**UNITED STATES**

**SECURITIESAND 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 thequarterly period ended March 31, 2002**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For thetransition periodfrom                    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 incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **520  Main Avenue  Fargo, ND**                                 |   | **58124**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |
|                                                            |   |                                  |
| **(701)  298-5600**                                             |
| (Registrant’s  telephone number, including area code)      |

 

Indicated by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days: YES ý NO o

 

At May 8, 2002,39,870,026 shares of Common Stock were outstanding.

 

----

 

COMMUNITY FIRST BANKSHARES, INC.

 

FORM 10-Q

 

QUARTER ENDED MARCH 31, 2002

 

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 |
|                             |   |   |
| PART II - OTHER  INFORMATION:    |
|                             |   |   |
|                             | Item 1. | Legal Proceedings |
|                             |   |   |
|                             | Item 2. | Changes in Securities |
|                             |   |   |
|                             | 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                       |

 

2

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COMMUNITY FIRSTBANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIALCONDITION

 
| **(Dollars in thousands, except per  share data)  (Unaudited)**                                                             |   | **March 31,  2002** |      | **December  31,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|-------------------------|--------|
| ASSETS                                                                                                                      |   |                |      |                    |   |
| Cash and due from banks                                                                                                     |   | $                   | 200,554   |                    | $      | 248,260 |   |
| Interest-bearing deposits                                                                                                   |   | 1,267               |      | 341                     |   |
| Available-for-sale securities                                                                                               |   | 1,457,223           |      | 1,437,066               |   |
| Held-to-maturity securities (fair value: 3/31/02 - $77,616, 12/31/01  - $76,765)                                            |   | 77,616              |      | 76,765                  |   |
| Loans                                                                                                                       |   | 3,654,691           |      | 3,736,692               |   |
| Less: Allowance for loan losses                                                                                             |   | (55,401             | )         | (54,991                 | )      |
| Net loans                                                                                                                   |   | 3,599,290           |      | 3,681,701               |   |
| Bank premises and equipment, net                                                                                            |   | 126,336             |      | 125,947                 |   |
| Accrued interest receivable                                                                                                 |   | 38,223              |      | 39,491                  |   |
| Goodwill                                                                                                                    |   | 62,903              |      | 62,903                  |   |
| Other intangible assets                                                                                                     |   | 34,245              |      | 34,554                  |   |
| Other assets                                                                                                                |   | 60,269              |      | 65,298                  |   |
| Total assets                                                                                                                |   | $                   | 5,657,926 |                    | $      | 5,772,326 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                   |   |                |      |                    |   |
| Deposits:                                                                                                                   |   |                |      |                    |   |
| Noninterest-bearing                                                                                                         |   | $                   | 382,085   |                    | $      | 487,864 |   |
| Interest-bearing:                                                                                                           |   |                |      |                    |   |
| Savings and NOW accounts                                                                                                    |   | 2,389,051           |      | 2,367,255               |   |
| Time accounts over $100,000                                                                                                 |   | 677,806             |      | 692,315                 |   |
| Other time accounts                                                                                                         |   | 1,140,633           |      | 1,203,379               |   |
| Total deposits                                                                                                              |   | 4,589,575           |      | 4,750,813               |   |
| Federal funds purchased and securities sold under agreements to  repurchase                                                 |   | 304,206             |      | 318,859                 |   |
| Other short-term borrowings                                                                                                 |   | 45,996              |      | 23,780                  |   |
| Long-term debt                                                                                                              |   | 132,478             |      | 136,841                 |   |
| Accrued interest payable                                                                                                    |   | 25,023              |      | 29,966                  |   |
| Other liabilities                                                                                                           |   | 28,608              |      | 35,362                  |   |
| Total liabilities                                                                                                           |   | 5,125,886           |      | 5,295,621               |   |
| Company-obligated mandatorily redeemable preferred securities of CFB  Capital I, II, & III                              |   | 180,000             |      | 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                                                                                                             |   | 193,403             |      | 193,103                 |   |
| Retained earnings                                                                                                           |   | 358,659             |      | 348,101                 |   |
| Unrealized gain (loss) on available-for-sale securities, net of tax                                                         |   | (87                 | )         | 3,847                   |   |
| Less cost of  common stock in treasury - March 31, 2002 — 11,145,562 shares December 31,  2001 — 9,155,144 shares |   | (200,445            | )         | (188,856                | )      |
| Total shareholders’ equity                                                                                             |   | 352,040             |      | 356,705                 |   |
| Total liabilities and shareholders’ equity                                                                             |   | $                   | 5,657,926 |                    | $      | 5,772,326 |   |

 

*See accompanying notes*.

 

3

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COMMUNITY FIRSTBANKSHARES, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME

 
|                                                                                          |   | **For the  Three Months Ended  March 31,** |       |
|-----------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
| **(Dollars in thousands, except per  share data)  (Unaudited)**                               |   | **2002**                                   | ** ** | **2001** | ** ** |
| Interest income:                                                                              |   |                                       |       |   |   |
| Loans                                                                                         |   | $                                          | 70,759     |   | $ | 87,521 |   |
| Investment securities                                                                         |   | 20,957                                     |       | 27,556 |   |
| Interest-bearing deposits                                                                     |   | 9                                          |       | 62 |   |
| Federal funds sold and resale agreements                                                      |   | 15                                         |       | 36 |   |
| Total interest income                                                                         |   | 91,740                                     |       | 115,175 |   |
| Interest expense:                                                                             |   |                                       |       |   |   |
| Deposits                                                                                      |   | 21,568                                     |       | 42,331 |   |
| Short-term and other borrowings                                                               |   | 1,595                                      |       | 5,564 |   |
| Long-term debt                                                                                |   | 1,991                                      |       | 2,193 |   |
| Total interest expense                                                                        |   | 25,154                                     |       | 50,088 |   |
| Net interest income                                                                           |   | 66,586                                     |       | 65,087 |   |
| Provision for loan losses                                                                     |   | 3,315                                      |       | 5,617 |   |
| Net interest income after provision for loan losses                                           |   | 63,271                                     |       | 59,470 |   |
| Noninterest income:                                                                           |   |                                       |       |   |   |
| Service charges on deposit accounts                                                           |   | 8,678                                      |       | 9,453 |   |
| Insurance commissions                                                                         |   | 3,277                                      |       | 3,050 |   |
| Fees from fiduciary activities                                                                |   | 1,426                                      |       | 1,506 |   |
| Security sales commissions                                                                    |   | 2,123                                      |       | 1,076 |   |
| Net gain on sales of available-for-sale securities                                            |   | 17                                         |       | 484 |   |
| Other                                                                                         |   | 2,500                                      |       | 3,723 |   |
| Total noninterest income                                                                      |   | 18,021                                     |       | 19,292 |   |
| Noninterest expense:                                                                          |   |                                       |       |   |   |
| Salaries and employee benefits                                                                |   | 28,490                                     |       | 28,007 |   |
| Net occupancy                                                                                 |   | 7,874                                      |       | 8,187 |   |
| FDIC insurance                                                                                |   | 212                                        |       | 242 |   |
| Legal and accounting                                                                          |   | 737                                        |       | 835 |   |
| Other professional service                                                                    |   | 877                                        |       | 1,314 |   |
| Advertising                                                                                   |   | 965                                        |       | 1,245 |   |
| Telephone                                                                                     |   | 1,528                                      |       | 1,419 |   |
| Restructuring charge                                                                          |   | —                                     |       | 7,656 |   |
| Data processing                                                                               |   | 826                                        |       | 890 |   |
| Company-obligated mandatorily redeemable preferred securities of CFB  Capital I, II & III |   | 2,615                                      |       | 2,561 |   |
| Amortization of intangibles                                                                   |   | 818                                        |       | 2,601 |   |
| Other                                                                                         |   | 7,188                                      |       | 8,058 |   |
| Total noninterest expense                                                                     |   | 52,130                                     |       | 63,015 |   |
|                                                                                          |   |                                       |       |   |   |
| Income before income taxes                                                                    |   | 29,162                                     |       | 15,747 |   |
| Provision for income taxes                                                                    |   | 9,901                                      |       | 5,519 |   |
| Net income                                                                                    |   | $                                          | 19,261     |   | $ | 10,228 |   |

 

*See accompanying notes.*

 

4

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|                                                            |   | **For the  Three Months Ended  March 31,** |       |
|-----------------------------------------------------------------|--------|--------------------------------------------|------------|
| **(Dollars in thousands, except per  share data)  (Unaudited)** |   | **2002**                                   |       | **2001** |   |
|                                                            |   |                                       |       |   |   |
| Earnings per common and common equivalent share:                |   |                                       |       |   |   |
| Basic net income                                                |   | $                                          | 0.48       |   | $ | 0.25 |   |
| Diluted net income                                              |   | $                                          | 0.47       |   | $ | 0.24 |   |
|                                                            |   |                                       |       |   |   |
| Average common shares outstanding:                              |   |                                       |       |   |   |
| Basic                                                           |   | 39,984,092                                 |       | 41,590,689 |   |
| Diluted                                                         |   | 40,644,637                                 |       | 41,997,381 |   |
|                                                            |   |                                       |       |   |   |
| Dividends per share                                             |   | $                                          |  0.19 |   | $ |  0.16 |   |

 

STATEMENTS OFCOMPREHENSIVE INCOME

 
|                                                               |   | **For the  Three Months Ended  March 31,** |   |
|--------------------------------------------------------------------|--------|--------------------------------------------|--------|
| **(Dollars in thousands)  (Unaudited)**                            |   | **2002**                                   |   | **2001** |   |
| Net income                                                         |   | $                                          | 19,261 |   | $ | 10,228 |   |
| Other comprehensive income, net of tax:                            |   |                                       |   |   |   |
| Unrealized gains  (losses) on securities:                          |   |                                       |   |   |   |
| Unrealized holding (losses) gains arising during period            |   | (3,923                                     | )      | 11,582 |   |
| Less: Reclassification adjustment for gains included in net income |   | (11                                        | )      | (290 | ) |
| Other comprehensive income                                         |   | (3,934                                     | )      | 11,292 |   |
| Comprehensive income                                               |   | $                                          | 15,327 |   | $ | 21,520 |   |

 

*See accompanying notes*.

 

5

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COMMUNITY FIRSTBANKSHARES, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                                                        |   | **For the  Three Months Ended  March 31,** |    |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
| **(In thousands)  (Unaudited)**                                                                             |   | **2002**                                   |    | **2001** |   |
| **Cash  flows from operating activities:**                                                                  |   |                                       |    |   |   |
| Net income                                                                                                  |   | $                                          | 19,261  |   | $ | 10,228 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:                          |   |                                       |    |   |   |
| Provision for loan losses                                                                                   |   | 3,315                                      |    | 5,617 |   |
| Depreciation                                                                                                |   | 3,414                                      |    | 3,326 |   |
| Amortization of intangibles                                                                                 |   | 818                                        |    | 2,601 |   |
| Net amortization of premiums (discounts) on securities                                                      |   | 114                                        |    | (191 | ) |
| Decrease in interest receivable                                                                             |   | 1,268                                      |    | 4,797 |   |
| Decrease in interest payable                                                                                |   | (4,943                                     | )       | (2,131 | ) |
| Other - net                                                                                                 |   | 346                                        |    | 2,716 |   |
| Net cash provided by operating activities                                                                   |   | 23,593                                     |    | 26,963 |   |
|                                                                                                        |   |                                       |    |   |   |
| **Cash  flows from investing activities:**                                                                  |   |                                       |    |   |   |
| Net increase in interest-bearing deposits                                                                   |   | (926                                       | )       | (320 | ) |
| Purchases of available-for-sale securities                                                                  |   | (446,018                                   | )       | (219,749 | ) |
| Maturities of available-for-sale securities                                                                 |   | 412,786                                    |    | 312,881 |   |
| Sales of available-for-sale securities, net of gains                                                        |   | 6,447                                      |    | 23,486 |   |
| Purchases of held-to-maturity securities                                                                    |   | (851                                       | )       | (859 | ) |
| Net decrease (increase) in loans                                                                            |   | 79,096                                     |    | (17,409 | ) |
| Net increase in bank premises and equipment                                                                 |   | (3,803                                     | )       | (4,751 | ) |
| Net cash provided by investing activities                                                                   |   | 46,731                                     |    | 93,279 |   |
|                                                                                                        |   |                                       |    |   |   |
| **Cash  flows from financing activities:**                                                                  |   |                                       |    |   |   |
| Net decrease in demand deposits, NOW accounts and savings accounts                                          |   | (83,983                                    | )       | (84,820 | ) |
| Net decrease in time accounts                                                                               |   | (77,255                                    | )       | (7,602 | ) |
| Net increase (decrease) in short-term & other borrowings                                                |   | 7,563                                      |    | (34,832 | ) |
| Net decrease in long-term debt                                                                              |   | (4,363                                     | )       | (4,685 | ) |
| Proceeds from issuance of Company-obligated mandatorily redeemable  preferred securities of CFB Capital III |   | 60,000                                     |    | — |   |
| Purchase of common stock held in treasury                                                                   |   | (15,258                                    | )       | (11,829 | ) |
| Sale of common stock held in treasury                                                                       |   | 2,874                                      |    | 1,165 |   |
| Common stock dividends paid                                                                                 |   | (7,608                                     | )       | (6,656 | ) |
| Net cash used in financing activities                                                                       |   | (118,030                                   | )       | (149,259 | ) |
| Net decrease in cash and cash equivalents                                                                   |   | (47,706                                    | )       | (29,017 | ) |
| Cash and cash equivalents at beginning of period                                                            |   | 248,260                                    |    | 256,136 |   |
| Cash and cash equivalents at end of period                                                                  |   | $                                          | 200,554 |   | $ | 227,119 |   |

 

6

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COMMUNITY FIRSTBANKSHARES, INC.

 

NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2002

 

**Note A – BASIS OF PRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements, which include theaccounts of Community First Bankshares, Inc. (the ‘Company’), its wholly-owneddata processing, credit origination, insurance agency and propertiessubsidiaries, and its wholly-owned subsidiary bank, have been prepared inaccordance with generally accepted accounting principles for interim financialinformation.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, alladjustments considered necessary for fair presentation have been included.

 

**Earnings Per Common Share**

 

Basic earnings per commonshare is calculated by dividing net income by the weighted average number ofshares of common stock outstanding.

 

Diluted earnings percommon share is calculated by dividing net income by the weighted averagenumber of shares of common stock outstanding. The weighted average number of shares of common stock outstanding isincreased by the number of shares of common stock that would be issued assumingthe exercise 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 – BUSINESS DIVESTITURES**

 

On February 8, 2002, the Company completed the sale of its Phoenix,Arizona branch to Community Bank of Arizona. The branch had assets of approximately $16 million.

 

**Note C – ACCOUNTING CHANGES**

 

Statement of Financial Accounting Standard Nos. 141 and 142 - BusinessCombinations and Goodwill and Other Intangible Assets  — In June 2001, the Financial Accounting Standards Board issuedstatements 141 and 142.  Statement 141requires that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001. Statement 142 prohibits the amortization of goodwill and intangibleassets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment atleast annually.  Intangible assets withfinite lives will continue to be amortized over their estimated useful lives.

 

Effective January 1, 2002, the Company adopted Statement 142, whichestablishes accounting and reporting standards for goodwill and otherintangible assets.  During the firstquarter of 2001, the Company performed the first of the required impairmenttests of goodwill as of January 1, 2002. The Company tested  forimpairment using the two-step process described in Statement 142.  The first step was a review for potentialimpairment, while the second step measures the amount of the impairment, ifany. The Company found no impairment of goodwill; therefore, the Company didnot record any transitional impairment as a cumulative effect of a change inaccounting principle.

 

The following table sets forth the computation of net income and basicand diluted earnings per share as though goodwill amortization had not beenrecorded as an expense during the first quarter of 2001  (dollars in thousands, except per sharedata):

 

7

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|                                                    |   | **For the  Three Months Ended  March** |   |
|---------------------------------------------------------|--------|----------------------------------------|--------|
|                                                    |   | **2002**                               |   | **2001** |   |
|                                                    |   |                                   |   |   |   |
| Reported Net  Income                                    |   | $                                      | 19,261 |   | $ | 10,228 |   |
|                                                    |   |                                   |   |   |   |
| Effect of SFAS  142                                     |   |                                   |   |   |   |
| After-tax  goodwill amortization included in net income |   | —                                 |   | 1,240 |   |
| Adjusted Net  Income                                    |   | 19,261                                 |   | 11,468 |   |
|                                                    |   |                                   |   |   |   |
| Adjusted basic  earnings per share                      |   | $                                      | 0.48   |   | $ | 0.28 |   |
| Adjusted diluted  earnings per share                    |   | $                                      | 0.47   |   | $ | 0.27 |   |

 

The aggregate amortization expense of intangible assets other thangoodwill for the year ended December 31, 2001 was $3,375,000.  The following table sets forth estimatedamortization expense for intangible assets other than goodwill for each of thefive years subsequent to December 31, 2001(in thousands):

 
| For year ended  December 31, 2002 |   | $     | 3,276  |   |
|-----------------------------------|--------|-------|--------|--------|
| For year ended  December 31, 2003 |   | 3,229 |   |
| For year ended  December 31, 2004 |   | 3,214 |   |
| For year ended  December 31, 2005 |   | 3,185 |   |
| For year ended  December 31, 2006 |   | 3,131 |   |

 

All of the Company’s intangible assets other than goodwill are subjectto amortization.  The following tablesets forth the gross carrying amount and accumulated amortization, in total andby major class of intangible assets as of December 31, 2001 (dollars inthousands):

 
|                          |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
|-------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
| Amortized  intangible assets: |   |                        |   |                          |   |
| Deposit-based  intangibles    |   | $                           | 39,620 |                          | $      | 11,652 |   |
| Insurance list  premiums      |   | 7,874                       |   | 1,630                         |   |
| Non-compete  agreements       |   | 659                         |   | 317                           |   |
| Total                         |   | $                           | 48,153 |                          | $      | 13,599 |   |

 

**Note D – SUBSEQUENT EVENTS**

 

On May 1, 2002,the Company redeemed all of the 8 7/8% Junior Subordinated Debentures that itissued in 1997, thereby triggering the redemption of all 2,400,000 of the 87/8% Cumulative Capital Securities issued by CFB Capital I, a Delaware businesstrust.

 

8

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**Note E – INVESTMENTS**

 

The following is asummary of available-for-sale and held-to-maturity securities at March 31, 2002(in thousands):

 
|                                |   | **Available-for-Sale  Securities** |      |
|-------------------------------------|--------|------------------------------------|-----------|
|                                |   | **Amortized  Cost**                |      | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| United States Treasury              |   | $                                  | 62,050    |   | $ | 1,690 |   | $ | 51 |   | $ | 63,689 |   |
| United States Government agencies   |   | 245,821                            |      | 3,321 |   | 1,759 |   | 247,383 |   |
| Mortgage-backed securities          |   | 927,485                            |      | 9,125 |   | 4,180 |   | 932,430 |   |
| Collateralized mortgage obligations |   | 4,148                              |      | 53 |   | 18 |   | 4,183 |   |
| State and political securities      |   | 92,694                             |      | 933 |   | 1,202 |   | 92,425 |   |
| Other securities                    |   | 125,169                            |      | 770 |   | 8,826 |   | 117,113 |   |
|                                |   | $                                  | 1,457,367 |   | $ | 15,892 |   | $ | 16,036 |   | $ | 1,457,223 |   |

 
|             |   | **Held-to-Maturity  Securities** |   |
|------------------|--------|----------------------------------|--------|
|             |   | **Amortized  Cost**              |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| Other securities |   | $                                | 77,616 |   | — |   | — |   | $ | 77,616 |   |
|             |   | $                                | 77,616 |   | $ | — |   | $ | — |   | $ | 77,616 |   |
|                  |        |                                  |        |  |  |  |  |  |  |  |  |  |  |

 

Proceeds from thesale of available-for-sale securities during the three months ended March 31,2002 and 2001 were $6,464,000 and $23,970,000, respectively.  Gross gains of $340,000 and $516,000 wererealized on sales during 2002 and 2001, respectively.  Gross losses of $323,000 and $32,000 were realized on salesduring 2002 and 2001, respectively. Gains and losses on disposition of these securities were computed usingthe specific identification method.

 

**Note F – LOANS**

 

The composition ofthe loan portfolio at March 31, 2002 was as follows (in thousands):

 
| Real estate                    |   | $         | 1,510,438 |   |
|--------------------------------|--------|-----------|-----------|--------|
| Real estate construction       |   | 498,199   |      |
| Commercial                     |   | 809,503   |      |
| Consumer and other             |   | 607,792   |      |
| Agriculture                    |   | 228,759   |      |
|                           |   | 3,654,691 |      |
| Less allowance for loan losses |   | (55,401   | )         |
| Net loans                      |   | $         | 3,599,290 |   |

 

**Note G – FINANCIAL INSTRUMENTS WITHOFF-BALANCE SHEET RISK**

 

In the normalcourse of business, the Company is party to financial instruments withoff-balance sheet risk to meet the financing needs of its customers and tomanage its interest rate risk.  Thesefinancial instruments include commitments to extend credit and letters ofcredit.  The contract or notionalamounts of these financial instruments at March 31, 2002 were as follows (inthousands):

 
| Commitments to extend credit |   | $      | 631,644 |   |
|------------------------------|--------|--------|---------|--------|
| Letters of credit            |   | 32,584 |    |

 

9

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**Note H – SUBORDINATED NOTES**

 

Long-term debt at March 31, 2002 included $60 million of 7.30%Subordinated Notes issued in June 1997. These notes are due June 30, 2004, with interest payablesemi-annually.  At March 31, 2002, $24million qualified as Tier 2 capital. At March 31, 2002, the subsidiary bank hada $25 million unsecured subordinated term note, maturing on December 22,2007.  The subsidiary bank note bears aninterest rate of LIBOR, plus 140 basis points.

 

**Note I – INCOME TAXES**

 

The reconciliationbetween the provision for income taxes and the amount computed by applying thestatutory federal income tax rate was as follows (in thousands):

 
|                                         |   | **For the  three months ended,  March 31, 2002** |   |
|----------------------------------------------|--------|--------------------------------------------------|--------|
| 35% of pretax income                         |   | $                                                | 10,206 |   |
| State income tax, net of federal tax benefit |   | 592                                              |   |
| Tax-exempt interest                          |   | (1,003                                           | )      |
| Other                                        |   | 106                                              |   |
| Provision for income taxes                   |   | $                                                | 9,901  |   |

 

**Note J – SHAREHOLDERS’ EQUITY**

 

On March 27, 2002,the Company issued $60 million of 8.125% Cumulative Capital Securities, throughCFB Capital III, a Delaware business trust subsidiary organized in February2002.  The proceeds of the offering wereinvested by CFB Capital III in Junior Subordinated Debentures of theCompany.  The Company used the netproceeds to redeem all of the 8 7/8% Junior Subordinated Debentures that itissued in 1997, thereby triggering the redemption of all 2,400,000 of the 87/8% Cumulative Capital Securities issued by CFB  I, a Delaware business trust. The debentures will mature not earlier than April 15, 2007, and notlater than April 15, 2032.  The capitalsecurities qualified as Tier I capital under capital guidelines of the Federal Reserve.

 

**Note K – SUPPLEMENTAL DISCLOSURES TOCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **Three months ended March 31 (in thousands)**          |   | **2002** |   | **2001** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|
| Unrealized (loss) gain on available-for-sale securities |   | $        | (6,513 | )        | $      | 18,678 |   |
|                                                         |        |          |        |          |        |  |  |

 

10

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

**Basis of Presentation**

 

The following is adiscussion of the Company’s financial condition as of March 31, 2002 andDecember 31, 2001, and its results of operations for the three month periodsended March 31, 2002 and 2001.

 

**Strategic Initiatives**

 

On March 22, 2001 theCompany announced a series of strategic initiatives designed to improvecustomer service and strengthen its position as a provider of diversifiedfinancial services.  Initiativesincluded a redefinition of the Company’s delivery model and the sale or closureof banking offices.  These initiativesare continuing in 2002 and the results of operations for the three months endedMarch 31, 2002 reflect the Company’s continuing efforts at implementing theinitiatives described below.

 

In an effort to properlyalign resources with market opportunities and provide the delivery supportstructure to optimize individual market potential, each of the Company’soffices was redefined as either a Regional Financial Center or a CommunityFinancial Center.  Regional FinancialCenters are those locations exhibiting strong commercial banking potential;requiring a broader based support structure. Community Financial Centers, which are less geographically concentrated,typically offer greater retail opportunities, including emphasis on insuranceand investment product sales.

 

In conjunction with therestructuring of the banking network, the Company sold 13 offices and closedeight additional offices.  Offices sold,in four separate transactions, included nine Arizona offices, three Nebraskaoffices and one office in North Dakota. Four of the eight offices closed were located in communities where the Companymaintains one or more additional offices, thus continuing to serve thosecustomers from existing locations.

 

As part of theseinitiatives, the Company made available an early-out program that was acceptedby 21 eligible management personnel.

 

As a result of theseinitiatives, the Company recorded a one-time after-tax restructuring chargetotaling $5.1 million.  The charge wasrecorded during the first quarter of 2001 and represents approximately $0.12per share.

 

In preparation for thesale of the nine Arizona offices, the Company charged off its largestnon-performing asset, a credit facility in the Arizona bank.  To maintain the current loan loss reservelevel, the Company recorded a special loan loss provision equal to the amountof the charge-off.  The specialprovision of $2.4 million, or approximately $0.04 per share after tax wasrecorded during the first quarter of 2001. In the first quarter of 2002, $1.2 million of this loan was recovered.

 

Under the redesigneddelivery structure, the Company will implement a centralized consumer creditprocess. Once fully operational, the central structure will offer a completerange of decision, origination, documentation and collection services to allCompany offices through a Fargo, North Dakota location.

 

**Critical Accounting Policies**

 

The Company has established various accounting policies which governthe application of accounting principles generally accepted in the UnitedStates in the preparation of the Company’s financial statements. Thesignificant accounting policies of the Company are described in the footnotesto the consolidated financial statements. Certain accounting policies involve significant judgments andassumptions by management which have a material impact on the carrying value ofcertain assets and liabilities; management considers such accounting policiesto be critical accounting policies.  Thejudgments and assumptions used by management are based on historical experienceand other factors,

 

11

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which are believed to be reasonable under the circumstances.  Because of the nature of the judgments andassumptions made by management, actual results could differ from thesejudgments and estimates which could have a material impact on the carryingvalues of assets and liabilities and the results of operations of the Company.

 

The Company believes the allowance for loan losses is a criticalaccounting policy that requires the most significant judgments and estimatesused in preparation of its consolidated financial statements.  The Company’s accounting policy for theallowance for loan losses is outlined in the Company’s Form 10-K dated March18, 2002.

 

**Overview**

 

For the three months ended March 31, 2002, net incomewas $19.3 million, an increase of $9.1 million or 89.2% from the $10.2 millionduring the 2001 period.  Basic earningsper common share for the three months ended March 31, 2002 were $0.48, comparedto $0.25 in the same period in 2001. Diluted earnings per share for the three months ended March 31, 2002were $0.47.  In the first quarter of2001, the Company recognized a one-time after-tax charge against earnings of$5.1 million, or 12 cents per share, and an after-tax special loan lossprovision of $1.5 million, or 4 cents per share.  Excluding the one-time charges, the Company’s net income was$16.8 million, or $0.40 per share (basic and diluted) for the three monthsended March 31, 2002.

 

Return on average assets and return on common equity for the threemonths ended March 31, 2002 were 1.38% and 22.03%, respectively, as compared tothe 2001 ratios of 0.69% and 11.92%. The increase in return on assets and return on equity is principally dueto the increase in net income.  Returnon average assets and return on average common equity, exclusive of theone-time charge and the special loan loss provision in the first quarter of2001, would have been 1.14% and 19.58% respectively.

 

**Results of Operations**

 

**Net Interest Income**

 

Net interestincome for the three months ended March 31, 2002 was $68.6 million, on atax-equivalent basis, an increase of $1.5 million, or 2.2%, from the netinterest income of $67.1 million earned during the 2001 period. The increasewas principally due to the combination of a $23.4 million reduction in interestincome and a $24.9 million decrease in interest expense resulting from a $299million reduction in average assets, which resulted in a 40 basis pointincrease in net interest margin.  Thereduction in average assets and reduction in interest expense is due in part,to the Company’s sale of 14 offices during the past 12 months.  The net interest margin of 5.36% for theperiod ended March 31, 2002 was up from 4.96% for the 2001 period.

 

**Provision for Loan Losses**

 

The provision for loan losses for the three months ended March 31, 2002was $3.3 million, a decrease of $2.3 million, or 41.1%, from the $5.6 millionprovision during the 2001 period. The decrease is principally due to the $2.4million special loan loss provision recorded in the first quarter of 2001 and theCompany’s objective of maintaining adequate reserve levels. Net charge-offswere $2.9 million or .32 percent (annualized) of average loans for the firstquarter of 2002, compared to $5.3 million or .57 percent for the first quarterof 2001. Charge-offs in the 2001 quarter were impacted by the write-off of a$2.4 million loan in Arizona.  Excludingthat charge, the net charge-offs for the 2001 quarter would have been $2.9million or .31 percent (annualized) of average loans. In the first quarter of2002, the company recovered $1.2 million on that loan.  Without the recovery, net charge-offs in the2002 quarter would have been $4.1 million or .45 percent (annualized) ofaverage loans, of which $1.0 million or .13 percent (annualized) relates to asingle commercial credit.  Nonperformingassets declined 4.3 percent between the first quarter of 2001 and the firstquarter of 2002, and comprised .42 percent of total assets in both thosequarters.

 

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**Noninterest Income**

 

Noninterest incomefor the three months ended March 31, 2002 was $18.0 million, a decrease of $1.3million, or 6.7%, from the 2001 level of $19.3 million. Commissions on the saleof investment securities were $2.1 million, a $1,047,000 or 97.3% increase fromthe $1.1 million recorded in the 2001 period, due primarily to the effect of arecent investment sales campaign. Insurance commissions were $3.3 million for the 2002 quarter, anincrease of $227,000 or 7.4% from the $3.1 million recorded in the 2001quarter.  Service charges on depositaccounts decreased $775,000 or 8.2%, to $8.7 million as of March 31, 2002,compared to $9.5 million during the 2001 period.  Other income decreased $1.2 million or 32.9% from $3.7 million in2001 to $2.5 million in 2002, including a reduction of $580,000 in the gain onsale of other real estate owned and a $561,000 reduction in the earnings creditrealized on the issuance of bank drafts. The 2001 period included $484,000 in net gains on the sale of investmentsecurities.

 

**Noninterest Expense**

 

Noninterest expense for the three months ended March 31, 2002 was $52.1million, a decrease of $10.9 million, or 17.3%, from the level of $63.0 millionduring the 2001 period. The decrease was principally due to the $7.7 millionone-time restructuring charge recorded during the first quarter of 2001.  Excluding the restructuring charge,noninterest expense declined 5.8% in the first three months of 2002 compared tothe same period in 2001.  The 2001period included $1.6 million of goodwill amortization.  The first quarter of 2001, also included a$462,000 early payment penalty, when the Company paid off various  Federal Home Loan Bank borrowings, whichcarried higher than market interest rates.

 

**Provision for Income Taxes**

 

The provision forincome taxes for the three months ended March 31, 2002 was $9.9 million, anincrease of $4.4 million, or 80.0%, from the 2001 level of $5.5 million. Theincrease was due principally to the increase in pre-tax net income, reflectingthe effect of the one-time restructuring charge and the special loan lossprovision recorded in the 2001 period. The effective tax rate for the three months ended March 31, 2002 was33.95%

 

**Financial Condition**

 

**Loans**

 

Total loans were$3.7 billion at March 31, 2002 and at December 31, 2001.

 

The followingtable presents the Company’s balance of each major category of loans:

 
|                           |   | **March 31,  2002**         |      | **December 31,  2001**      |   |
|--------------------------------|--------|-----------------------------|-----------|-----------------------------|--------|
|                           |   | **Amount**                  |      | **Percent of  Total Loans** |   | **Amount** |   | **Percent of  Total Loans** |   |
| Loan category:                 |   | **(Dollars in Thousands )** |      |
| Real estate                    |   | $                           | 1,510,438 |                        | 41.3   | % | $ | 1,515,118 |   | 40.5 | % |
| Real estate construction       |   | 498,199                     |      | 13.6                        | %      | 519,031 |   | 13.9 | % |
| Commercial                     |   | 809,503                     |      | 22.2                        | %      | 824,318 |   | 22.1 | % |
| Consumer and other             |   | 607,792                     |      | 16.6                        | %      | 627,034 |   | 16.8 | % |
| Agricultural                   |   | 228,759                     |      | 6.3                         | %      | 251,191 |   | 6.7 | % |
| Total loans                    |   | 3,654,691                   |      | 100.0                       | %      | 3,736,692 |   | 100.0 | % |
| Less allowance for loan losses |   | (55,401                     | )         |                        |   | (54,991 | ) |   |   |
| Total                          |   | $                           | 3,599,290 |                        |   |   | $ | 3,681,701 |   |   |   |

 

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**NonperformingAssets**

 

At March 31, 2002, nonperforming assets were $23.8 million, a decreaseof $131,000 or 0.6% from the $23.9 million level at December 31, 2001. At March31, 2002, nonperforming loans as a percent of total loans were .58%, up fromthe December 31, 2001 level of .56%. OREO was $2.7 million at March 31, 2002, a decrease of $134,000 from$2.9 million at December 31, 2001.

 

Nonperformingassets of the Company are summarized in the following table:

 
|                                                   |   | **March 31, 2002** |      | **December 31, 2001** |   |
|--------------------------------------------------------|--------|--------------------|-----------|-----------------------|--------|
| Loans                                                  |   |               |      |                  |   |
| Nonaccrual loans                                       |   | $                  | 20,831    |                  | $      | 20,818 |   |
| Restructured loans                                     |   | 242                |      | 252                   |   |
| Nonperforming loans                                    |   | 21,073             |      | 21,070                |   |
| Other real estate owned                                |   | 2,735              |      | 2,869                 |   |
| Nonperforming assets                                   |   | $                  | 23,808    |                  | $      | 23,939 |   |
| Loans 90 days or more past due but still accruing      |   | $                  | 5,668     |                  | $      | 6,270 |   |
| Nonperforming loans as a percentage of total loans     |   | .58                | %         | .56                   | %      |
| Nonperforming assets as a percentage of total assets   |   | .42                | %         | .41                   | %      |
| Nonperforming assets as a percentage of loans and OREO |   | .65                | %         | .64                   | %      |
|                                                   |   |               |      |                  |   |
| Total Loans                                            |   | $                  | 3,654,691 |                  | $      | 3,736,692 |   |
| Total Assets                                           |   | 5,657,926          |      | 5,772,326             |   |

 

**Allowancefor Loan Losses**

 

At March 31, 2002 theallowance for loan losses was $55.4 million, an increase of $2.9 million fromthe March 31, 2001 balance of $52.5 million. Net charge-offs during the three months ended March 31, 2002 were $2.4million less than those incurred during the three months ended March 31, 2001,principally as a result of the Company’s charge-off of the Company’s singlelargest non-performing asset, a $2.4 million credit facility at one of itsArizona offices in the first quarter of 2001, $1.2 million of which wasrecovered in the first quarter of 2002, and the charge-off of a single $1.0million commercial credit in the 2002 period.

 

At March 31, 2002,the allowance for loan losses as a percentage of total loans was 1.52%, anincrease from the March 31, 2001 level of 1.40%.

 

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The followingtable sets forth the Company’s allowance for loan losses:

 
|                                                    |   | **March 31,** |      |
|---------------------------------------------------------|--------|---------------|-----------|
| **(Dollars in thousands)**                              |   | **2002**      |      | **2001** |   |
| Balance at beginning of period                          |   | $             | 54,991    |   | $ | 52,168 |   |
| Charge-offs:                                            |   |          |      |   |   |
| Real estate                                             |   | 1,455         |      | 208 |   |
| Real estate construction                                |   | 3             |      | 2,438 |   |
| Commercial                                              |   | 1,699         |      | 1,469 |   |
| Consumer and other                                      |   | 2,656         |      | 2,314 |   |
| Agricultural                                            |   | 12            |      | 91 |   |
| Total charge-offs                                       |   | 5,825         |      | 6,520 |   |
| Recoveries:                                             |   |          |      |   |   |
| Real estate                                             |   | 72            |      | 26 |   |
| Real estate construction                                |   | 1,201         |      | 1 |   |
| Commercial                                              |   | 317           |      | 205 |   |
| Consumer and other                                      |   | 1,300         |      | 877 |   |
| Agricultural                                            |   | 30            |      | 123 |   |
| Total recoveries                                        |   | 2,920         |      | 1,232 |   |
| Net charge-offs                                         |   | 2,905         |      | 5,288 |   |
| Provision charged to operations                         |   | 3,315         |      | 5,617 |   |
| Balance at end of period                                |   | $             | 55,401    |   | $ | 52,497 |   |
| Allowance as a percentage of total loans                |   | 1.52          | %         | 1.40 | % |
| Annualized net charge-offs to average loans outstanding |   | 0.32          | %         | 0.57 | % |
|                                                    |   |          |      |   |   |
| Total Loans                                             |   | $             | 3,654,691 |   | $ | 3,750,323 |   |
| Average Loans                                           |   | 3,732,033     |      | 3,738,045 |   |

 

#### **Investments**

 

The investmentportfolio, including available-for-sale securities and held-to-maturitysecurities, was $1.5 billion at March 31, 2002 and December 31, 2001.  At March 31, 2002, the investment portfoliorepresented 27.1% of total assets, compared with 26.2% at December 31,2001.  In addition to investmentsecurities, the Company had investments in interest-bearing deposits of $1.3million at March 31, 2002, an increase of $926,000 from $341,000 at December 31,2001.

 

**Deposits**

 

Total depositswere $4.6 billion at March 31, 2002, a decrease of $161.2 million, or 3.4%,from $4.8 billion at December 31, 2001. Noninterest-bearing deposits at March 31, 2002 were $382 million, adecrease of $106 million, or 21.7%, from $488 million at December 31,2001.  The decrease in total depositsand noninterest bearing deposits was principally due to the impact of the saleof Company offices during 2001 and 2002, which had $134 million in deposits atthe time of sale, and also due to the seasonality of deposit balances.  The Company’s core deposits as a percent oftotal deposits were 85.1% and 85.3% as of March 31, 2002 and December 31, 2001,respectively.  Interest-bearing depositswere $4.2 billion at March 31, 2002, and December 31, 2001.

 

**Borrowings**

 

Short-termborrowings of the Company were $46 million as of March 31, 2002, an increase of$22 million, or 91.7%, from $24 million as of December 31, 2001.  The increase is due primarily to thefluctuation in the level of daily deposits and its impact on short-termliquidity, and reflects the Company’s strategy of funding short-term liquidityneeds in a cost-effective manner.

 

Long-term debt ofthe Company was $132 million as of March 31, 2002, a decrease of $5 million, or3.6%, from the $137 million as of December 31, 2001.

 

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**Capital Management**

 

Shareholders’equity decreased $5 million to $352 million at March 31, 2002 from $357 millionat December 31, 2001.  Unrealized gain andloss on available-for-sale securities, net of taxes, decreased $3.9 millionduring the first quarter of 2002.  AtMarch 31, 2002, the Company’s Tier 1 capital, total risk-based capital andleverage ratios were 8.92%, 12.85%, and 6.63%, 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).  At March 31, 2002,the Company had risk-weighted assets of $4.2 billion.

 

On March 27, 2002,the Company issued $60 million in 8.125% Cumulative Capital Securities, throughCFB Capital III, a business trust subsidiary organized in March 2002.  All $60 million of the capital securitiesqualify as Tier I Capital for regulatory capital calculation purposes.  The proceeds from the offering were used onMay 1, 2002 to redeem the $60 million of 8-7/8% junior subordinated debenturesthat were issued in February 1997.  TheCompany has unconditionally guaranteed the obligations of CFB Capital III underthe 8.125% cumulative capital securities.

 

#### **Stock Repurchases**

 

In August 2001,the Company adopted a common stock repurchase program providing for thesystematic repurchase of up to 3 million shares of the Company’s commonstock.  Previously, in April 2000 and inAugust 2000, the Company had adopted similar repurchase programs for up to 5million shares each.  During 2000 and2001, the Company repurchased all shares authorized under the 2000 programs.  During the first quarter of 2002, theCompany repurchased 600,000 shares under the 2001 program, at prices rangingfrom $24.19 to $25.96.  At March 31,2002, 2.4 million shares remain under the current repurchase authorization.

 

#### **Forward-lookingStatements**

 

**This Form 10-Q containsforward-looking statements under the Private Securities Litigation Reform Actof 1995 that are subject to certain risks and uncertainties that could causeactual results to differ materially from historical earnings and thosepresently anticipated or projected. The Company wishes to caution readers notto place undue reliance on any such forward-looking statements, which speakonly as of the date made.  Forward–lookingstatements can be identified by the fact that they do not relate strictly tohistorical or current facts. They often include words such as “believe,”“expect,” “anticipate,” “intend,” “plan,” “estimate,” or words of similarmeaning, or future or conditional verbs such as “will,” “would,” “should,”“could” or “may.” Factors that could cause actual results to differ from theresults discussed in the forward-looking statements include, but are notlimited to:  risk of loans andinvestments, including dependence on local economic conditions; competition forthe company’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’sacquisition strategy, including risks of adversely changing results ofoperations and factors affecting the company’s ability to consummate furtheracquisitions, and other risks detailed in the company’s filings with theSecurities and Exchange Commission including the risks identified in theCompany’s Form 10-K filed with the Commission on March 18, 2002, all of whichare difficult to predict and many of which are beyond the control of thecompany.**

 

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**Item3.  Quantitative and QualitativeDisclosure About Market Risk**

 

There have been nomaterial changes in market risk exposures that affect the quantitative andqualitative disclosures presented as of December 31, 2001 in the Company’s Form10-K and Annual Report.

 

**PARTII - OTHER INFORMATION**

 

Item 1.            Legal Proceedings:

 

None.

 

Item 2.            Changesin Securities:

 

None.

 

Item 3.            Defaultsupon Senior Securities:

 

None.

 

Item 4.            Submissionof Matters to a Vote of Security Holders:

 

None.

 

Item 5.            OtherInformation:

 

None.

 

Item 6.            Exhibitsand Reports on Form 8-K:

 

(a)       Exhibits:

 

(b)       Reports on Form 8-K:

 

On March 28, 2002,the Company filed a Form 8-K related to the offering on 8.125% cumulativecapital securities of CFB Capital III.

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                    |   | **COMMUNITY FIRST BANKSHARES, INC.**   |
|-------------------------|--------|----------------------------------------|
|                    |   |                                   |
|                    |   |                                   |
| Date:  May 8, 2002 |   | /s/                                    | Mark A. Anderson |
|                    |   | Mark A. Anderson                       |
|                    |   | President and Chief  Executive Officer |
|                    |   |                                   |
|                    |   |                                   |
| Date:  May 8, 2002 |   | /s/                                    | Craig A. Weiss |
|                    |   | Craig A. Weiss                         |
|                    |   | Chief Financial Officer                |

 

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