170,537 437,898 121,028 124,529 54,758 120,000 0 0 22,988 474 408 387,539 260,997 5,454,135 3,606,406 258,859 218,307 64,234 49,077 3,426 2,814 326,519 270,198 119,024 94,522 134,540 108,761 191,979 161,437 6,107 7,483 466 93 149,953 125,980 83,122 64,920 58,311 41,522 702 0 0 0 59,013 41,522 1.36 1.01 1.32 .97 0 0 14,801 15,283 3,748 2,678 140 267 0 0 30,165 25,906 8,903 5,512 2,611 1,504 40,045 30,165 19,905 15,159 0 0 20,140 15,006
EX-27.3 18 EXHIBIT 27.3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORTS IN FORM 10-Q FOR QUARTERS ENDED MARCH 31, 1998, JUNE 30, 1998 AND SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1998 DEC-31-1998 DEC-31-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998 MAR-31-1998 JUN-30-1998 SEP-30-1998 207,030 251,394 216,826 13,601 14,032 7,482 106,700 52,870 40,990 0 0 0 1,847,994 1,965,743 1,940,993 105,177 88,585 69,399 105,304 88,532 69,399 3,102,074 3,203,549 3,387,246 39,997 42,268 45,567 5,775,193 5,896,870 5,981,149 4,807,215 4,818,511 4,829,161 184,700 384,934 319,912 139,246 49,840 176,082 127,175 127,832 119,280 120,000 120,000 120,000 0 0 0 474 474 477 396,383 395,279 416,237 5,775,193 5,896,870 5,981,149 75,500 155,023 240,241 27,471 58,721 90,603 1,171 2,403 3,307 104,142 216,147 334,151 39,710 80,722 121,955 44,010 91,536 141,959 60,132 124,611 192,192 1,752 5,956 10,782 481 985 1,339 49,528 111,571 168,848 23,044 37,299 58,643 16,767 27,050 40,444 (68) (3,908) (3,908) 0 0 0 16,699 23,142 36,536 .35 .49 .77 .35 .48 .76 0 0 0 12,026 10,879 17,848 5,961 3,730 2,863 123 105 180 0 0 0 40,045 40,045 40,045 2,726 5,522 9,844 926 1,789 2,626 39,997 42,268 45,567 0 0 0 0 0 0 0 0 0
EX-27.4 19 EXHIBIT 27.4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORTS IN FORM 10-Q FOR QUARTERS ENDED MARCH 31, 1997, JUNE 30, 1997 AND SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 145,329 152,581 232,743 14,026 18,596 16,630 36,775 34,220 57,230 0 0 0 550,657 523,324 962,421 265,611 271,918 268,120 263,840 271,962 269,326 2,340,341 2,455,855 2,898,603 30,026 32,106 40,093 3,519,560 3,614,544 4,714,482 2,942,726 2,944,034 4,334,621 155,332 168,637 185,276 40,553 46,419 56,718 27,576 87,895 129,958 60,000 60,000 60,000 0 0 0 435 438 440 291,295 305,378 317,644 3,519,560 3,614,544 4,714,482 56,055 115,139 185,038 12,701 25,317 43,273 427 1,231 2,183 69,183 141,687 230,494 24,673 49,803 83,395 27,596 56,140 94,206 41,587 85,547 136,288 1,372 4,015 5,928 (3) 67 126 30,193 63,897 104,417 19,615 39,824 61,369 13,651 27,784 42,760 416 1,027 1,256 0 0 0 14,067 28,811 44,016 .34 .68 1.02 .32 .66 .99 0 0 0 10,580 12,055 14,228 2,624 1,991 6,315 251 204 156 0 0 0 30,165 30,165 30,165 1,726 2,889 5,200 560 1,160 2,045 30,026 32,016 40,093 0 0 0 0 0 0 0 0 0
EX-99.1 20 EXHIBIT 99.1 EXHIBIT 99.1 Independent Accountants' Report The Board of Directors and Stockholders Community Bancorp, Inc. Thornton, Colorado We have audited the accompanying consolidated balance sheet of COMMUNITY BANCORP, INC. as of December 31, 1997 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of COMMUNITY BANCORP, INC. as of December 31, 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Baird, Kurtz & Dobson Denver, Colorado January 23, 1998 EX-99.2 21 EXHIBIT 99.2 EXHIBIT 99.2 [Letterhead of Starr Colton Pena Vogel & Co.] INDEPENDENT AUDITOR'S REPORT To the Board of Directors Western Bancshares of Las Cruces, Inc. Las Cruces, New Mexico We have audited the accompanying consolidated statements of financial condition of Western Bancshares of Las Cruces, Inc. (the Company) and subsidiary, as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Western Bancshares of Las Cruces, Inc. and subsidiary, as of December 31, 1997 and 1996, and the consolidated results of operations and cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating supplementary information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual companies. Such information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. /s/ Starr Colton Pena Vogel & Co. March 25, 1998 EX-99.3 22 EXHIBIT 99.3 EXHIBIT 99.3 [Letterhead of Simpson & Company] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Guardian Bancorp Salt Lake City, Utah We have audited the consolidated balance sheets of Guardian Bancorp (an S corporation) and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guardian Bancorp and subsidiary, as of December 31, 1997 and 1996, and the results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information in Schedules 1 and 2 is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations, and cash flows of the individual companies. Such information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. /s/ Simpson & Company Salt Lake City, Utah February 6, 1998 EX-99.4 23 EXHIBIT 99.4 EXHIBIT 99.4 Reconciliation of Amounts Previously Reported
First Second Third (Amounts in thousands, except per share data) Quarter Quarter Quarter ------- ------- ------- AS PREVIOUSLY REPORTED DURING 1998: Net income 13,785 10,282 14,539 Earnings per common and common equivalent shares Basic: 0.34 0.24 0.31 Diluted: 0.33 0.24 0.31 EFFECT OF POOLING OF INTERESTS TRANSACTIONS: Net income 2,914 (3,839) (1,145) Earnings per common and common equivalent shares Basic: 0.01 (0.10) (0.03) Diluted: 0.02 (0.11) (0.03) AS RESTATED FOR 1998: Net income 16,699 6,443 13,394 Earnings per common and common equivalent shares Basic: 0.35 0.14 0.28 Diluted: 0.35 0.13 0.28 AS PREVIOUSLY REPORTED DURING 1997: Net income 10,532 11,135 12,299 Earnings per common and common equivalent shares Basic: 0.30 0.30 0.33 Diluted: 0.28 0.29 0.32 EFFECT OF POOLING OF INTERESTS TRANSACTIONS: Net income 3,535 3,609 2,906 Earnings per common and common equivalent shares Basic: 0.04 0.03 0.02 Diluted: 0.04 0.04 0.03 AS RESTATED FOR 1997: Net income 14,067 14,744 15,205 Earnings per common and common equivalent shares Basic: 0.34 0.33 0.35 Diluted: 0.32 0.33 0.35
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