**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

 

**FORM 10-Q**

 

 

| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|----------------------------------------------------------------------------------------------|
|       |   |                                                                                         |
|       |   | **For the quarterly period ended September 30, 2003**                                        |

 

**OR**

 

| **o**  |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------|--------|---------------------------------------------------------------------------------------------------|
|   |   |                                                                                              |
|   |   | **For the transition period  from          to** |
|   |   |                                                                                              |

 

**Commission file number   0-19368 **

 

| **COMMUNITY  FIRST BANKSHARES, INC.**                     |
|-----------------------------------------------------------|
| (Exact name of registrant as specified in its charter)    |
|                                                      |   |   |
| **Delaware**                                              |   | **46-0391436** |
| (State or other jurisdiction of                           |   | (I.R.S. Employer Identification No.) |
| incorporation or organization)                            |   |   |
|                                                      |   |   |
| **520 Main Avenue**                                       |   |   |
| **Fargo, ND**                                             |   | **58124** |
| (Address of principal executive offices)                  |   | (Zip Code) |
|                                                      |   |   |
| **(701) 298-5600**                                        |
| (Registrant’s telephone number, including area code) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 ý NO o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):  YES ýNO o

 

At November 7, 2003, 37,532,466 shares ofCommon Stock were outstanding.

 

 

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COMMUNITY FIRST BANKSHARES, INC.

 

FORM 10-Q

 

QUARTER ENDED SEPTEMBER 30, 2003

 

INDEX

 

 
| PART I - FINANCIAL INFORMATION: |
|---------------------------------|
|                            |   |   |
|                            | Item 1. | Condensed Consolidated Financial Statements  and Notes |
|                            |   |   |
|                            | Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                            |   |   |
|                            | Item 3. | Quantitative and Qualitative Disclosure  About Market Risk |
|                            |   |   |
|                            | Item 4. | Controls and Procedures |
|                            |   |   |
| PART II - OTHER INFORMATION:    |
|                            |   |   |
|                            | Item 1. | Legal Proceedings |
|                            |   |   |
|                            | Item 2. | Changes in Securities and Use of Proceeds |
|                            |   |   |
|                            | Item 3. | Defaults Upon Senior Securities |
|                            |   |   |
|                            | Item 4. | Submission of Matters to a Vote of Security  Holders |
|                            |   |   |
|                            | Item 5. | Other Information |
|                            |   |   |
|                            | Item 6. | Exhibits and Reports on Form 8-K |
|                            |   |   |
| SIGNATURES  AND CERTIFICATIONS  |

 

2

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COMMUNITY FIRST BANKSHARES, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 
| **(Dollars in thousands, except per share data)**                                                                                |   | **September  30,  2003** |      | **December  31,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
|                                                                                                                             |   | **(unaudited)**          |      |                    |   |
| ASSETS                                                                                                                           |   |                     |      |                    |   |
| Cash and due from banks                                                                                                          |   | $                        | 228,452   |                    | $      | 242,887 |   |
| Interest-bearing deposits                                                                                                        |   | 4,501                    |      | 4,613                   |   |
| Available-for-sale securities                                                                                                    |   | 1,549,792                |      | 1,672,445               |   |
| Held-to-maturity securities (fair value:  9/30/03 - $82,591, 12/31/02 - $80,165)                                                 |   | 82,591                   |      | 80,165                  |   |
| Loans                                                                                                                            |   | 3,358,152                |      | 3,577,893               |   |
| Less: Allowance for loan losses                                                                                                  |   | (53,999                  | )         | (56,156                 | )      |
| Net loans                                                                                                                        |   | 3,304,153                |      | 3,521,737               |   |
| Bank premises and equipment, net                                                                                                 |   | 132,533                  |      | 132,122                 |   |
| Accrued interest receivable                                                                                                      |   | 33,718                   |      | 34,863                  |   |
| Goodwill                                                                                                                         |   | 63,448                   |      | 62,903                  |   |
| Other intangible assets                                                                                                          |   | 30,466                   |      | 32,577                  |   |
| Other assets                                                                                                                     |   | 53,804                   |      | 42,858                  |   |
| Total assets                                                                                                                     |   | $                        | 5,483,458 |                    | $      | 5,827,170 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                        |   |                     |      |                    |   |
| Deposits:                                                                                                                        |   |                     |      |                    |   |
| Noninterest-bearing                                                                                                              |   | $                        | 441,139   |                    | $      | 470,900 |   |
| Interest-bearing:                                                                                                                |   |                     |      |                    |   |
| Savings and NOW accounts                                                                                                         |   | 2,474,429                |      | 2,424,943               |   |
| Time accounts over $100,000                                                                                                      |   | 510,445                  |      | 670,187                 |   |
| Other time accounts                                                                                                              |   | 944,080                  |      | 1,103,716               |   |
| Total deposits                                                                                                                   |   | 4,370,093                |      | 4,669,746               |   |
| Federal funds purchased and securities sold  under agreements to repurchase                                                      |   | 442,794                  |      | 377,230                 |   |
| Other short-term borrowings                                                                                                      |   | 30,477                   |      | 76,260                  |   |
| Long-term debt                                                                                                                   |   | 100,500                  |      | 127,500                 |   |
| Accrued interest payable                                                                                                         |   | 13,097                   |      | 18,987                  |   |
| Other liabilities                                                                                                                |   | 40,388                   |      | 58,998                  |   |
| Total liabilities                                                                                                                |   | 4,997,349                |      | 5,328,721               |   |
| Company-obligated mandatorily redeemable  preferred securities of subsidiary trusts                                              |   | 120,000                  |      | 120,000                 |   |
| Shareholders’ equity:                                                                                                       |   |                     |      |                    |   |
| Common stock, par value $.01 per share:                                                                                          |   |                     |      |                    |   |
| Authorized Shares – 80,000,000                                                                                              |   |                     |      |                    |   |
| Issued Shares – 51,021,896                                                                                                  |   | 510                      |      | 510                     |   |
| Capital surplus                                                                                                                  |   | 193,516                  |      | 193,887                 |   |
| Retained earnings                                                                                                                |   | 423,043                  |      | 393,550                 |   |
| Unrealized gain on available-for-sale  securities, net of tax                                                                    |   | 11,426                   |      | 23,826                  |   |
| Less cost of common stock in treasury -  September 30, 2003 – 13,298,505 shares  December 31, 2002 – 12,343,096 shares |   | (262,386                 | )         | (233,324                | )      |
| Total shareholders’ equity                                                                                                  |   | 366,109                  |      | 378,449                 |   |
| Total liabilities and shareholders’ equity                                                                                  |   | $                        | 5,483,458 |                    | $      | 5,827,170 |   |

 

*See accompanying notes*.

 

3

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COMMUNITY FIRST BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
| **(Dollars in thousands, except per share data)(Unaudited)**                       |     | **For the  Three Months Ended  September 30,** |     | **For the  Nine Months Ended  September 30,** |     |
|------------------------------------------------------------------------------------|----------|------------------------------------------------|----------|-----------------------------------------------|----------|
|                                                                               | **2003** |                                           | **2002** |                                          | **2003** |   | **2002** |   |
| Interest income:                                                                   |     |                                           |     |                                          |     |   |   |   |   |
| Loans                                                                              |     | $                                              | 59,774   |                                          | $        | 69,514 |   | $ | 184,394 |   | $ | 209,994 |   |
| Investment securities                                                              |     | 15,983                                         |     | 19,517                                        |     | 54,141 |   | 61,416 |   |
| Interest-bearing deposits                                                          |     | 12                                             |     | 13                                            |     | 40 |   | 31 |   |
| Federal funds sold and resale agreements                                           |     | 2                                              |     | 65                                            |     | 3 |   | 92 |   |
| Total interest income                                                              |     | 75,771                                         |     | 89,109                                        |     | 238,578 |   | 271,533 |   |
| Interest expense:                                                                  |     |                                           |     |                                          |     |   |   |   |   |
| Deposits                                                                           |     | 11,060                                         |     | 18,114                                        |     | 38,429 |   | 58,272 |   |
| Short-term and other borrowings                                                    |     | 1,067                                          |     | 1,550                                         |     | 3,905 |   | 4,957 |   |
| Long-term debt                                                                     |     | 1,671                                          |     | 2,017                                         |     | 5,316 |   | 5,994 |   |
| Total interest expense                                                             |     | 13,798                                         |     | 21,681                                        |     | 47,650 |   | 69,223 |   |
| Net interest income                                                                |     | 61,973                                         |     | 67,428                                        |     | 190,928 |   | 202,310 |   |
| Provision for loan losses                                                          |     | 3,403                                          |     | 3,352                                         |     | 10,377 |   | 9,964 |   |
| Net interest income after provision for  loan losses                               |     | 58,570                                         |     | 64,076                                        |     | 180,551 |   | 192,346 |   |
| Noninterest income:                                                                |     |                                           |     |                                          |     |   |   |   |   |
| Service charges on deposit accounts                                                |     | 11,061                                         |     | 10,344                                        |     | 30,440 |   | 30,098 |   |
| Insurance commissions                                                              |     | 4,080                                          |     | 3,758                                         |     | 11,525 |   | 10,365 |   |
| Fees from fiduciary activities                                                     |     | 1,186                                          |     | 1,272                                         |     | 3,913 |   | 4,101 |   |
| Security sales commissions                                                         |     | 2,048                                          |     | 1,827                                         |     | 6,409 |   | 7,417 |   |
| Net gain (loss) on sales of  available-for-sale securities                         |     | 444                                            |     | 56                                            |     | 2,703 |   | (115 | ) |
| Other                                                                              |     | 4,783                                          |     | 3,628                                         |     | 11,677 |   | 8,650 |   |
| Total noninterest income                                                           |     | 23,602                                         |     | 20,885                                        |     | 66,667 |   | 60,516 |   |
| Noninterest expense:                                                               |     |                                           |     |                                          |     |   |   |   |   |
| Salaries and employee benefits                                                     |     | 28,665                                         |     | 28,105                                        |     | 84,825 |   | 85,864 |   |
| Net occupancy                                                                      |     | 8,206                                          |     | 8,671                                         |     | 25,249 |   | 24,654 |   |
| FDIC insurance                                                                     |     | 179                                            |     | 194                                           |     | 555 |   | 611 |   |
| Legal and accounting                                                               |     | 646                                            |     | 781                                           |     | 1,932 |   | 2,433 |   |
| Other professional services                                                        |     | 1,052                                          |     | 943                                           |     | 3,158 |   | 2,850 |   |
| Advertising                                                                        |     | 1,141                                          |     | 1,077                                         |     | 3,094 |   | 3,070 |   |
| Telephone                                                                          |     | 1,408                                          |     | 1,340                                         |     | 4,562 |   | 4,298 |   |
| Data processing                                                                    |     | 1,630                                          |     | 1,853                                         |     | 5,208 |   | 5,422 |   |
| Company-obligated mandatorily redeemable  preferred securities of subsidiary trust |     | 2,359                                          |     | 2,450                                         |     | 7,549 |   | 7,957 |   |
| Amortization of intangibles                                                        |     | 844                                            |     | 833                                           |     | 2,515 |   | 2,487 |   |
| Other                                                                              |     | 8,793                                          |     | 8,124                                         |     | 24,152 |   | 23,535 |   |
| Total noninterest expense                                                          |     | 54,923                                         |     | 54,371                                        |     | 162,799 |   | 163,181 |   |
|                                                                               |     |                                           |     |                                          |     |   |   |   |   |
| Income before income taxes                                                         |     | 27,249                                         |     | 30,590                                        |     | 84,419 |   | 89,681 |   |
| Provision for income taxes                                                         |     | 8,908                                          |     | 10,221                                        |     | 27,591 |   | 30,194 |   |
| Net income                                                                         |     | $                                              | 18,341   |                                          | $        | 20,369 |   | $ | 56,828 |   | $ | 59,487 |   |

* *

*See accompanying notes.*

 

4

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| **(Dollars in thousands, except per share data)(Unaudited)** |     | **For the  Three Months Ended  September 30,** |     | **For the  Nine Months Ended  September 30,** |     |
|--------------------------------------------------------------|----------|------------------------------------------------|----------|-----------------------------------------------|----------|
|                                                         | **2003** |                                           | **2002** |                                          | **2003** |   | **2002** |   |
|                                                         |     |                                           |     |                                          |     |   |   |   |   |
| Earnings per common and common equivalent  share:            |     |                                           |     |                                          |     |   |   |   |   |
| Basic net  income                                            |     | $                                              | 0.48     |                                          | $        | 0.52 |   | $ | 1.48 |   | $ | 1.50 |   |
| Diluted net  income                                          |     | $                                              | 0.48     |                                          | $        | 0.51 |   | $ | 1.46 |   | $ | 1.47 |   |
|                                                         |     |                                           |     |                                          |     |   |   |   |   |
| Average common shares outstanding:                           |     |                                           |     |                                          |     |   |   |   |   |
| Basic                                                        |     | 37,936,390                                     |     | 39,424,624                                    |     | 38,300,486 |   | 39,724,971 |   |
| Diluted                                                      |     | 38,462,034                                     |     | 40,073,077                                    |     | 38,831,640 |   | 40,409,350 |   |
|                                                         |     |                                           |     |                                          |     |   |   |   |   |
| Dividends  per share                                         |     | $                                              | 0.23     |                                          | $        | 0.21 |   | $ | 0.67 |   | $ | 0.59 |   |

 

STATEMENTS OF COMPREHENSIVE INCOME

 
| **(Dollars in thousands)(Unaudited)**                                        |     | **For the  Three Months Ended  September 30,** |     | **For the  Nine Months Ended  September 30,** |     |
|------------------------------------------------------------------------------|----------|------------------------------------------------|----------|-----------------------------------------------|----------|
|                                                                         | **2003** |                                           | **2002** |                                          | **2003** |   | **2002** |   |
|                                                                         |     |                                           |     |                                          |     |   |   |   |   |
| Net income                                                                   |     | $                                              | 18,341   |                                          | $        | 20,369 |   | $ | 56,828 |   | $ | 59,487 |   |
| Other comprehensive income (loss), net of  tax:                              |     |                                           |     |                                          |     |   |   |   |   |
| Unrealized gains (losses) on securities:                                     |     |                                           |     |                                          |     |   |   |   |   |
| Unrealized holding gains (losses) arising  during period                     |     | (8,592                                         | )        | 8,404                                         |     | (10,778 | ) | 18,931 |   |
| Less: Reclassification adjustment for  (gains) losses included in net income |     | (266                                           | )        | (34                                           | )        | (1,622 | ) | 69 |   |
| Other comprehensive income                                                   |     | (8,858                                         | )        | 8,370                                         |     | (12,400 | ) | 19,000 |   |
| Comprehensive income                                                         |     | $                                              | 9,483    |                                          | $        | 28,739 |   | $ | 44,428 |   | $ | 78,487 |   |

 

*See accompanying notes*.

 

5

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COMMUNITY FIRST BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

 

 
| **(In thousands)(Unaudited)**                                                                                 |     | **For the  Nine Months Ended  September 30,** |     |
|---------------------------------------------------------------------------------------------------------------|----------|-----------------------------------------------|----------|
|                                                                                                          | **2003** |                                          | **2002** |   |
| **Cash flows from operating activities:**                                                                     |     |                                          |     |   |   |
| Net income                                                                                                    |     | $                                             | 56,828   |   | $ | 59,487 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                            |     |                                          |     |   |   |
| Provision for loan losses                                                                                     |     | 10,377                                        |     | 9,964 |   |
| Depreciation                                                                                                  |     | 12,959                                        |     | 10,708 |   |
| Amortization of intangibles                                                                                   |     | 2,515                                         |     | 2,487 |   |
| Net amortization of premiums (discounts) on  securities                                                       |     | 6,696                                         |     | 1,208 |   |
| Decrease (increase) in interest receivable                                                                    |     | 1,145                                         |     | (452 | ) |
| Decrease in interest payable                                                                                  |     | (5,890                                        | )        | (10,560 | ) |
| Other - net                                                                                                   |     | (22,377                                       | )        | 4,171 |   |
| Net cash provided by operating activities                                                                     |     | 62,253                                        |     | 77,013 |   |
|                                                                                                          |     |                                          |     |   |   |
| **Cash flows from investing activities:**                                                                     |     |                                          |     |   |   |
| Net decrease (increase) in interest-bearing  deposits                                                         |     | 112                                           |     | (2,471 | ) |
| Purchases of available-for-sale securities                                                                    |     | (1,088,689                                    | )        | (809,359 | ) |
| Maturities of available-for-sale securities                                                                   |     | 982,439                                       |     | 838,998 |   |
| Sales of available-for-sale securities, net  of gains                                                         |     | 201,679                                       |     | 54,886 |   |
| Purchases of held-to-maturity securities                                                                      |     | (2,426                                        | )        | (2,517 | ) |
| Net decrease in loans                                                                                         |     | 207,207                                       |     | 80,710 |   |
| Net increase in bank premises and equipment                                                                   |     | (13,370                                       | )        | (13,017 | ) |
| Net cash provided by investing activities                                                                     |     | 286,952                                       |     | 147,230 |   |
|                                                                                                          |     |                                          |     |   |   |
| **Cash flows from financing activities:**                                                                     |     |                                          |     |   |   |
| Net increase (decrease) in demand deposits,  NOW accounts and savings accounts                                |     | 19,725                                        |     | (51,224 | ) |
| Net decrease in time accounts                                                                                 |     | (319,378                                      | )        | (58,837 | ) |
| Net increase (decrease) in short-term &  other borrowings                                                 |     | 19,781                                        |     | (54,846 | ) |
| Net decrease in long-term debt                                                                                |     | (27,000                                       | )        | (341 | ) |
| Net cost of redemption of Company-obligated  mandatorily redeemable preferred securities of subsidiary trusts |     | (1,007                                        | )        | (1,118 | ) |
| Purchase of common stock held in treasury                                                                     |     | (35,537                                       | )        | (32,972 | ) |
| Sale of common stock held in treasury                                                                         |     | 5,419                                         |     | 4,719 |   |
| Common stock dividends paid                                                                                   |     | (25,643                                       | )        | (23,445 | ) |
| Net cash used in financing activities                                                                         |     | (363,640                                      | )        | (218,064 | ) |
| Net (decrease) increase in cash and cash  equivalents                                                         |     | (14,435                                       | )        | 6,179 |   |
| Cash and cash equivalents at beginning of  period                                                             |     | 242,887                                       |     | 248,260 |   |
| Cash and cash equivalents at end of period                                                                    |     | $                                             | 228,452  |   | $ | 254,439 |   |

 

6

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COMMUNITY FIRST BANKSHARES, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

 

September 30, 2003

 

**NoteA - BASIS OF PRESENTATION**

 

The accompanying unaudited condensedconsolidated financial statements, which include the accounts of CommunityFirst Bankshares, Inc. (the “Company”), its wholly-owned data processing,credit origination and insurance agency subsidiaries, and its wholly-ownedsubsidiary bank, have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments considered necessary for fairpresentation have been included.

 

**EarningsPer Common Share**

 

Basic earnings per common share is calculatedby dividing net income by the weighted average number of shares of common stockoutstanding.

 

Diluted earnings percommon share is calculated by adjusting the weighted average number of sharesof common stock outstanding for shares that would be issued assuming theexercise of stock options and warrants during each period.  Such adjustments to the weighted averagenumber of shares of common stock outstanding are made only when suchadjustments dilute earnings per share.

 

**Note B – ACQUISITIONS**

 

Through its insurancesubsidiary, the Company completed the purchase of three insurance agenciesduring the second quarter.  Theseincluded the June 2, 2003 purchase of the Larry Levitt Insurance Agency,located in Rock Springs, Wyoming; the May 1, 2003 purchase of Kraft InsuranceServices, Inc. an insurance agency in Grand Junction, Colorado; and the April1, 2003 purchase of Carr Agency, an insurance agency in Thornton, Colorado.  At the time of the transactions, the threeagencies combined had approximately $760,000 in annual commission revenue.

 

**Note C - ACCOUNTING CHANGES**

 

In November 2002, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No.45,  (“FIN 45”) Guarantor’s Accountingand Disclosure for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers. FIN 45 requires certain guarantees to be recorded at fair value andapplies to contracts or indemnification agreements that contingently require theguarantor to make payments to the guaranteed party based on changes in anunderlying condition that is related to an asset, liability or equity securityof the guaranteed party. Examples of contracts meeting these characteristicsinclude standby and performance letters of credit. The recognition requirementsof FIN 45 are to be applied prospectively to guarantees issued or modifiedsubsequent to December 31, 2002. FIN 45 also expands the disclosures to be madeby guarantors, effective as of December 31, 2002, to include the nature of theguarantee, the maximum potential amount of future payments that the guarantorcould be required to make under the guarantee, and the current amount of theliability, if any, for the guarantor’s obligation under the guarantee.Significant guarantees that have been entered into by the Company are disclosedin Note H, Financial Instruments with Off-Balance Sheet Risk and Note I,Guarantees of Indebtedness of Others. The adoption of FIN 45 did not have a material impact on the Company’sresults of operations, financial position or liquidity.

 

In January 2003, the FASBissued Interpretation No. 46 (“FIN 46”), Consolidation of Variable InterestEntities.  FIN 46 clarifies theapplication of Accounting Research Bulletin No. 51, Consolidated FinancialStatement, to certain entities in which equity investors do not have thecharacteristics of a controlling

 

7

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financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties.  The recognition and measurement provisionsof this Interpretation are effective for newly created variable interest entitiesformed after January 31, 2003, and for existing variable interest entities,until the end of the first interim or annual reporting period beginning afterDecember 15, 2003.  Previously, the FASBhad announced the effective date for existing variable interest entities asbeing on the first interim or annual reporting period beginning after June 15,2003, but delayed the effective date to provide further guidance.  The Company adopted the disclosureprovisions of FIN 46 effective December 31, 2002.  The Company will adopt the accounting provisions of FIN 46 forexisting variable interest entities on October 1, 2003.  At this time, management believes adoptionof FIN 46 with regard to existing variable interest entities will not have amaterial effect on the Company’s financial statements. The Company hasdetermined that the provisions of FIN 46 may require de-consolidation of thesubsidiary trusts, which issued Company-obligated mandatorily redeemablepreferred securities (“Trust Preferred Securities”).  Prior to the adoption of FIN 46, the Company consolidated thetrusts and the balance sheet included the Trust Preferred Securities of thetrusts.  Upon adoption of the accountingprovisions of FIN 46, the trusts may be de-consolidated and the junior subordinateddebentures of the Company owned by the trusts would be reflected in thestatement of financial conditions.  TheTrust Preferred Securities currently qualify as Tier 1 capital of the Companyfor regulatory capital purposes.  Thebanking regulatory agencies have not issued any guidance that would change thecapital treatment for Trust Preferred Securities based on the impact of theadoption of FIN 46.

 

In December2002, the FASB issued Statement No. 148 (“FAS 148”), Accounting for Stock-BasedCompensation-Transition and Disclosure, an amendment to FASB StatementNo. 123 (“FAS 123”), Accounting for Stock-Based Compensation. In addition,FAS 148 amends the disclosure requirements of FAS 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  The Companyadopted the disclosure provisions of FAS 148 effective March 31, 2003.

 

In May 2003, the FASBissued Statement No. 150 (“FAS 150”), Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity, whichestablishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equities.  FAS 150 was effective immediately forfinancial instruments entered into or modified after May 31, 2003, andotherwise was effective at the beginning of the first interim period beginningafter June 15, 2003.  However, in November2003, the FASB announced that the provisions as they relate to certainmandatorily redeemable securities (including the Company’s Trust PreferredSecurities) were delayed indefinitely. The banking regulatory agencies have notissued any guidance that would change the capital treatment of the TrustPreferred Securities based on the impact, if any, of the adoption of FAS 150.

 

**Note D – SUBSEQUENT EVENTS**

 

On October 1, 2003, theCompany, through its insurance subsidiary, completed the purchase of the SummitInsurance Group, located in Frisco, Colorado, with offices in Leadville andVail, Colorado.  At the time of thetransaction, the agency had approximately $400,000 in annual commissionrevenue.

 

**Note E – STOCK BASED COMPENSATION**

 

At September 30, 2003,the Company had one stock-based employee compensation plan.  The Company accounts for this plan under therecognition and measurement principles of APB Opinion No. 25, Accounting forStock Issued to Employees, and related interpretations.  No stock-based employee compensation expenseis reflected in net income, as all options granted under this plan have anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of FAS 123 to stock-basedemployee compensation:

 

8

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|                                              |                                                                                                                                   | **Three  MonthsEnded September 30** |   | **Nine  MonthsEnded September 30** |   |
|---------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|--------|------------------------------------|--------|
| **(Dollars in thousands, except per share data)** |                                                                                                                                   | **2003**                            |   | **2002**                           |   | **2003** |   | **2002** |   |
| Net income, as reported                           |                                                                                                                                   | $                                   | 18,341 |                               | $      | 20,369 |   | $ | 56,828 |   | $ | 59,487 |   |
| Deduct:                                           | Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects. |                                | (620   | )                                  | (972   | ) | (2,187 | ) | (2,234 | ) |
|                                              |                                                                                                                                   |                                |   |                               |   |   |   |   |   |
| Pro forma net income                              |                                                                                                                                   | $                                   | 17,721 |                               | $      | 19,397 |   | $ | 54,641 |   | $ | 57,253 |   |
|                                              |                                                                                                                                   |                                |   |                               |   |   |   |   |   |
| Earnings per share:                               |                                                                                                                                   |                                |   |                               |   |   |   |   |   |
| Basic – as reported                          |                                                                                                                                   | $                                   | 0.48   |                               | $      | 0.52 |   | $ | 1.48 |   | $ | 1.50 |   |
| Basic – pro forma                            |                                                                                                                                   | $                                   | 0.47   |                               | $      | 0.49 |   | $ | 1.43 |   | $ | 1.44 |   |
|                                              |                                                                                                                                   |                                |   |                               |   |   |   |   |   |
| Diluted – as reported                        |                                                                                                                                   | $                                   | 0.48   |                               | $      | 0.51 |   | $ | 1.46 |   | $ | 1.47 |   |
| Diluted – pro forma                          |                                                                                                                                   | $                                   | 0.46   |                               | $      | 0.48 |   | $ | 1.41 |   | $ | 1.42 |   |
|                                                   |                                                                                                                                        |                                     |        |                                    |        |  |  |  |  |  |  |  |  |  |

 

The fair value of theoptions was estimated at the grant date using a Black-Scholes option-pricingmodel. Option valuation models require the input of highly subjectiveassumptions. Because the Company’s employee stock options have characteristicssignificantly different from traded options, and because changes in thesubjective input assumptions can materially affect the fair value estimate, inmanagement’s opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its employee stock options.

 

The following weighted-average assumptions were used in the valuationmodel:

 
|                    |   | **Three  Months  Ended September 30** |   | **Nine  Months  Ended September 30** |   |
|-------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                    |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Risk free interest rate |   | 2.85% to 3.79                         | %      | 3.61                                 | %      | 2.23% to 3.79 | % | 3.61 | % |
| Dividend yield          |   | 3.23                                  | %      | 3.17                                 | %      | 3.23% to 3.44 | % | 3.17 | % |
| Price volatility        |   | .253                                  |   | .265                                 |   | .253 to .257 |   | .265 |   |
| Expected life (years)   |   | 7.5                                   |   | 7.5                                  |   | 7.5 |   | 7.5 |   |

 

**Note F- INVESTMENTS**

 

The following is a summary ofavailable-for-sale and held-to-maturity securities at September 30, 2003 (inthousands):

 
|                                |   | **Available-for-Sale  Securities** |      |
|-------------------------------------|--------|------------------------------------|-----------|
|                                |   | **Amortized  Cost**                |      | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| United States Treasury              |   | $                                  | 37,555    |   | $ | 496 |   | $ | 13 |   | $ | 38,038 |   |
| United States Government agencies   |   | 327,241                            |      | 3,251 |   | 2,552 |   | 327,940 |   |
| Mortgage-backed securities          |   | 1,029,796                          |      | 15,632 |   | 2,409 |   | 1,043,019 |   |
| Collateralized mortgage obligations |   | 2,114                              |      | 21 |   | — |   | 2,135 |   |
| State and political securities      |   | 59,559                             |      | 2,586 |   | 1 |   | 62,144 |   |
| Other securities                    |   | 74,609                             |      | 2,565 |   | 658 |   | 76,516 |   |
|                                |   | $                                  | 1,530,874 |   | $ | 24,551 |   | $ | 5,633 |   | $ | 1,549,792 |   |

 

9

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|              |   | **Held-to-Maturity  Securities** |   |
|-------------------|--------|----------------------------------|--------|
|              |   | **Amortized  Cost**              |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| Other  securities |   | $                                | 82,591 |   | $ | — |   | $ | — |   | $ | 82,591 |   |
|              |   | $                                | 82,591 |   | $ | — |   | $ | — |   | $ | 82,591 |   |

 

Proceeds from the sale of available-for-salesecurities during the three months ended September 30, 2003 and 2002 were$25,792,000 and $46,895,000, respectively. Gross gains of $444,000 and $1,531,000 were realized on sales during thethree months ended September 30, 2003 and 2002, respectively.  Gross losses of $0 and $1,475,000 wererealized on sales during the three months ended September 30, 2003 and 2002,respectively.  Gains and losses ondisposition of these securities were computed using the specific identificationmethod.

 

**NoteG - LOANS**

 

The composition of the loan portfolio atSeptember 30, 2003 was as follows (in thousands):

 

| Real estate                    |   | $         | 1,568,259 |   |
|--------------------------------|--------|-----------|-----------|--------|
| Real estate construction       |   | 333,577   |      |
| Commercial                     |   | 611,791   |      |
| Consumer and other             |   | 661,947   |      |
| Agriculture                    |   | 182,578   |      |
|                           |   | 3,358,152 |      |
| Less allowance for loan losses |   | (53,999   | )         |
| Net loans                      |   | $         | 3,304,153 |   |

 

**NoteH - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**

 

In the normal course of business, the Companyis party to financial instruments with off-balance sheet risk to meet thefinancing needs of its customers and to manage its interest rate risk.  These financial instruments includecommitments to extend credit and letters of credit.  Since the conditions requiring the Company to fund letters ofcredit may not occur and since customers may not utilize the total loancommitments, the Company expects its liquidity requirements to be less than theoutstanding commitments.  The contractor notional amounts of these financial instruments at September 30, 2003 wereas follows (in thousands):

 
| Commitments to extend credit             |   | $      | 759,543 |   |
|------------------------------------------|--------|--------|---------|--------|
| Standby and commercial letters of credit |   | 31,721 |    |

 

**Note I – GUARANTEES OF INDEBTEDNESS OF OTHERS**

 

Standby letters of creditare conditional commitments the Company issues to guarantee the performance ofa customer to a third-party. The guarantees frequently support public andprivate borrowing arrangements, including commercial paper issuances, bondfinancings and other similar transactions. In the event of a customer’s nonperformance,the Company’s credit loss exposure is the same as in any extension of credit,up to the letter’s contractual amount. Management assesses the borrower’scredit to determine the necessary collateral, which may include marketablesecurities, real estate, accounts receivable and inventory. The maximumpotential future payments guaranteed by the Company under standby letter ofcredit arrangements at September 30, 2003, is approximately $24 million with aweighted average term of approximately 11 months. The fair value of standbyletters of credit is not material to the Company’s financial statements.

 

**NoteJ- SUBORDINATED NOTES**

 

Long-term debt atSeptember 30, 2003 included $50 million of 7.30% Subordinated Notes issued inJune 1997. These notes are due June 30, 2004, with interest payablesemi-annually. At September 30, 2003, the subsidiary bank had a $25 millionunsecured subordinated term note, maturing on December 22, 2007.  The subsidiary bank note bears an interestrate of LIBOR, plus 140 basis points.

 

10

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**NoteK - INCOME TAXES**

 

The reconciliation between the provision forincome taxes and the amount computed by applying the statutory federal incometax rate was as follows (in thousands):

 
|                                          |   | **For the  nine months ended,  September 30, 2003** |   |
|-----------------------------------------------|--------|-----------------------------------------------------|--------|
| 35% of pretax income                          |   | $                                                   | 29,547 |   |
| State income tax, net of federal tax  benefit |   | 1,590                                               |   |
| Tax-exempt interest                           |   | (2,647                                              | )      |
| Other                                         |   | (899                                                | )      |
| Provision for income taxes                    |   | $                                                   | 27,591 |   |

 

**NoteL – TRUST PREFERRED SECURITIES**

 

On March 4, 2003, theCompany issued $60 million of 7.60% Cumulative Capital Securities, through CFBCapital IV, a Delaware statutory trust subsidiary organized in February2003.  The proceeds of the offering wereinvested by CFB Capital IV in Junior Subordinated Debentures of theCompany.  The Company used the netproceeds to redeem on April 4, 2003, all of the 8.20% Junior SubordinatedDebentures that it issued in 1997, thereby triggering the redemption of all 2,400,000of the 8.20% Cumulative Capital Securities issued by CFB II, a Delawarestatutory trust.  The new debentureswill mature not earlier than March 15, 2008, and not later than March 15,2033.  At September 30, 2003, $120million in capital securities qualified as Tier I capital under capitalguidelines of the Federal Reserve. Refer to Note C - Accounting Changes for a discussion of FIN 46and FAS 150 and their potential impact on the recording and reporting of thesesecurities on the Company’s financial statements.

 

**NoteM - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **Nine months ended September 30 (in thousands)**        |   | **2003** |    | **2002** |   |
|----------------------------------------------------------|--------|----------|---------|----------|--------|
| Unrealized (loss) gain on  available-for-sale securities |   | $        | (20,528 | )        | $      | 31,456 |   |
|                                                          |        |          |         |          |        |  |  |

 

11

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**Basisof Presentation**

 

The following is a discussion of theCompany’s financial condition as of September 30, 2003 and December 31, 2002,and its results of operations for the nine-month periods ended September 30,2003 and 2002.

 

**StrategicInitiatives**

 

During 2002 and 2003, theCompany has continued to implement a series of strategic initiatives that itannounced in 2001 that are designed to improve customer service and strengthenits position as a provider of diversified financial services. These initiativesincluded a redefinition of the Company’s delivery model and the sale or closureof selected banking offices.

 

Under the redesigneddelivery structure, the Company is implementing a centralized consumer creditprocess, which, when fully operational, will offer a complete range ofdecision, origination, documentation and collection services to all Companyoffices through a Fargo, North Dakota, location. As of September 30, 2003, allindirect consumer underwriting, administration, documentation and collectionhave been centralized.  Centralizationof the underwriting, administration, documentation and collection of directconsumer loans, as well as documentation of commercial and agricultural loans,are expected to be completed by the second quarter of 2004, at which time thecentralized delivery initiative will be completed.

 

The Company also hasrecently initiated a strategy, which consists of a market extension model, whereinthe Company intends to open additional offices in selected areas of theCompany’s current geographic footprint that the Company believes are growth oremerging growth markets.  Additionaloffices are expected to be within the 12-state area within which the Companycurrently operates.  Services providedat the new locations will be determined by the opportunities identified in thatarea, and may include business, retail, investment sales, insurance products,mortgage products and wealth management. During the third quarter, the Company announced its initial three marketextension locations in the metropolitan Minneapolis/St. Paul market.  The addition of these three offices is notexpected to have a material impact on the Company’s financial condition orresults of operation during 2003 and 2004. The Company has announced that it plans to open 30 new offices by 2007.

 

The Companyannounced the transition of 16 Regional Financial Centers to CommunityFinancial Centers. Regional Financial Centers offer a broad mix of business andretail activity, while Community Financial Centers maintain a retail focus.Transitioning branches into the Community Financial Center model is consistentwith the Company’s long-term strategic plan to specifically address the clientneeds of its individual markets through highly targeted service offerings.  The Company expects to complete thesetransitions in early 2004.

 

The Company continues tofocus on insurance agency acquisitions and the commitment to providinginsurance in each of its markets. During the second quarter, through its insurance subsidiary, the Companycompleted the purchase of three insurance agencies, which at the time ofacquisition had a combined annual commission revenue of approximately$760,000.  Acquisitions included theJune 2, 2003 purchase of an agency located in Rock Springs, Wyoming, the May 1,2003 purchase of an agency in Grand Junction, Colorado and the April 1, 2003purchase of a Thornton, Colorado agency. In addition, on October 1, 2003 the Company, through its insurancesubsidiary completed the purchase of an insurance agency in Frisco, Colorado,with offices in Leadville and Vail, Colorado. At the time of acquisition, the agency had annual commission revenue ofapproximately $400,000.

 

# **Critical Accounting Policies**

 

The Company hasestablished various accounting policies that govern the application ofaccounting

 

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principles generally acceptedin the United States in the preparation of the Company’s financial statements.The significant accounting policies of the Company are described in thefootnotes to the consolidated financial statements included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.  Certain accounting policies involvesignificant judgments and assumptions by management that have a material impacton the carrying value of certain assets and liabilities; management considerssuch accounting policies to be critical accounting policies.  The judgments and assumptions used bymanagement are based on historical experience and other factors, which arebelieved to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions made bymanagement, actual results could differ from these judgments and estimates thatcould have a material impact on the carrying values of assets and liabilitiesand the results of operations of the Company. The Company believes that its critical accounting policies include theallowance for loan losses, goodwill impairment and income taxes.

 

The Company believes theallowance for loan losses is a critical accounting policy that requires themost significant judgment and estimates used in the preparation of itsconsolidated financial statements. The current level of the allowance for loanlosses is a result of management’s assessment of the risks within the portfoliobased on the information revealed in credit evaluation processes. Thisassessment 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. An allowance is recorded forindividual loan categories based on the relative risk characteristics of theloan portfolios. Commercial, commercial real estate, construction andagricultural amounts are based on a quarterly review of the individual loansoutstanding, including outstanding commitments to lend. Residential real estateand consumer amounts are based on a quarterly analysis of the performance ofthe respective portfolios, including historical and expected delinquency andcharge-off statistics.  Ultimate lossesmay vary from current estimates, and as adjustments become necessary, theallowance for loan losses is adjusted in the periods in which such lossesbecome known or fail to occur. Actual loan charge-offs and subsequentrecoveries are deducted from and added to the allowance, respectively.  The Company’s recorded allowance for loanlosses and related provisions for loan losses could be materially differentthan the amounts recorded under different conditions or using differentassumptions.

 

The Company believes theannual testing for impairment of goodwill is a critical accounting policy thatrequires significant judgment and estimates. The Company performed its initialimpairment test during the first quarter of 2002 and its initial annualimpairment test during the fourth quarter of 2002.  Both tests indicated no impairment existed, thus no adjustment tothe carrying amount of goodwill was recorded. The Company will perform its annual impairment test during the fourthquarter each year.  The Company uses amulti-period discounted earnings model to determine if the equity fair value ofthe underlying reporting unit is equal to or greater than the current bookvalue.  The model is based onmanagement’s estimate of the Company’s projected earnings stream over thefollowing five years. The valuation model includes various management estimatesand assumptions and thus, to the extent these estimates and assumptions varyfrom actual future results, are subject to error and may not be indicative ofactual impairment.

 

The Company also believesthe estimation of its income tax liability is a critical accounting policy thatrequires significant judgment and estimates on the part of management.  The Company estimates its income taxliability based on an estimate of its current and deferred taxes, which arebased on its estimates of taxable income. The Company makes its estimate based on its interpretations of theexisting income tax laws as they relate to the Company’s activities.  Such interpretations could differ from thoseof the taxing authorities. Periodically, the Company is examined by variousfederal and state tax authorities.  Inthe event management’s estimates and assumptions vary from the views of thetaxing authorities, adjustments to the periodic tax accruals may be necessary.

 

The Company’s accountingpolicies for the allowance for loan losses, testing for the impairment ofgoodwill and estimation of its income tax liability are outlined in theCompany’s Form 10-K for the year ended December 31, 2002.  The Company further believes that there havebeen no significant changes to the methodology used in the assessment of theseestimates and judgments, since the prior year end.

 

13

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**Overview**

 

For the three monthsended September 30, 2003, net income was $18.3 million, a decrease of $2.1million or 10.3% from the $20.4 million during the 2002 period.  Basic earnings per common share for thethree months ended September 30, 2003 were $0.48, compared to $0.52 in the sameperiod of 2002.  Diluted earnings pershare for the three months ended September 30, 2003 were $0.48.

 

Return on average assetsand return on common equity for the three months ended September 30, 2003 were1.32% and 20.20%, respectively, as compared to the 2002 ratios of 1.45% and21.83%.  The decrease in return on assetsand return on equity is principally due to the decrease in net income.

 

For the nine months endedSeptember 30, 2003, net income was $56.8 million, a decrease of $2.7 million or4.5% from $59.5 million during the 2002 period.  Basic earnings per common share for the nine months ended September30, 2003 were $1.48, compared to $1.50 in the same period in 2002.  Diluted earnings per share for the ninemonths ended September 30, 2003 were $1.46. The decrease in earnings per share is due to the 4.5% decrease in netincome, offset in part by the 3.9% decrease in the average shares outstanding.

 

Return on average assetsand return on common equity for the nine months ended September 30, 2003 were1.35% and 20.56%, respectively, as compared to the 2002 ratios of 1.42% and22.04%.  The decrease in return onassets and return on equity is principally due to a decrease in net income.

 

**Resultsof Operations**

 

**NetInterest Income**

 

Net interest income forthe three months ended September 30, 2003 was $61.8 million, a decrease of $5.6million, or 8.3%, from the net interest income of $67.4 million earned duringthe 2002 period. The decrease was principally due to the combination of a $13.3million reduction in interest income and a $7.9 million decrease in interestexpense resulting from the continued low interest rate environment and a changein the earning asset mix. During the third quarter of 2003, loans comprised 68%of total average earning assets, down from 71% during the comparable period in2002.  The decrease in the percentage ofloans in the earning asset mix reflects the Company’s strategy of focusing onloan quality, rather than seeking to build loan volume that could possiblyincrease nonperforming assets in a challenging economic environment.** **The net interest margin of 5.02%for the period ended September 30, 2003 was down from 5.38% for the 2002period. The sluggish economy makes growth of the loan portfoliochallenging.  The Company continues tostress disciplined loan underwriting and strong credit administration.  Record low interest rates, significantmortgage-backed security prepayments and fewer high yielding investmentopportunities are expected to contribute to margin pressure.  If the Company continues to experience anincrease in rates on the long end of the yield curve, net interest margin couldbegin to show greater stability as prepayments slow, premium amortization slowsand cash flow is reinvested at higher rates. A shift in earning asset mix, including increased loan demand, will benecessary for the Company to show any significant increase in net interestmargin.  With current economicconditions, the Company expects minimal change in loan volume in the near term.

 

Net interest income forthe nine months ended September 30, 2003 was $190.9 million, a decrease of$11.4 million, or 5.6%, from the net interest income of $202.3 million earnedduring the corresponding 2002 period. The decrease was principally due to thecombination of a $33.0 million reduction in interest income and a $21.6 milliondecrease in interest expense resulting from a 32 basis point decrease in netinterest margin, offset by a $6.4 million increase in average earningassets.  The net interest margin of5.09% for the nine-month period ended September 30, 2003 was down from 5.41%for the corresponding 2002 period. The decrease in net interest margin for thenine-month period ended September 30, 2003, is principally due to economicconditions similar to those noted in the third quarter of 2003.

 

14

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**Provisionfor Loan Losses**

 

The provisionfor loan losses for the three months ended September 30, 2003 was $3.4 million,a slight increase of $51,000, or 1.5%, from the $3.4 million provision duringthe 2002 period. Net charge-offs were $3.6 million or .42% (annualized) ofaverage loans for the third quarter of 2003, compared to $2.8 million or .30%for the third quarter of 2002.  Thethird quarter 2003 increase in net-charge offs is attributed in part to thepartial charge-off of two loans, which are classified as non-performing loans.Nonperforming assets at September 30, 2003 were $32.4 million, an increase of$6.5 million, or 25.1% from $25.9 million at September 30, 2002**.**  The increase in nonperforming assets isattributed primarily to a single agri-business credit.  Based upon the Company’s monthly review ofits loan portfolio, management believes is not indicative of any systemic assetquality deterioration.  Nonperformingassets comprised .59 percent and .46 percent of total assets at September 30,2003 and September 30, 2002, respectively.

 

The provision for loanlosses for the nine months ended September 30, 2002 was $10.4 million, anincrease of $413,000, or 4.1%, from the $10.0 million provision during thecorresponding 2002 period.

 

#### **Noninterest Income**

 

Noninterest income forthe three months ended September 30, 2003 was $23.6 million, an increase of$2.7 million, or 12.9%, from the 2002 level of $20.9 million. Insurancecommissions, which continue to demonstrate strong growth, were $4.1 million forthe 2003 quarter, an increase of $322,000 or 8.6% from the $3.8 millionrecorded in the 2002 quarter. Insurance commission growth is partially due tothe addition of four agencies during 2002, which at the time of acquisition hadestimated annual commission revenue of $1.1 million.  During the second quarter of 2003, the Company, through itsinsurance subsidiary, acquired two insurance agencies in Colorado and one inWyoming that, at the time of acquisition, had approximately $763,000 in annualcommission revenue.  Commissions on thesale of investment securities were $2.0 million for the quarter ended September30, 2003 and an increase of $221,000, or 12.1% from $1.8 million for thequarter ended September 30, 2002. Service charges on deposit accounts increased$717,000 or 6.9%, to $11.1 million as of September 30, 2003, compared to $10.3million during the 2002 period.  Otherincome increased $1.2 million or 33.3% from $3.6 million in 2002 to $4.8million in 2003, principally as a result of a $1.2 million gain realized fromde-mutualization distributions of participating insurance policies owned by theCompany, which resulted from a corporate reorganization of the policyprovider.  Noninterest income in thethree-month period ended September 30, 2003, included an increase of $388,000in net gains on the sale of investment securities, over the 2002 period.  The gains realized on the de-mutualizationdistribution offset approximately $834,000 of prepayment penalties incurred inthe third quarter to prepay long-term Federal Home Loan bank advances and amodest portfolio restructuring to limit potential prepayment risk exposure.

 

Noninterest income forthe nine months ended September 30, 2003 was $66.7 million, an increase of $6.2million, or 10.2%, from the 2002 level of $60.5 million.  Other income increased $3.0 million,principally due to a $895,000 increase in premiums on the sale of SBA loans andthe mortgage business of the Company’s joint venture.  Investment sales commissions decreased $1.0 million, or 13.6%from record levels recorded in the nine-month period ended September 30,2002.  Insurance commissions increased$1.2 million or 11.2%, reflecting in part the acquisition of four agenciesduring 2002 and three agencies acquired in 2003.   The 2003 period included a $2.7 million gain on the sale ofinvestment securities, compared to a $115,000 loss in the corresponding 2002period.  The increase in gain on thesale of investment securities was in part due to the Company’s sale of selectedmortgage-backed securities in an effort to mitigate investment portfolioprepayment risk.

 

**NoninterestExpense**

 

Noninterest expense forthe three months ended September 30, 2003 was $54.9 million, an increase of$552,000, or 1.0%, from the level of $54.4 million during the 2002 period. Theincrease is due to a $562,000, or 2.0% increase in salary and benefits from$28.1 million for the three months ended September 30, 2002 to $28.7 millionfor the three months ended September 30, 2003.

 

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Noninterest expense forthe nine months ended September 30, 2003 was $162.8 million, a decrease of$382,000, or 0.2%, from the level of $163.2 million during the 2002 period.Noninterest expense includes a $1.0 million decrease in salary and benefits, offsetby the $595,000 increase in net occupancy expense reflects the results ofoperating efficiencies realized through the implementation of initiativesannounced in prior years. The decrease in salary and benefits expense in partreflects the Company’s disciplined approach to staffing levels, while theincrease in net occupancy reflects addition depreciation of fixed assets andsoftware acquired to facilitate the Company’s centralized approach todelivering its products and services. These items were partially offset by a $1.4 million early paymentpenalty that was paid during 2003, when the Company elected to pay off variousFederal Home Loan Bank borrowings that carried higher than market interestrates.

 

**Provision for Income Taxes**

 

The provision for incometaxes for the three months ended September 30, 2003 was $8.9 million, adecrease of $1.3 million, or 12.8%, from the 2002 level of $10.2 million. Thedecrease was due principally to the decrease in pre-tax net income.  The effective tax rate for the three monthsended September 30, 2003 was 32.63%, as compared to 33.41% for the three monthsended September 30, 2002.

 

The provision for incometaxes for the nine months ended September 30, 2003 was $27.6 million, adecrease of $2.6 million, or 8.6%, from the 2002 level of $30.2 million.  The decrease was due primarily to thedecrease in pre-tax net income.

 

**Financial Condition**

 

**Loans**

 

Total loans were $3.4billion at September 30, 2003, a decrease of $220 million, or 6.1% from $3.6billion at December 31, 2002.  Thedecrease reflects management’s continued reluctance to maintain loan volume atthe expense of loan quality.  While theCompany continues to seek quality loan opportunities, the current economicenvironment, in the Company’s judgment, does not provide sufficientopportunities to re-deploy cash flow generated from existing loanrepayments.  The Company continues tostress disciplined loan underwriting and strong credit administration.  Loan volumes are below our targets due topre-payments, aggressive competition and limited new quality loan opportunitiesthroughout the marketplace.

 

While loan volumeis down on both a linked-quarter and year-over-year basis, the Companycontinues to experience strong activity in select markets and loan segments, specificallyindirect consumer and commercial real estate portfolios.  Some markets, especially southernCalifornia, New Mexico and selected Colorado and Wyoming, locations continue towitness strong commercial and single-family home activity.  The Company continues to approach realestate construction cautiously, and as a result, the construction and landdevelopment category at September 30, 2003 decreased  $120 million, or 26.4% since September 30, 2002. Modest growth inthe consumer loan portfolio is due to an expanded network of automobile dealersserved by the Company’s centralized indirect lending function.  While the Company expects seasonalmoderation in indirect volume during fourth quarter, it anticipates continuedgrowth in this portfolio.

 

The following tablepresents the Company’s balance of each major category of loans:

 
|                           |   | **September 30, 2003**       |      | **December 31, 2002**       |   |
|--------------------------------|--------|------------------------------|-----------|-----------------------------|--------|
|                           |   | **Amount**                   |      | **Percent of  Total Loans** |   | **Amount** |   | **Percent of  Total Loans** |   |
|                           |   | **(Dollars  in Thousands )** |      |
| Loan category:                 |   |                         |      |                        |   |   |   |   |   |
| Real estate                    |   | $                            | 1,568,259 |                        | 46.8   | % | $ | 1,568,710 |   | 43.8 | % |
| Real estate construction       |   | 333,577                      |      | 9.9                         | %      | 439,536 |   | 12.3 | % |
| Commercial                     |   | 611,791                      |      | 18.2                        | %      | 723,530 |   | 20.2 | % |
| Consumer and other             |   | 661,947                      |      | 19.7                        | %      | 625,429 |   | 17.5 | % |
| Agricultural                   |   | 182,578                      |      | 5.4                         | %      | 220,688 |   | 6.2 | % |
| Total loans                    |   | 3,358,152                    |      | 100.0                       | %      | 3,577,893 |   | 100.0 | % |
| Less allowance for loan losses |   | (53,999                      | )         |                        |   | (56,156 | ) |   |   |
| Total                          |   | $                            | 3,304,153 |                        |   |   | $ | 3,521,737 |   |   |   |

 

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**NonperformingAssets**

 

At September 30, 2003,nonperforming assets were $32.4 million, an increase of $3.5 million or 12.1%from the $28.9 million level at December 31, 2002. At September 30, 2003,nonperforming loans as a percent of total loans were .78%, up from the December31, 2002 level of .64%.  The increase innonperforming assets is attributed primarily to a single agri-businesscredit.  Based on a review of the loanportfolio, management believes this is not indicative of any systemic assetquality deterioration. OREO was $6.2 million at September 30, 2003, an increaseof $246,000, or 4.1% from $6.0 million at December 31, 2002.

 

Nonperforming assets ofthe Company are summarized in the following table:

 
| **(Dollars  in thousands)**                             |   | **September 30, 2003** |   | **December 31, 2002** |   |
|---------------------------------------------------------|--------|------------------------|--------|-----------------------|--------|
| Loans                                                   |   |                   |   |                  |   |
| Nonaccrual loans                                        |   | $                      | 25,932 |                  | $      | 22,728 |   |
| Restructured loans                                      |   | 197                    |   | 220                   |   |
| Nonperforming loans                                     |   | 26,129                 |   | 22,948                |   |
| Other real  estate owned                                |   | 6,236                  |   | 5,990                 |   |
| Nonperforming assets                                    |   | $                      | 32,365 |                  | $      | 28,938 |   |
| Loans 90 days or more past due but still  accruing      |   | $                      | 4,451  |                  | $      | 4,258 |   |
| Nonperforming loans as a percentage of  total loans     |   | .78                    | %      | .64                   | %      |
| Nonperforming assets as a percentage of  total assets   |   | .59                    | %      | .50                   | %      |
| Nonperforming assets as a percentage of  loans and OREO |   | .96                    | %      | .81                   | %      |

 

**Allowancefor Loan Losses**

 

At September 30, 2003 theallowance for loan losses was $54.0 million, a decrease of $2.1 million fromthe September 30, 2002 balance of $56.1 million.  Net charge-offs during the three months ended September 30, 2003were $3.6 million, an increase of $793,000 or 28.3% from the $2.8 millionduring the three months ended September 30, 2002. The increase in netcharge-offs was due principally to the partial charge-off of two specificcredits, an agri-business loan and a construction contractor credit, which,based on a review of the loan portfolio, management believes is not indicativeof systemic asset quality deterioration. While net charge-offs andnonperforming assets increased during the third quarter of 2003, managementbelieves the current allowance for loan losses is appropriate based onmanagement’s assessment of potential losses within the remaining nonperformingasset portfolio and the reduction in total loans outstanding.

 

At September 30, 2003,the allowance for loan losses as a percentage of total loans was 1.61%, anincrease from the September 30, 2002 level of 1.57%.

 

The following table setsforth the Company’s allowance for loan losses:
|                                                     |   | **September  30,** |       |
|----------------------------------------------------------|--------|--------------------|------------|
| **(Dollars in thousands)**                               |   | **2003**           | ** ** | **2002** | ** ** |
| Balance at beginning of period                           |   | $                  | 54,187     |   | $ | 55,552 |   |
| Charge-offs:                                             |   |               |       |   |   |
| Real estate                                              |   | 839                |       | 222 |   |
| Real estate construction                                 |   | (17                | )          | — |   |
| Commercial                                               |   | 1,206              |       | 1,239 |   |
| Consumer and other                                       |   | 2,526              |       | 3,166 |   |
| Agricultural                                             |   | 548                |       | 54 |   |
| Total charge-offs                                        |   | 5,102              |       | 4,681 |   |
| Recoveries:                                              |   |               |       |   |   |
| Real estate                                              |   | 91                 |       | 99 |   |
| Real estate construction                                 |   | 21                 |       | 64 |   |
| Commercial                                               |   | 177                |       | 304 |   |
| Consumer and other                                       |   | 1,209              |       | 1,328 |   |
| Agricultural                                             |   | 13                 |       | 88 |   |
| Total recoveries                                         |   | 1,511              |       | 1,883 |   |
| Net charge-offs                                          |   | 3,591              |       | 2,798 |   |
| Provision  charged to operations                         |   | 3,403              |       | 3,352 |   |
| Balance at  end of period                                |   | $                  | 53,999     |   | $ | 56,105 |   |
| Allowance as a percentage of total loans                 |   | 1.61               | %          | 1.54 | % |
| Annualized net charge-offs to average loans  outstanding |   | 0.42               | %          | 0.30 | % |
|                                                     |   |               |       |   |   |
| Total Loans                                              |   | $                  | 3,358,152  |   | $ | 3,647,133 |   |
| Average Loans                                            |   | 3,410,868          |       | 3,648,884 |   |

 

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**Investments**

 

The investment portfolio,including available-for-sale securities and held-to-maturity securities, was$1.6 billion at September 30, 2003, a decrease of $120 million or 6.9% from$1.8 billion at December 31, 2002.  AtSeptember 30, 2003, the investment portfolio represented 29.8% of total assets,compared with 30.1% at December 31, 2002. In addition to investment securities, the Company had investments ininterest-bearing deposits of $4.5 million at September 30, 2003, a decrease of$112,000, or 2.4% from $4.6 million at December 31, 2002.

 

**Deposits**

 

Total deposits were $4.4billion at September 30, 2003, a decrease of $300 million, or 6.4%, from $4.7billion at December 31, 2002. Noninterest-bearing deposits at September 30, 2003 were $441 million, adecrease of $30.0 million, or 6.4%, from $471 million at December 31,2002.  The decrease in total depositsand noninterest-bearing deposits was principally due to the continued lowinterest rate environment and the Company’s focus on maintaining interestbearing liabilities at interest rate levels which contribute to a strong netinterest margin. The Company’s core deposits which are all deposits, excludingtime accounts over $100,000, as a percent of total deposits were 88.3% and85.6% as of September 30, 2003 and December 31, 2002, respectively.  Interest-bearing deposits were $3.9 billionat September 30, 2003, a decrease of $270 million or 6.4% from $4.2 billion atDecember 31, 2002.

 

**Borrowings**

 

Federal funds purchasedand securities sold under agreements to repurchase of the Company were $442.8million as of September 30, 2003, an increase of $65.6 million, or 17.4%, from$377.2 million as of December 31, 2002. The increase is due primarily to the fluctuation in the level of dailydeposits and the resulting impact on daily liquidity, and reflects theCompany’s strategy of funding short-term liquidity needs in the mostcost-effective manner.

 

Short-term borrowings ofthe Company were $30.5 million as of September 30, 2003, a decrease of $45.8million, or 60.0%, from $76.3 million as of December 31, 2002.  The decrease, which is principally due to a$40 million FHLB advance that matured in January 2003, reflects the Company’sstrategy of funding short-term liquidity needs in the most cost-effectivemanner.  Short-term borrowings includeborrowing arrangements wherein the original maturity is less than one year, aswell as previously classified long-term borrowings maturing within one year.

 

 

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Long-term debt of theCompany was $100.5 million as of September 30, 2003, a decrease of $27 million,or 21.2%, from the $127.5 million as of December 31, 2002. The Companyrepurchased $10 million of its 7.30% Subordinated Notes issued in June1997.  The 7.30% Notes no longer qualifyas Tier 2 Capital, as they mature in less than one year.

 

**Assetand Liability Management**

 

*LIQUIDITY MANAGEMENT*

 

Liquidity management isan effort of management to provide a continuing flow of funds to meet itsfinancial commitments, customer borrowing needs and deposit withdrawalrequirements. The liquidity position of the Company and its subsidiary bank ismonitored by the Asset and Liability Management Committee (“ALCO”) of theCompany. The largest category of assets representing a ready source ofliquidity for the Company is its short-term financial instruments, whichinclude federal funds sold, interest-bearing deposits at other financialinstitutions, U.S. Treasury securities and other securities maturing within oneyear. Liquidity is also provided through the regularly scheduled maturities ofassets. The investment portfolio contains a number of high quality issues withvarying maturities and regular principal payments. Maturities in the loanportfolio also provide a steady flow of funds, and strict adherence to thecredit policies of the Company helps ensure the collectability of these loans.The liquidity position of the Company is also greatly enhanced by itssignificant base of core deposits.

 

In the normal course ofbusiness, the Company is party to financial instruments with off-balance sheetrisk. Because many of the commitments are expected to expire without beingdrawn upon, total commitment amounts do not necessarily represent the Company’sfuture liquidity requirements. These instruments are further described in NoteH - Financial Instruments With Off-Balance Sheet Risk.

 

The liquidity ratio isone measure of a bank’s ability to meet its current obligations and is definedas the percentage of liquid assets to deposits. Liquid assets include cash anddue from banks, unpledged investment securities with maturities of less thanone year and federal funds sold. At September 30, 2003 and December 31, 2002,the liquidity ratio was 5.43% and 8.32%, respectively. The level of loansmaturing within one year greatly add to the Company’s liquidity position.Including loans maturing within one year, the liquidity ratio was 22.44% and27.94%, respectively, for the same periods. The decrease in both liquidity ratios is principally due to the $120million reduction in the investment portfolio, specifically the volume ofunpledged investment securities maturing in less than one year.

 

The Company has revolvinglines of credit with its primary lenders, which provide for borrowing up to $85million. These lines could be utilized to finance stock repurchase activity,underwrite commercial paper and fund other operating expenses. At September 30,2003, the Company had $22 million in commercial paper outstanding, supported bythe Company’s revolving line of credit.

 

The Company maintainsavailable lines of federal funds borrowings at the Federal Reserve Bank ofMinneapolis. The Company’s subsidiary bank has the ability to borrow anaggregate of $417 million in federal funds from twelve nonaffiliated financialinstitutions. At September 30, 2003, the Company had $137 million outstandingon these lines.

 

The Company also has a$224 million line of credit from the Federal Reserve under its Primary Creditprogram, which permits financial institutions with collateralized lines ofcredit at the Federal Reserve to borrow funds on a short-term basis.  Funds are priced at a spread above thefederal funds target rate and are available on an as needed basis.  At September 30, 2003, there was no balanceowing on this line.

 

Additionally, theCompany’s subsidiary bank is a member of the Federal Home Loan Bank (“FHLB”)System. As part of membership, the Company’s subsidiary bank purchased a modestamount of stock of FHLB and obtained advance lines of credit that represent anaggregate of $367 million in additional funding capacity.  At September 30, 2003, the Company had $34million outstanding on this line.

 

Subsequent to quarterend, the Company obtained another federal fund line with a nonaffiliatedfinancial institution. This new line provides for additional overnightborrowing capacity of $100 million.

 

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INTEREST RATE SENSITIVITY

 

Interest rate sensitivityindicates the exposure of a financial institution’s earnings to futurefluctuations in interest rates. Management of interest rate sensitivity isaccomplished through the composition of loans and investments and by adjustingthe maturities on earning assets and interest-bearing liabilities. Ratesensitivity and liquidity are related since both are affected by maturingassets and liabilities. However, interest rate sensitivity also takes intoconsideration those assets and liabilities with interest rates that are subjectto change prior to maturity.

 

ALCO attempts tostructure the Company’s balance sheet to provide for an approximately equalamount of rate-sensitive assets and rate-sensitive liabilities. In addition tofacilitating liquidity needs, this strategy assists management in maintainingrelative stability in net interest income despite unexpected fluctuations ininterest rates. ALCO uses three methods for measuring and managing interestrate risk: Repricing Mismatch Analysis, Balance Sheet Simulation Modeling and EquityFair Value Modeling.

 

Repricing MismatchAnalysis

 

Management performs aRepricing Mismatch Analysis (“Gap Analysis”) which represents a point in timenet position of assets, liabilities and off-balance sheet instruments subjectto repricing in specified time periods. Gap Analysis is performedquarterly.  However, management believesGap Analysis alone does not accurately measure the magnitude of changes in netinterest income because changes in interest rates do not impact all categoriesof assets, liabilities and off-balance sheet instruments equally orsimultaneously.

 

Balance Sheet SimulationModeling

 

Balance Sheet SimulationModeling allows management to analyze the short-term (12 months or less) impactof interest rate fluctuations on projected earnings.  Using financial simulation computer software, management hasbuilt a model that projects a number of interest rate scenarios.  Each scenario captures the impact of contractualobligations embedded in the Company’s assets and liabilities.  These contractual obligations includematurities, loan and security payments, repricing dates, interest rate caps,and interest rate floors.  Theprojection results also measure the impact of various management assumptionsincluding loan and deposit volume targets, security and loan prepayments,pricing spreads and implied repricing caps and floors on variable ratenon-maturity deposits. Management completes an earnings simulationquarterly.  The simulation process isthe Company’s primary interest rate risk management tool.

 

While management strivesto use the best assumptions possible in the simulation process, all assumptionsare uncertain by definition.  Due tonumerous market factors, and the potential for changes in management strategyover time, actual results may deviate from model projections.

 

Based on the results ofthe simulation model as of September 30, 2003, management would expect netinterest income to decrease 2.06%, assuming a 100 basis point increase inmarket rates.  The decrease in netinterest income is attributable to the short duration of the Company’sliabilities relative to its assets under rising rates.  Assuming rates dropped 100 basis points,management would expect net interest income to decline 2.58%.  This decline exceeds the Company’s internalALCO guidelines of 1.40%. Under this declining rate scenario, because ofprojected security prepayments and the assumed floor on transaction accountpricing, assets reprice faster than liabilities.

 

Several factors mitigatethe Company’s projected exposure to declining rates.  First, management-established risk guidelines are measuredagainst instantaneous rate shocks. Gradual rate shifts over several months reduce the level of projectedrisk under both rising and declining rate scenarios.  Also, the current model assumes that there is no room todownprice non-maturity transaction deposits. Management has effectively floored these liability accounts at currentlevels in its model.  As an abundance ofcaution, management believes this is an appropriate assumption for riskmanagement purposes, but management believes there would be the potential forsome downpricing on this sizeable

 

20

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volume of liabilities.

 

In addition to earningsat risk, the simulation process is also used as a tool in liquidity and capitalmanagement.  Management models theimpact of interest rate fluctuations on the anticipated cash flows from variousfinancial instruments, ultimately measuring the impact that changing rates willhave on the Company’s liquidity profile. Management also reviews the implications of strategies that impact assetmix and capital levels, measuring several key regulatory capital ratios undervarious interest rate scenarios.

 

Equity Fair Value Modeling

 

Because Balance SheetSimulation Modeling is dependent on accurate volume forecasts, its usefulnessas a risk management tool is limited to relatively short time frames.  As a complement to the simulation process, managementuses Equity Fair Value Modeling to measure long-term interest rate riskexposure.  This method estimates theimpact of interest rate changes on the discounted future cash flows of theCompany’s current assets, liabilities and off-balance sheet instruments.  This risk model does not incorporateprojected volume assumptions.

 

Similar to the simulationprocess, fair value results are heavily driven by management assumptions.  While management strives to use the bestassumptions possible, due to numerous market factors, actual results maydeviate from model projections.

 

Based on the modelresults from September 30, 2003, management would expect equity fair value todecline 5.17% assuming a 100 basis point increase in rates.  This exposure is within the ALCO establishedguidelines of 10.00%.  Assuming ratesdeclined 100 basis points, the model projects a decline in equity fair value of0.07%.  This exposure is also within theALCO established policy guidelines of 10.00%.

 

The Company does notengage in the speculative use of derivative financial instruments.

 

**Capital Management**

 

Shareholders’ equity was$366 million at September 30, 2003, a decrease of $12 million, or 3.2% from$378 million at December 31, 2002. Unrealized gain on available-for-sale securities, net of taxes,decreased $12.4 million, or 52.1% from $23.8 million at December 31, 2002 to$11.4 million at September 30, 2003.  AtSeptember 30, 2003, the Company’s Tier 1 capital, total risk-based capital andleverage ratios were 9.57%, 11.35%, and 6.96%, respectively, compared tominimum required levels of 4%, 8% and 3%, respectively (subject to change andthe discretion of regulatory authorities to impose higher standards inindividual cases).  Ratios of 6%, 10%,and 5%, respectively, are generally regarded as well capitalized ratios.  At September 30, 2003, the Company hadrisk-weighted assets of $4.0 billion. The September 30, 2003 capital ratios include both the $60 million 7.60%Junior Subordinated Debentures issued March 4, 2003 and the $60 million 8.125%Junior Subordinated Debentures issued March 27, 2002.  Capital and leverage ratios remain substantially within minimumregulatory capital limits for a well-capitalized institution.

 

On March 4, 2003, theCompany issued $60 million in 7.60% Cumulative Capital Securities, through CFBCapital IV, a statutory trust subsidiary organized in February 2003.  All $60 million of the capital securitiesqualify as Tier I Capital for regulatory capital calculation purposes.  The proceeds from the offering were used onApril 4, 2003 to redeem the $60 million of 8.20% junior subordinated debenturesthat were issued in December 1997.  TheCompany has unconditionally guaranteed the obligations of CFB Capital IV underthe 7.60% cumulative capital securities.

 

**StockRepurchases**

 

During the third quarterof 2003, the Company repurchased 612,000 shares of its common stock at pricesranging from $26.44 to $28.83. On April 24, 2003, the Company announced thatthe Board of Directors approved an additional common stock repurchaseauthorization wherein the Company may

 

21

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repurchase up to an additional3 million shares of its common stock outstanding.  The shares will be repurchased primarily on the open market, withtiming dependent on market condition and any pending acquisitions.  The Company has 2,790,000 shares that remainauthorized for repurchase under existing authorizations.  Since the first quarter of 2000, the Companyhas repurchased a total of 14.0 million shares of its common stock, which representsapproximately 28% of the shares that were outstanding as of March 2000.

 

**Off-Balance Sheet Arrangements, ContractualObligations and Other Commercial Commitments**

 

**Off-Balance Sheet Arrangements**

 

In the normal course ofbusiness, the Company enters into various business arrangements wherein it maybe required by the terms of the arrangement to guarantee or invest additionalcapital as a result of investment opportunities and financial performance.

 

***Mortgage Loan Joint Venture:***  The Company, through its subsidiary bank,and Wells Fargo & Company formed a joint venture mortgage company for thepurpose of providing mortgage origination, documentation, servicing process andsupport for substantially all the residential mortgage business of the Company.  The Company has 50% ownership and 50% votingrights over the affairs of the joint venture and accordingly records itsinvestment and its continuing share of the income or loss of the joint ventureunder the equity method of accounting. As a 50% holder of the joint venture, the Company may be required toincrease its investment in the joint venture in the event additional investmentcapital were required.  As of September30, 2003, the Company’s investment in the joint venture totaled $555,000.

 

***Federal Reserve Stock:***  The Company’s affiliate bank is required byFederal banking regulations to be a member of the Federal Reserve System.  As a member of the Federal Reserve System,the Company may be required to maintain stock ownership in the Federal ReserveSystem in an amount equal to six percent of the affiliate bank’s paid-incapital and surplus.  The affiliate bankis required and currently has purchased an amount of common stock equal tothree percent, or one-half the bank’s subscription amount.  At the discretion of the Federal ReserveSystem, the bank may be required to increase its investment to an amount equalto the full six percent of its total paid-in capital and surplus.  At September 30, 2003, the Company’s investmentin the Federal Reserve System totaled $9.6 million.

 

**Contractual Obligations and OtherCommercial Commitments:**

 

In the normal course ofbusiness, the Company arranges financing through entering into debtarrangements with various creditors for the purpose of financing specificassets or providing a funding source.  The contract or notional amounts of these financing arrangements atSeptember 30, 2003, as well as the maturity of these commitments are (inthousands):

 
|                          |   | **Payment Due by Period** |    |
|-------------------------------|--------|---------------------------|---------|
| **Contractual  Obligations**  |   | **Total**                 |    | **Less than  1 Year** |   | **1-3  Years** |   | **3-5  Years** |   | **More than  5 Years** |   |
|                          |   |                      |    |   |   |   |   |   |   |   |   |
| Long Term Debt                |   | $                         | 100,500 |   | $ | 59,500 |   | $ | 10,000 |   | $ | 29,000 |   | $ | 2,000 |   |
| Capital Lease Obligations     |   | 6,484                     |    | 1,356 |   | 3,081 |   | 1,921 |   | 126 |   |
| Operating Leases              |   | 6,632                     |    | 1,965 |   | 1,561 |   | 1,069 |   | 2,037 |   |
|                          |   |                      |    |   |   |   |   |   |   |   |   |
| Total Contractual Obligations |   | $                         | 113,616 |   | $ | 62,821 |   | $ | 14,642 |   | $ | 31,990 |   | $ | 4,163 |   |

 

***Long Term Debt:***  At September 30, 2003, the Company had longterm debt outstanding of $100.5 million. Long-term debt includes $50 million ofunsecured subordinated notes payable, bearing interest at a rate of 7.30%,payable semi-annually, that mature June 30, 2004.  The subordinated notes, whose terms include certain covenantspertaining to regulatory compliance, financial performance, timely reporting,failure to pay principal at maturity, failure to make scheduled payments, andbankruptcy, insolvency or reorganization of the Company, may not be paid early.The subsidiary bank had Federal

 

22

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Home Loan Bank advancestotaling $25.5 million outstanding at September 30, 2003.  Also at September 30, 2003, the subsidiarybank had a $25 million unsecured subordinated term note payable to anon-affiliated bank, with a maturity date of December 22, 2007.  The subsidiary bank note payable is subjectto covenants that include remaining in compliance with all regulatory agencyrequirements, providing timely financial information and providing access tocertain Company records.  The Companybelieves it is in material compliance with all long-term debt covenants atSeptember 30, 2003.

 

***Capital Lease Obligations:***  The Company frequently acquires the rightsto equipment used in the operation of the Company by entering into long-termcapital leases.  At September 30, 2003,the Company was liable for the payment of lease schedules associated with theacquisition of equipment and premises totaling $5,497,000, exclusive of financecharges.  The effect of capital leasesrecorded at September 30, 2003 is summarized in the table above.

 

***Operating Leases:***  In the normal course of business, theCompany enters into operating lease arrangements for the use of premises andequipment.  Operating leases includerental agreements with tenants providing facilities through which the Companydelivers its products and services.

 

***Company-Obligated Mandatorily Redeemable PreferredSecurities: ***AtSeptember 30, 2003, the Company has unconditionally guaranteed the obligationof CFB Capital IV, under the $60, million, 7.60% Cumulative Capital Securitiesissued March 4, 2003, and the obligation of CFB Capital III, under the $60million, 8.125% Cumulative Capital Securities issued March 27, 2002. The $60million Capital IV securities, which mature March 15, 2033, may be redeemed anytime on or after March 15, 2008.  The$60 million Capital III securities, which mature April 15, 2032, may beredeemed any time on or after April 15, 2007.

 

In the normal course ofbusiness, the Company is party to financial instruments with off-balance-sheetrisk. These transactions enable customers to meet their financing needs. Thesefinancial instruments include commitments to extend credit and letters ofcredit. The contract or notional amounts of these financial instruments atSeptember 30, 2003, as well as the maturity of these commitments are (inthousands):

 
|                              |   | **Amount of commitment expiring per period** |    |
|-----------------------------------|--------|----------------------------------------------|---------|
| **Other  Commercial Commitments** |   | **Total**                                    |    | **Less than  1 Year** |   | **1-3   Years** |   | **3-5   Years** |   | **More than  5 Years** |   |
|                              |   |                                         |    |   |   |   |   |   |   |   |   |
| Commitments to Extend Credit      |   | $                                            | 759,543 |   | $ | 575,250 |   | $ | 52,296 |   | $ | 19,526 |   | $ | 112,471 |   |
| Standby Letters of Credit         |   | 23,899                                       |    | 19,645 |   | 3,359 |   | 96 |   | 799 |   |
| Commercial Letters of Credit      |   | 7,822                                        |    | 7,068 |   | 604 |   | 90 |   | 60 |   |
|                              |   |                                         |    |   |   |   |   |   |   |   |   |
| Total Commercial Commitments      |   | $                                            | 791,264 |   | $ | 601,963 |   | $ | 56,259 |   | $ | 19,712 |   | $ | 113,330 |   |

 

***Commitments to extend credit***arelegally binding and have fixed expiration dates or other termination clauses.The Company’s exposure to credit loss on commitments to extend credit, in theevent of nonperformance by the counterparty, is represented by the contractualamounts of the commitments. The Company monitors its credit risk forcommitments to extend credit by applying the same credit policies in makingcommitments as it does for loans and by obtaining collateral to secure commitmentsbased on management’s credit assessment of the counterparty. Collateral held bythe Company may include marketable securities, receivables, inventory,agricultural commodities, equipment and real estate. Because many of thecommitments are expected to expire without being drawn upon, total commitmentamounts do not necessarily represent the Company’s future liquidityrequirements. In addition, the Company also offers various consumer credit lineproducts to its customers that are cancelable upon notification by the Company,which are included above in commitments to extend credit.

 

***Standby letters of credit*** areconditional commitments issued by the Company to guarantee the financialperformance of a customer to a third party. Those guarantees are primarilyissued to support public and private borrowing arrangements.

 

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***Commercial letters of credit*** areissued by the Company on behalf of customers to ensure payments of amounts owedor collection of amounts receivable in connection with trade transactions. TheCompany’s exposure to credit loss in the event of nonperformance by thecounterparty is the contractual amount of the letter of credit and representsthe same exposure as that involved in extending loans.

 

**Forward-lookingStatements**

 

**This Form 10-Q contains forward-looking statements underthe Private Securities Litigation Reform Act of 1995 that are subject tocertain risks and uncertainties that could cause actual results to differmaterially from historical earnings and those presently anticipated orprojected. The Company wishes to caution readers not to place undue reliance onany such forward-looking statements, which speak only as of the date made.  Forward-looking statements can beidentified by the fact that they do not relate strictly to historical orcurrent facts. They often include words such as “believe,” “expect,”“anticipate,” “intend,” “plan,” “estimate,” or words of similar meaning, orfuture or conditional verbs such as “will,” “would,” “should,” “could” or“may.” Factors that could cause actual results to differ from the resultsdiscussed in the forward-looking statements include, but are not limitedto:  risk of loans and investments,including dependence on local economic conditions; competition for thecompany’s customers from other providers of financial services; possibleadverse effects of changes in interest rates; balance sheet and critical ratiorisks related to the share repurchase program; risks related to the company’s acquisitionand market extension strategy, including risks of adversely changing results ofoperations and factors affecting the company’s ability to consummate furtheracquisitions or extend its market, and other risks detailed in the company’sfilings with the Securities and Exchange Commission including the risksidentified in the Company’s Form 10-K filed with the Commission on March 19,2003, all of which are difficult to predict and many of which are beyond thecontrol of the company.**

 

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**Item 3. Quantitative and Qualitative Disclosure About Market Risk**

 

There have been nomaterial changes in market risk exposures that affect the quantitative andqualitative disclosures presented as of December 31, 2002 in the Company’s Form10-K and Annual Report.

 

**Item 4. Controls and Procedures**

 

The Company, with the participation of management, including the ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report. Disclosure controls and procedures are designed to provide a reasonablelevel of assurance that information required to be disclosed in the Company’sreports under the Securities and Exchange Act of 1934 is recorded and reportedwithin the appropriate time periods. Based upon that review, the CEO and CFO concluded that the Company’sdisclosure controls and procedures are effective.  During the fiscal quarter covered by this report, there have beenno changes in internal control over financial reporting that has materiallyaffected, or are reasonably likely to materially affect, the Company's internalcontrol over financial reporting.

 

**PARTII - OTHER INFORMATION**

 
| Item 1. |   | Legal Proceedings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| Item 2. |   | Changes in Securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
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|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
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| Item 3. |   | Defaults  upon Senior Securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Item 4. |   | Submission  of Matters to a Vote of Security Holders:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Item 5. |   | Other Information:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   | On October  16, 2003, the Company announced its results of operations and financial  condition for the third quarter, issued a press release, filed a current  report on Form 8-K with the Commission with the earnings announcement as an  exhibit and held a conference call with investors to discuss the third  quarter results.  The Company adopted  FAS 150 on July 1, 2003 and the financial information released on October 16,  2003 reflected the reclassification of the Company’s $120 million in trust  preferred securities as liabilities in the statement of financial condition  and the payments on such securities as interest expense.  In November 2003, the FASB announced that  the provisions of FAS 150 as they relate to certain mandatorily redeemable  securities (including the company’s trust preferred securities), were delayed  indefinitely.  Based on this revised  guidance, the Company did not include such securities in liabilities, and did  not include the payments as interest expense, in this Form 10-Q.  There is no effect on the Company’s net  income.  However, the Company’s total  liabilities, noninterest expense, interest expense and net interest margin  have been revised from the earnings announcement on October 16, 2003 in this  Form 10-Q to reflect the change in accounting guidance.  The Company will issue a press release  describing the change in accounting treatment from the earnings announcement  to the 10-Q disclosures. |

 

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| Item 6. |   | Exhibits and  Reports on Form 8-K: |
|---------|--------|------------------------------------|
|    |   |                               |
|    |   | (a)                                | Exhibits: |
|    |   |                               |   |
|    |   |                               | 12.1 | Statement re  computation of ratios. |
|    |   |                               |   |   |
|    |   |                               | 31.1 | Certification  of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (Rules 13a-14 and 15-d-14 of the Exchange Act) |
|    |   |                               |   |   |
|    |   |                               | 31.2 | Certification  of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (Rules 13a-14 and 15-d-14 of the Exchange Act). |
|    |   |                               |   |   |
|    |   |                               | 32 | Certifications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350). |
|    |   |                               |   |   |
|    |   | (b)                                | Reports on  Form 8-K: |
|    |   |                               |   |
|    |   |                               | During the  quarter, the Company furnished to or filed with the Commission the following  reports on Form 8-K. |
|    |   |                               |   |
|    |   |                               | On July 17,  2003, the Company filed a current report under Items 9 and 12 on Form 8-K  related to a press release dated July 17, 2003 announcing the Company’s  results for the quarter ended June 30, 2003. |
|    |   |                               |   |
|    |   |                               | On August  25, 2003, the Company filed a current report under Item 11 on Form 8-K  related to the notification sent to its directors and executive officers  subject to Section 16 of the Securities Exchange Act of 1934, informing them  of a blackout period under the Company’s 401(k) Retirement Plan. |
|    |   |                               |   |
|    |   |                               | On August  27, 2003, the Company filed a current report under Item 11 on Form 8-K  related to the revised notification sent to its directors and executive  officers subject to Section 16 of the Securities Exchange Act of 1934,  informing them of a blackout period under the Company’s 401(k) Retirement  Plan. |
|    |   |                               |   |
|    |   |                               | On September  18, 2003, the Company filed a current report under Item 9 on Form 8-K related  to a slide presentation that the Company’s Chief Executive Officer and Chief  Operating Officer delivered at an investor conference on September 18, 2003. |

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|                         | **COMMUNITY FIRST BANKSHARES, INC.**                  |
|------------------------------|-------------------------------------------------------|
|                         |                                                  |
|                         |                                                  |
| Date:  November 7, 2003 | /s/ Mark A.  Anderson                                 |   |
|                         | Mark A.  Anderson                                     |
|                         | President  and Chief Executive Officer                |
|                         |                                                  |
|                         |                                                  |
| Date:  November 7, 2003 | /s/ Craig A.  Weiss                                   |   |
|                         | Craig A.  Weiss                                       |
|                         | Executive  Vice President and Chief Financial Officer |

 

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