**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

** **

**FORM 10-Q**

 

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended      March 31, 2003**

** **

**OR**

** **

** ̈****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe transition period from               to               **

** **

**Commissionfile number   0-19368**

** **

**COMMUNITY FIRST BANKSHARES, INC.**

(Exact name of registrantas 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)       |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days: YES ý NO   ̈

 

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

 

At May 9, 2003, 38,447,050 shares of Common Stock were outstanding.

 

 

----

 

COMMUNITY FIRSTBANKSHARES, INC.

 

FORM 10-Q

 

QUARTER ENDED MARCH 31,2003

 

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 |
|                            |   |
| 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

----

 

COMMUNITY FIRSTBANKSHARES, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION

 
| **(Dollars in thousands, except per  share data)**                                                                            |   | **March 31,  2003** |      | **December  31,  2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|-------------------------|------------|
|                                                                                                                          |   | **(unaudited)**     |      |                    | ** ** |
| ASSETS                                                                                                                        |   |                |      |                    |       |
| Cash and due  from banks                                                                                                      |   | $                   | 201,185   |                    | $          | 242,887 |   |
| Interest-bearing  deposits                                                                                                    |   | 8,238               |      | 4,613                   |       |
| Available-for-sale  securities                                                                                                |   | 1,702,469           |      | 1,672,445               |       |
| Held-to-maturity  securities (fair value: 3/31/03 - $81,018, 12/31/02 - $80,165)                                              |   | 81,018              |      | 80,165                  |       |
| Loans                                                                                                                         |   | 3,494,772           |      | 3,577,893               |       |
| Less: Allowance  for loan losses                                                                                              |   | (54,895             | )         | (56,156                 | )          |
| Net loans                                                                                                                     |   | 3,439,877           |      | 3,521,737               |       |
| Bank premises  and equipment, net                                                                                             |   | 132,736             |      | 132,122                 |       |
| Accrued interest  receivable                                                                                                  |   | 33,844              |      | 34,863                  |       |
| Goodwill                                                                                                                      |   | 62,903              |      | 62,903                  |       |
| Other intangible  assets                                                                                                      |   | 31,844              |      | 32,577                  |       |
| Other assets                                                                                                                  |   | 49,879              |      | 42,858                  |       |
| Total assets                                                                                                                  |   | $                   | 5,743,993 |                    | $          | 5,827,170 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                    |   |                |      |                    |       |
| Deposits:                                                                                                                     |   |                |      |                    |       |
| Noninterest-bearing                                                                                                           |   | $                   | 369,282   |                    | $          | 470,900 |   |
| Interest-bearing:                                                                                                             |   |                |      |                    |       |
| Savings and NOW  accounts                                                                                                     |   | 2,503,208           |      | 2,424,943               |       |
| Time accounts  over $100,000                                                                                                  |   | 605,849             |      | 670,187                 |       |
| Other time  accounts                                                                                                          |   | 1,064,381           |      | 1,103,716               |       |
| Total deposits                                                                                                                |   | 4,542,720           |      | 4,669,746               |       |
| Federal funds  purchased and securities sold under agreements to repurchase                                                   |   | 437,287             |      | 377,230                 |       |
| Other short-term  borrowings                                                                                                  |   | 30,602              |      | 76,260                  |       |
| Long-term debt                                                                                                                |   | 117,500             |      | 127,500                 |       |
| Accrued interest  payable                                                                                                     |   | 19,669              |      | 18,987                  |       |
| Other  liabilities                                                                                                            |   | 38,381              |      | 58,998                  |       |
| Total  liabilities                                                                                                            |   | 5,186,159           |      | 5,328,721               |       |
| Company-obligated  mandatorily redeemable preferred securities of subsidiary trusts                                           |   | 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                                                                                                               |   | 194,144             |      | 193,887                 |       |
| Retained  earnings                                                                                                            |   | 403,759             |      | 393,550                 |       |
| Unrealized gain  on available-for-sale securities, net of tax                                                                 |   | 19,389              |      | 23,826                  |       |
| Less cost of  common stock in treasury -  March 31, 2003 – 12,567,569 shares  December 31, 2002 – 12,343,096 shares |   | (239,968            | )         | (233,324                | )          |
| Total  shareholders’ equity                                                                                              |   | 377,834             |      | 378,449                 |       |
| Total  liabilities and shareholders’ equity                                                                              |   | $                   | 5,743,993 |                    | $          | 5,827,170 |   |

* *

*Seeaccompanying notes*.

 

3

----

 

COMMUNITY FIRSTBANKSHARES, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME

 
|                                                                               |   | **For the  Three Months Ended** |   |
|------------------------------------------------------------------------------------|--------|---------------------------------|--------|
| **(Dollars in thousands, except per  share data)**                                 |   | **March 31,**                   |   |
| **(Unaudited)**                                                                    |   | **2003**                        |   | **2002** |   |
| Interest income:                                                                   |   |                            |   |   |   |
| Loans                                                                              |   | $                               | 63,210 |   | $ | 70,759 |   |
| Investment  securities                                                             |   | 19,636                          |   | 20,957 |   |
| Interest-bearing  deposits                                                         |   | 12                              |   | 9 |   |
| Federal funds  sold and resale agreements                                          |   | —                          |   | 15 |   |
| Total interest  income                                                             |   | 82,858                          |   | 91,740 |   |
| Interest  expense:                                                                 |   |                            |   |   |   |
| Deposits                                                                           |   | 14,707                          |   | 21,568 |   |
| Short-term and  other borrowings                                                   |   | 1,358                           |   | 1,595 |   |
| Long-term debt                                                                     |   | 1,899                           |   | 1,991 |   |
| Total interest  expense                                                            |   | 17,964                          |   | 25,154 |   |
| Net interest  income                                                               |   | 64,894                          |   | 66,586 |   |
| Provision for  loan losses                                                         |   | 3,487                           |   | 3,315 |   |
| Net interest  income after provision for loan losses                               |   | 61,407                          |   | 63,271 |   |
| Noninterest  income:                                                               |   |                            |   |   |   |
| Service charges  on deposit accounts                                               |   | 9,380                           |   | 9,657 |   |
| Insurance  commissions                                                             |   | 4,081                           |   | 3,277 |   |
| Fees from  fiduciary activities                                                    |   | 1,278                           |   | 1,426 |   |
| Security sales  commissions                                                        |   | 2,051                           |   | 2,123 |   |
| Net gain on  sales of available-for-sale securities                                |   | 464                             |   | 17 |   |
| Other                                                                              |   | 3,673                           |   | 2,500 |   |
| Total  noninterest income                                                          |   | 20,927                          |   | 19,000 |   |
| Noninterest  expense:                                                              |   |                            |   |   |   |
| Salaries and  employee benefits                                                    |   | 27,914                          |   | 28,490 |   |
| Net occupancy                                                                      |   | 8,608                           |   | 7,874 |   |
| FDIC insurance                                                                     |   | 191                             |   | 212 |   |
| Legal and  accounting                                                              |   | 407                             |   | 737 |   |
| Other  professional services                                                       |   | 889                             |   | 877 |   |
| Advertising                                                                        |   | 930                             |   | 965 |   |
| Telephone                                                                          |   | 1,526                           |   | 1,528 |   |
| Data processing                                                                    |   | 1,718                           |   | 1,805 |   |
| Company-obligated  mandatorily redeemable preferred securities of subsidiary trust |   | 2,791                           |   | 2,615 |   |
| Amortization of  intangibles                                                       |   | 831                             |   | 818 |   |
| Other                                                                              |   | 7,675                           |   | 7,188 |   |
| Total  noninterest expense                                                         |   | 53,480                          |   | 53,109 |   |
|                                                                               |   |                            |   |   |   |
| Income before  income taxes                                                        |   | 28,854                          |   | 29,162 |   |
| Provision for  income taxes                                                        |   | 9,453                           |   | 9,901 |   |
| Net income                                                                         |   | $                               | 19,401 |   | $ | 19,261 |   |

* *

*Seeaccompanying notes.*

 

4

----

 
|                                               |   | **For the  Three Months Ended** |   |
|----------------------------------------------------|--------|---------------------------------|--------|
| **(Dollars in thousands, except per  share data)** |   | **March 31,**                   |   |
| **(Unaudited)**                                    |   | **2003**                        |   | **2002** |   |
|                                               |   |                            |   |   |   |
| Earnings per  common and common equivalent share:  |   |                            |   |   |   |
| Basic net income                                   |   | $                               | 0.50   |   | $ | 0.48 |   |
| Diluted net  income                                |   | $                               | 0.50   |   | $ | 0.47 |   |
|                                               |   |                            |   |   |   |
| Average common  shares outstanding:                |   |                            |   |   |   |
| Basic                                              |   | 38,601,216                      |   | 39,984,092 |   |
| Diluted                                            |   | 39,111,903                      |   | 40,644,637 |   |
|                                               |   |                            |   |   |   |
| Dividends per share                                |   | $                               | 0.22   |   | $ | 0.19 |   |

 

STATEMENTS OFCOMPREHENSIVE INCOME

 
|                                                                |   | **For the  Three Months Ended** |   |
|---------------------------------------------------------------------|--------|---------------------------------|--------|
| **(Dollars in thousands)**                                          |   | **March 31,**                   |   |
| **(Unaudited)**                                                     |   | **2003**                        |   | **2002** |   |
| Net income                                                          |   | $                               | 19,401 |   | $ | 19,261 |   |
| Other  comprehensive loss, net of tax:                              |   |                            |   |   |   |
| Unrealized  losses on securities:                                   |   |                            |   |   |   |
| Unrealized  holding losses arising during period                    |   | (4,159                          | )      | (3,923 | ) |
| Less:  Reclassification adjustment for gains included in net income |   | (278                            | )      | (11 | ) |
| Other  comprehensive loss                                           |   | (4,437                          | )      | (3,934 | ) |
| Comprehensive  income                                               |   | $                               | 14,964 |   | $ | 15,327 |   |

 

*Seeaccompanying notes*.

 

5

----

 

COMMUNITY FIRSTBANKSHARES, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| **(In thousands)**                                                                       |   | **For the  Three Months Ended  March 31,** |    |
|------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|
| **(Unaudited)**                                                                          |   | **2003**                                   |    | **2002** |   |
| **Cash flows from operating  activities:**                                               |   |                                       |    |   |   |
| Net income                                                                               |   | $                                          | 19,401  |   | $ | 19,261 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:       |   |                                       |    |   |   |
| Provision for  loan losses                                                               |   | 3,487                                      |    | 3,315 |   |
| Depreciation                                                                             |   | 4,296                                      |    | 3,414 |   |
| Amortization of  intangibles                                                             |   | 831                                        |    | 818 |   |
| Net amortization  of premiums (discounts) on securities                                  |   | 1,280                                      |    | 114 |   |
| Decrease in  interest receivable                                                         |   | 1,019                                      |    | 1,268 |   |
| Increase  (decrease) in interest payable                                                 |   | 682                                        |    | (4,943 | ) |
| Decrease in due  to broker                                                               |   | (22,414                                    | )       | — |   |
| Other - net                                                                              |   | (2,413                                     | )       | 346 |   |
| Net cash  provided by operating activities                                               |   | 6,169                                      |    | 23,593 |   |
|                                                                                     |   |                                       |    |   |   |
| **Cash flows from investing  activities:**                                               |   |                                       |    |   |   |
| Net increase in  interest-bearing deposits                                               |   | (3,625                                     | )       | (926 | ) |
| Purchases of  available-for-sale securities                                              |   | (604,607                                   | )       | (446,018 | ) |
| Maturities of  available-for-sale securities                                             |   | 504,332                                    |    | 412,786 |   |
| Sales of  available-for-sale securities, net of gains                                    |   | 61,625                                     |    | 6,447 |   |
| Purchases of  held-to-maturity securities                                                |   | (853                                       | )       | (851 | ) |
| Net decrease in  loans                                                                   |   | 78,373                                     |    | 79,096 |   |
| Net increase in  bank premises and equipment                                             |   | (4,910                                     | )       | (3,803 | ) |
| Net cash  provided by investing activities                                               |   | 30,335                                     |    | 46,731 |   |
|                                                                                     |   |                                       |    |   |   |
| **Cash flows from financing  activities:**                                               |   |                                       |    |   |   |
| Net decrease in  demand deposits, NOW accounts and savings accounts                      |   | (23,353                                    | )       | (83,983 | ) |
| Net decrease in  time accounts                                                           |   | (103,673                                   | )       | (77,255 | ) |
| Net increase in  short-term & other borrowings                                       |   | 14,399                                     |    | 7,563 |   |
| Net decrease in  long-term debt                                                          |   | (10,000                                    | )       | (4,363 | ) |
| Proceeds from  issuance of Company-obligated mandatorily redeemable preferred securities |   | 60,000                                     |    | 60,000 |   |
| Purchase of  common stock held in treasury                                               |   | (8,552                                     | )       | (15,258 | ) |
| Sale of common  stock held in treasury                                                   |   | 1,470                                      |    | 2,874 |   |
| Common stock  dividends paid                                                             |   | (8,497                                     | )       | (7,608 | ) |
| Net cash used in  financing activities                                                   |   | (78,206                                    | )       | (118,030 | ) |
| Net decrease in  cash and cash equivalents                                               |   | (41,702                                    | )       | (47,706 | ) |
| Cash and cash  equivalents at beginning of period                                        |   | 242,887                                    |    | 248,260 |   |
| Cash and cash  equivalents at end of period                                              |   | $                                          | 201,185 |   | $ | 200,554 |   |

 

6

----

 

COMMUNITY FIRST BANKSHARES,INC.

 

NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

MARCH 31, 2003

 

**Note A -BASIS OF PRESENTATION**

 

The accompanying unaudited condensed consolidatedfinancial statements, which include the accounts of Community First Bankshares,Inc. (the ‘Company’), its wholly-owned data processing, credit origination andinsurance agency subsidiaries, and its wholly-owned subsidiary bank, have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information.  Accordingly, they do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all adjustments considered necessary for fair presentation havebeen included.

 

**Earnings Per Common Share**

 

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

 

Diluted earnings per common share is calculated byadjusting the weighted average number of shares of common stock outstanding forshares that would be issued assuming the exercise of stock options and warrantsduring each period.  Such adjustments tothe weighted average number of shares of common stock outstanding are made onlywhen such adjustments dilute earnings per share.

 

**Note B –ACCOUNTING CHANGES**

 

In November 2002, the Financial Accounting StandardsBoard issued Interpretation No. 45, (FIN 45) Guarantor’s Accounting and Disclosure for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others. FIN 45 requires certainguarantees to be recorded at fair value and applies to contracts orindemnification agreements that contingently require the guarantor to makepayments to the guaranteed party based on changes in an underlying conditionthat is related to an asset, liability or equity security of the guaranteedparty. Examples of contracts meeting these characteristics include standby andperformance letters of credit. The recognition requirements of FIN 45 are to beapplied prospectively to guarantees issued or modified subsequent to December31, 2002. FIN 45 also expands the disclosures to be made by guarantors,effective as of December 31, 2002, to include the nature of the guarantee, themaximum potential amount of future payments that the guarantor could berequired to make under the guarantee, and the current amount of the liability,if any, for the guarantor’s obligation under the guarantee. Significantguarantees that have been entered into by the Company are disclosed in Note H,Financial Instruments with Off-Balance-Sheet Risk.  The adoption of FIN 45 did not have a material impact on theCompany’s results of operations, financial position or liquidity.

 

In January 2003, the FASB issued Interpretation No. 46(FIN 46), Consolidation of Variable Interest Entities.  FIN 46 clarifies the application ofAccounting Research Bulletin No. 51, Consolidated Financial Statement, tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties.  The recognitionand measurement provisions of this Interpretation are effective for newlycreated variable interest entities formed after January 31, 2003, and forexisting variable interest entities, on the first interim or annual reportingperiod beginning after June 15, 2003. The Company adopted the disclosure provisions of FIN 46 effectiveDecember 31, 2002.  The Company willadopt the provisions of FIN 46 for existing variable entities on July 1,2003.  At this time management believesadoption of FIN 46 with regard to existing variable entities will not have amaterial effect on the Company’s financial statements.

 

7

----

 

In December 2002, the FASB issued Statement No. 148(FAS 148), Accounting for Stock-Based Compensation- Transition and Disclosure,an amendment to FASB Statement 123. In addition, FAS 148 amends the disclosurerequirements of FASB Statement No. 123 (FAS 123), Accounting for Stock-BasedCompensation, to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The Company adopted the disclosureprovisions of FAS 148 effective March 31, 2003.

 

**Note C –STOCK BASED COMPENSATION**

 

At March 31, 2003, the company had one stock-basedemployee compensation plan.  The Companyaccounts for this plan under the recognition and measurement principles of APBOpinion No. 25, Accounting for Stock Issued to Employees, and relatedinterpretations.  No stock-based employeecompensation cost is reflected in net income, as all options granted under thisplan have an exercise price equal to the market value of the underlying commonstock on the date of grant.  Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of FAS 123, tostock-based employee compensation:

 
|                                               |                                                                                                                                   | **Three  Months Ended March 31** |   |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|--------|
| **(Dollars in thousands, except per  share data)** |                                                                                                                                   | **2003**                         |   | **2002** |   |
| Net income, as  reported                           |                                                                                                                                   | $                                | 19,401 |   | $ | 19,261 |   |
| Deduct:                                            | Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects. |                             | (662   | ) | (555 | ) |
|                                               |                                                                                                                                   |                             |   |   |   |
| Pro forma net  income                              |                                                                                                                                   | $                                | 18,739 |   | $ | 18,706 |   |
|                                               |                                                                                                                                   |                             |   |   |   |
| Earnings per  share:                               |                                                                                                                                   |                             |   |   |   |
| Basic – as  reported                          |                                                                                                                                   | $                                | 0.50   |   | $ | 0.48 |   |
| Basic – pro  forma                            |                                                                                                                                   | $                                | 0.49   |   | $ | 0.47 |   |
|                                               |                                                                                                                                   |                             |   |   |   |
| Diluted – as  reported                        |                                                                                                                                   | $                                | 0.50   |   | $ | 0.47 |   |
| Diluted – pro  forma                          |                                                                                                                                   | $                                | 0.48   |   | $ | 0.46 |   |
|                                                    |                                                                                                                                        |                                  |        |  |  |  |  |  |

 

The fair value of the options was estimated at thegrant date using a Black-Scholes option-pricing model. Option valuation modelsrequire the input of highly subjective assumptions. Because the Company’semployee stock options have characteristics significantly different from tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the fair value estimate, in management’s opinion, the existing models donot necessarily provide a reliable single measure of the fair value of itsemployee stock options.

 

The following weighted-average assumptions were usedin the valuation model: risk-free interest rates ranging from 2.23 percent to3.21 percent based on estimated life for 2003 options granted and 3.61 percentfor 2002; dividend yield of 3.33 percent and 3.17 percent in 2003 and 2002,respectively; stock price volatility factors of .257 and .265 in 2003 and 2002,respectively; and expected life of options of 7.5 years.

 

**Note D –SUBSEQUENT EVENTS**

 

On April 1, 2003, the Company, through its insurancesubsidiary, completed the purchase of the Carr Agency, an insurance agency inThornton, Colorado.

 

8

----

 

On April 4, 2003, the Company redeemed all of the8.20% Junior Subordinated Debentures that it issued in 1997, thereby triggeringthe redemption of all 2,400,000 shares of the 8.20% Cumulative CapitalSecurities issued by CFB Capital II, a Delaware statutory trust.

 

On May 1, 2003, the Company, through its insurancesubsidiary, completed the purchase of Kraft Insurance Service, Inc., aninsurance agency in Grand Junction, Colorado.

 

**Note E –INVESTMENTS**

 

The following is a summary of available-for-sale andheld-to-maturity securities at March 31, 2003 (in thousands):

 
|                                 |   | **Available-for-Sale  Securities** |      |
|--------------------------------------|--------|------------------------------------|-----------|
|                                 |   | **Amortized  Cost**                |      | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| United States  Treasury              |   | $                                  | 36,931    |   | $ | 677 |   | $ | — |   | $ | 37,608 |   |
| United States  Government agencies   |   | 297,311                            |      | 5,496 |   | 213 |   | 302,594 |   |
| Mortgage-backed  securities          |   | 1,168,280                          |      | 25,355 |   | 954 |   | 1,192,681 |   |
| Collateralized  mortgage obligations |   | 3,147                              |      | 28 |   | — |   | 3,175 |   |
| State and  political securities      |   | 67,237                             |      | 2,810 |   | — |   | 70,047 |   |
| Other securities                     |   | 97,462                             |      | 531 |   | 1,629 |   | 96,364 |   |
|                                 |   | $                                  | 1,670,368 |   | $ | 34,897 |   | $ | 2,796 |   | $ | 1,702,469 |   |

 
|             |   | **Held-to-Maturity  Securities** |   |
|------------------|--------|----------------------------------|--------|
|             |   | **Amortized  Cost**              |   | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| Other securities |   | $                                | 81,018 |   | $ | — |   | $ | — |   | $ | 81,018 |   |
|             |   | $                                | 81,018 |   | $ | — |   | $ | — |   | $ | 81,018 |   |

 

Proceeds from the sale of available-for-salesecurities during the three months ended March 31, 2003 and 2002 were$62,089,000 and $6,464,000, respectively. Gross gains of $561,000 and $340,000 were realized on sales during 2003and 2002, respectively.  Gross losses of$97,000 and $323,000 were realized on sales during 2003 and 2002,respectively.  Gains and losses ondisposition of these securities were computed using the specific identificationmethod.

 

**Note F -LOANS**

 

The composition of the loan portfolio at March 31,2003 was as follows (in thousands):

 
| Real estate                     |   | $         | 1,563,617 |   |
|---------------------------------|--------|-----------|-----------|--------|
| Real estate  construction       |   | 410,681   |      |
| Commercial                      |   | 687,263   |      |
| Consumer and  other             |   | 634,581   |      |
| Agriculture                     |   | 198,630   |      |
|                            |   | 3,494,772 |      |
| Less allowance  for loan losses |   | (54,895   | )         |
| Net loans                       |   | $         | 3,439,877 |   |

 

**Note G -FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**

 

In the normal course of business, the Company is partyto financial instruments with off-balance sheet risk to meet the financingneeds of its customers and to manage its interest rate risk.  These financial instruments include commitmentsto extend credit and letters of credit. Since the conditions requiring the Company to fund letters of credit maynot occur and since customers may not utilize the total loan commitments, theCompany expects its liquidity requirements to be less than the outstanding

 

9

----

 

commitments.  The contract or notional amounts of thesefinancial instruments at March 31, 2003 were as follows (in thousands):

 
| Commitments to  extend credit             |   | $      | 683,480 |   |
|-------------------------------------------|--------|--------|---------|--------|
| Standby and  Commercial letters of credit |   | 29,237 |    |

 

**Note H –GUARANTEES OF INDEBTENESS OF OTHERS**

 

Standby letters of credit are conditional commitmentsthe Company issues to guarantee the performance of a customer to a third-party.The guarantees frequently support public and private borrowing arrangements, includingcommercial paper issuances, bond financings and other similar transactions. Inthe event of a customer’s nonperformance, the Company’s credit loss exposure isthe same as in any extension of credit, up to the letter’s contractual amount.Management assesses the borrower’s credit to determine the necessarycollateral, which may include marketable securities, real estate, accountsreceivable and inventory. The maximum potential future payments guaranteed bythe Company under standby letter of credit arrangements at March 31, 2003, isapproximately $19 million with a weighted average term of approximately 10months. The fair value of standby letters of credit is not material to theCompany’s financial statements.

 

**Note I –SUBORDINATED NOTES**

 

Long-term debt at March 31, 2003 included $50 millionof 7.30% Subordinated Notes issued in June 1997.  During the quarter, the Company repurchased $10 million of thesenotes, thus reducing borrowing costs, while maintaining capital adequacy, asthese notes will no longer qualify as Tier 2 capital after June 30, 2003.  These notes are due June 30, 2004, withinterest payable semi-annually.  AtMarch 31, 2003, $10 million qualified as Tier 2 capital. At March 31, 2003, thesubsidiary bank had a $25 million unsecured subordinated term note, maturing onDecember 22, 2007.  The subsidiary banknote bears an interest rate of LIBOR, plus 140 basis points.

 

**Note J –INCOME TAXES**

 

The reconciliation between the provision for incometaxes and the amount computed by applying the statutory federal income tax ratewas as follows (in thousands):

 
|                                          |   | **For the  three months ended,  March 31, 2003** |   |
|-----------------------------------------------|--------|--------------------------------------------------|--------|
| 35% of pretax  income                         |   | $                                                | 10,100 |   |
| State income  tax, net of federal tax benefit |   | 498                                              |   |
| Tax-exempt  interest                          |   | (889                                             | )      |
| Other                                         |   | (256                                             | )      |
| Provision for  income taxes                   |   | $                                                | 9,453  |   |

 

**Note K –SHAREHOLDERS’ EQUITY**

 

On March 4, 2003,the Company issued $60 million of 7.60% Cumulative Capital Securities, throughCFB Capital 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 all2,400,000 of the 8.20% Cumulative Capital Securities issued by CFB II, aDelaware statutory trust.  Thedebentures will mature not earlier than March 15, 2008, and not later thanMarch 15, 2033.  At March 31, 2003, $119million in capital securities qualified as Tier I capital under capitalguidelines of the Federal Reserve.

 

10

----

 

**Note L –SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **Three months ended March 31 (in  thousands)**   |   | **2003** |   | **2002** |   |
|---------------------------------------------------|--------|----------|--------|----------|--------|
| Unrealized loss  on available-for-sale securities |   | $        | (7,345 | )        | $      | (6,513 | ) |
|                                                   |        |          |        |          |        |  |  |

 

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

 

**Basis ofPresentation**

 

The following is a discussion of the Company’sfinancial condition as of March 31, 2003 and December 31, 2002, and its resultsof operations for the three month periods ended March 31, 2003 and 2002.

 

**StrategicInitiatives**

 

During 2002 and the first quarter of 2003, the Companycontinued to implement a series of strategic initiatives that it announced in2001 that are designed to improve customer service and strengthen its positionas a provider of diversified financial services. Initiatives included aredefinition of the Company’s delivery model and the sale or closure ofselected banking offices.

 

Under the redesigned delivery structure, the Companyis implementing a centralized consumer credit process, which when fullyoperational, will offer a complete range of decision, origination, documentationand collection services to all Company offices through a Fargo, North Dakota,location. As of March 31, 2003, all indirect consumer underwriting,administration, documentation and collection have been centralized.  Centralization of the underwriting, administration,documentation and collection of direct consumer loans, as well as documentationof commercial and agricultural loans, continues on schedule.  Completion of the loan processingcentralization process is planned for the fourth quarter of 2003.

 

# **Critical Accounting Policies**

 

The Company has established various accountingpolicies which govern the application of accounting principles generallyaccepted in the United States in the preparation of the Company’s financialstatements. The significant accounting policies of the Company are described inthe footnotes to the consolidated financial statements included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.  Certain accounting policies involvesignificant judgments and assumptions by management which have a materialimpact on the carrying value of certain assets and liabilities; managementconsiders such 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 estimateswhich could have a material impact on the carrying values of assets andliabilities and the results of operations of the Company.  The Company believes that its criticalaccounting policies include the allowance for loan losses, goodwill impairmentand income taxes.

 

The Company believes the allowance for loan losses isa critical accounting policy that requires the most significant judgment andestimates used in the preparation of its consolidated financial statements. Thecurrent level of the allowance for loan losses is a result of management’sassessment of the risks within the portfolio based on the information revealedin credit evaluation processes. This assessment of risk takes into account thecomposition of the loan portfolio, previous loan experience, current economicconditions and other factors that, in management’s judgment, deserverecognition. An allowance is recorded for individual loan categories based onthe relative risk characteristics of the loan portfolios. Commercial,commercial real estate, construction and agricultural amounts are based on aquarterly review of the individual loans outstanding, including outstandingcommitments to lend. Residential real estate and consumer amounts are based ona quarterly analysis of the performance of the respective portfolios, includinghistorical and expected delinquency and charge-off statistics.  Ultimate losses may vary from currentestimates, and as adjustments become necessary, the allowance for loan

 

11

----

 

losses is adjusted in theperiods in which such losses become known or fail to occur. Actual loancharge-offs and subsequent recoveries are deducted from and added to theallowance, respectively.  The Company’srecorded allowance for loan losses and related provisions for loan losses couldbe materially different than the amounts recorded under different conditions orusing different assumptions.

 

The Company believes the annual testing for impairmentof goodwill is a critical accounting policy that requires significant judgmentand estimates. The Company performed its initial impairment test during thefirst quarter of 2002 and its initial annual impairment test during the fourthquarter of 2002.  Both tests indicatedno impairment existed, thus no adjustment to the carrying amount of goodwillwas recorded.  The Company will performits annual impairment test during the fourth quarter each year.  The Company uses a multi-period discountedearnings model to determine if the equity fair value of the underlying reportingunit is equal to or greater than the current book value.  The model is based on management’s estimateof the Company’s projected earnings stream over the following five years. Thevaluation model includes various management estimates and assumptions and thus,to the extent these estimates and assumptions vary from actual future results,are subject to error and may not be indicative of future impairment tests.

 

The Company also believes the estimation of its incometax liability is a critical accounting policy that requires significantjudgment and estimates on the part of management.  The Company estimates its income tax liability based on anestimate of its current and deferred taxes based on its estimates of taxableincome.  The Company makes its estimatebased on its interpretations of the existing income tax laws as they relate tothe Company’s activities.  Suchinterpretations could differ from those of the taxing authorities.Periodically, the Company is examined by various federal and state taxauthorities.  In the event management’sestimates and assumptions vary from the views of the taxing authorities,adjustments to the periodic tax accruals may be necessary.

 

The Company’s accounting policies for the allowancefor loan losses, testing for the impairment of goodwill and estimation of itsincome tax liability are outlined in the Company’s Form 10-K for the year endedDecember 31, 2002.  The Company furtherbelieves that there have been no significant changes to the methodology used inthe assessment of these estimates and judgments, since the prior year end.

 

**Overview**

 

For the three months ended March 31, 2003, net incomewas $19.4 million, an increase of $140,000 or 0.7% from the $19.3 millionduring the 2002 period.  Basic earningsper common share for the three months ended March 31, 2003 were $0.50, comparedto $0.48 in the same period in 2002. Diluted earnings per share for the three months ended March 31, 2003were $0.50.

 

Return on average assets and return on common equityfor the three months ended March 31, 2003 were 1.38% and 21.01%, respectively,as compared to the 2002 ratios of 1.38% and 22.03%.  The increase in return on assets and return on equity isprincipally due to the increase in net income.

 

**Resultsof Operations**

 

**Net Interest Income**

 

Net interest income for the three months ended March31, 2003 was $64.9 million, a decrease of $1.4 million, or 2.1%, from the netinterest income of $66.6 million earned during the 2002 period. The decreasewas principally due to the combination of a $8.9 million reduction in interestincome and a $7.2 million decrease in interest expense resulting from thecontinued low interest rate environment and a change in the earning asset mix.During the first quarter of 2003, loans comprised 68% of total average earningassets, down from 72% during the comparable period in 2002.  The decrease in the percentage of loans theearning asset mix reflects the Company’s strategy of focusing on loan quality,not loan volume.** **The net interestmargin of 5.15% for the period ended March 31, 2003 was down from 5.36% for the2002 period.  The Company anticipatescontinue downward pressure on its net interest margin as a result of thecurrent interest rate environment.  Thesluggish economy makes growth of the loan portfolio

 

12

----

 

challenging.  Record low interest rates, mortgage-backedsecurity prepayments and fewer high yielding investment opportunities areexpected to contribute to margin pressure.

 

**Provision for Loan Losses**

 

The provision for loan losses for the three monthsended March 31, 2003 was $3.5 million, a increase of $172,000, or 5.2%, fromthe $3.3 million provision during the 2002 period. Net charge-offs were $4.7million or .54 percent (annualized) of average loans for the first quarter of2003, compared to $2.9 million or .32 percent for the first quarter of2002.  The first quarter 2003 increasein net-charge offs is attributed in part by the partial charge-off of two loanswhich were classified as non-performing loans during the quarter.  In the first quarter of 2002, the Companyrecovered $1.2 million on an Arizona loan. Nonperforming assets at March 31,2003 were $35.2 million, an increase of $11.4 million, or 47.8% from $23.8million at March 31, 2002**.** The increase in nonperforming assets is attributed primarily to twocredits and management believes is not indicative of any systemic asset qualitydeterioration.  Nonperforming assetscomprised .61 percent and .42 percent of total assets at March 31, 2003 andMarch 31, 2002, respectively.

 

**NoninterestIncome**

 

Noninterest income for the three months ended March31, 2003 was $20.9 million, an increase of $1.9 million, or 10.0%, from the2002 level of $19.0 million. Insurance commissions, which continue todemonstrate strong growth, were $4.1 million for the 2003 quarter, an increaseof $804,000 or 24.5% from the $3.3 million recorded in the 2002 quarter.Insurance commission growth is partially due to the addition of four agenciesduring 2002, which at the time of acquisition had estimated annual commissionrevenue of $1.1 million.  Commissions onthe sale of investment securities were $2.1 million at both March 31, 2003 andMarch 31, 2002 reflecting a challenging investment securities salesenvironment. In line with a 1.9 percent decrease in average deposits during thethree months ended March 31, 2003, compared to the 2002 period, service chargeson deposit accounts decreased $277,000 or 2.9%, to $9.4 million as of March 31,2003, compared to $9.7 million during the 2002 period.  Other income increased $1.2 million or 46.9%from $2.5 million in 2002 to $3.7 million in 2003, driven principally by a $1.1million increase in premiums on the sale of SBA loans, offset in part by a$94,000 loss on the sale of repossessed personal property in the 2002period.  The 2003 period included anincrease of $447,000 in net gains on the sale of investment securities, overthe 2002 period.

 

**Noninterest Expense**

 

Noninterest expense for the three months ended March31, 2003 was $53.5 million, an increase of $371,000, or 0.7%, from the level of$53.1 million during the 2002 period. The modest increase reflects the Company’s continued focus on expensecontrol.  Salary and benefits for thethree months ended March 31, 2003 was $27.9 million, a decrease of $567,000 or2.0% from $28.5 million at March 31, 2002. The reduction is the result of operating efficiencies related tostrategic initiatives implemented during 2002 and the Company’s focus onnoninterest expense control.  Netoccupancy increased $734,000 or 9.3% from $7.9 million during the three-monthperiod ended March 31, 2002 to $8.6 million for the three-month period endedMarch 31, 2003.  This increase reflectsincreased depreciation expense as a result of equipment purchases associatedwith the Company’s initiatives related to improving delivery channels.  Other real estate and repossessed personalproperty expense was $370,000 at March 31, 2003, an increase of $268,000 or163% from $102,000 at March 31, 2002, due to an increase in the volume ofproperties moving through the other real estate process.  Company-obligated mandatorily redeemablepreferred security expense increased $176,000, or 6.7% to $2.8 million at March31, 2003, from $2.6 million at March 31, 2002. This increase is attributed to the additional expense associated withthe issuance of the 7.60% junior subordinated debentures issued in March 2003.

 

13

----

 

**Provision for Income Taxes**

 

The provision for income taxes for the three monthsended March 31, 2003 was $9.5 million, a decrease of $448,000, or 4.5%, fromthe 2002 level of $9.9 million. The decrease was due principally to thedecrease in pre-tax net income.  Theeffective tax rate for the three months ended March 31, 2003 was 32.76%, ascompared to 33.95% for the three months ended March 31, 2002.

 

**FinancialCondition**

 

**Loans**

 

Total loans were $3.5 billion at March 31, 2003, adecrease of $83 million, or 2.3% from $3.6 billion at December 31, 2002.

 

The following table presents the Company’s balance ofeach major category of loans:

** **
|                            |   | **March 31, 2003**          |      | **December 31, 2002**       |   |
|---------------------------------|--------|-----------------------------|-----------|-----------------------------|--------|
|                            |   | **Amount**                  |      | **Percent of  Total Loans** |   | **Amount** |   | **Percent of  Total Loans** |   |
|                            |   | **(Dollars  in Thousands)** |      |
| Loan category:                  |   |                        |      |
| Real estate                     |   | $                           | 1,563,617 |                        | 44.7   | % | $ | 1,568,710 |   | 43.8 | % |
| Real estate  construction       |   | 410,681                     |      | 11.7                        | %      | 439,536 |   | 12.3 | % |
| Commercial                      |   | 687,263                     |      | 19.7                        | %      | 723,530 |   | 20.2 | % |
| Consumer and  other             |   | 634,581                     |      | 18.2                        | %      | 625,429 |   | 17.5 | % |
| Agricultural                    |   | 198,630                     |      | 5.7                         | %      | 220,688 |   | 6.2 | % |
| Total loans                     |   | 3,494,772                   |      | 100.0                       | %      | 3,577,893 |   | 100.0 | % |
| Less allowance  for loan losses |   | (54,895                     | )         |                        |   | (56,156 | ) |   |   |
| Total                           |   | $                           | 3,439,877 |                        |   |   | $ | 3,521,737 |   |   |   |

 

**NonperformingAssets**

 

At March 31, 2003, nonperforming assets were $35.2million, an increase of $6.3 million or 21.8% from the $28.9 million level atDecember 31, 2002. At March 31, 2003, nonperforming loans as a percent of totalloans were .80%, up from the December 31, 2002 level of .64%.  The increase in nonperforming assets is attributedprimarily to two credits, an agri-business credit and a construction,contractor credit.  Based on a review ofthe loan portfolio, management believes this is not indicative of any systemicasset quality deterioration. OREO was $7.1 million at March 31, 2003, anincrease of $1.1 million, or 18.3% at December 31, 2002.  The increase in OREO was due principally tothe addition of one commercial property carried at a fair value of $752,000.

 

Nonperforming assets of the Company are summarized inthe following table:

 
| **(Dollars  in thousands)**                             |   | **March 31, 2003** |      | **December 31, 2002** |   |
|---------------------------------------------------------|--------|--------------------|-----------|-----------------------|--------|
| Loans                                                   |   |               |      |                  |   |
| Nonaccrual loans                                        |   | $                  | 27,897    |                  | $      | 22,728 |   |
| Restructured  loans                                     |   | 212                |      | 220                   |   |
| Nonperforming  loans                                    |   | 28,109             |      | 22,948                |   |
| Other real estate owned                                 |   | 7,082              |      | 5,990                 |   |
| Nonperforming  assets                                   |   | $                  | 35,191    |                  | $      | 28,938 |   |
| Loans 90 days or  more past due but still accruing      |   | $                  | 3,364     |                  | $      | 4,258 |   |
| Nonperforming  loans as a percentage of total loans     |   | .80                | %         | .64                   | %      |
| Nonperforming  assets as a percentage of total assets   |   | .61                | %         | .50                   | %      |
| Nonperforming  assets as a percentage of loans and OREO |   | 1.00               | %         | .81                   | %      |
|                                                    |   |               |      |                  |   |
| Total Loans                                             |   | $                  | 3,494,772 |                  | $      | 3,577,893 |   |
| Total Assets                                            |   | 5,743,993          |      | 5,827,170             |   |

 

14

----

 

**Allowancefor Loan Losses**

 

At March 31, 2003 the allowance for loan losses was$54.9 million, a decrease of $506,000 from the March 31, 2002 balance of $55.4million.  Net charge-offs during thethree months ended March 31, 2003 were $4.7 million, an increase of $1.8million or 62.1% from the $2.9 million during the three months ended March 31,2002. The increase in net charge-offs was due principally to the charge-off oftwo specific credits, an agri-business line and a construction contractor,which, based on a review of the loan portfolio, management believes is notindicative of systemic asset quality deterioration.  The 2002 period included a $1.2 million partial recovery of anArizona loan charged off in 2001.  Whilenet charge-offs and nonperforming assets increased during the first quarter of2003, management believes the current allowance for loan losses is appropriatebased on management’s assessment of potential losses within the remainingnonperforming asset portfolio and the reduction in total loans outstanding.

 

At March 31, 2003, the allowance for loan losses as apercentage of total loans was 1.57%, an increase from the March 31, 2002 levelof 1.52%.

 

The following table sets forth the Company’s allowancefor loan losses:

 
|                                                     |   | **March 31,** |      |
|----------------------------------------------------------|--------|---------------|-----------|
| **(Dollars in thousands)**                               |   | **2003**      |      | **2002** |   |
| Balance at  beginning of period                          |   | $             | 56,156    |   | $ | 54,991 |   |
| Charge-offs:                                             |   |          |      |   |   |
| Real estate                                              |   | 400           |      | 1,455 |   |
| Real estate  construction                                |   | 250           |      | 3 |   |
| Commercial                                               |   | 2,227         |      | 1,699 |   |
| Consumer and  other                                      |   | 2,757         |      | 2,656 |   |
| Agricultural                                             |   | 930           |      | 12 |   |
| Total  charge-offs                                       |   | 6,564         |      | 5,825 |   |
| Recoveries:                                              |   |          |      |   |   |
| Real estate                                              |   | 192           |      | 72 |   |
| Real estate construction                                 |   | —        |      | 1,201 |   |
| Commercial                                               |   | 339           |      | 317 |   |
| Consumer and  other                                      |   | 1,260         |      | 1,300 |   |
| Agricultural                                             |   | 25            |      | 30 |   |
| Total recoveries                                         |   | 1,816         |      | 2,920 |   |
| Net charge-offs                                          |   | 4,748         |      | 2,905 |   |
| Provision charged to operations                          |   | 3,487         |      | 3,315 |   |
| Balance at end of period                                 |   | $             | 54,895    |   | $ | 55,401 |   |
| Allowance as a  percentage of total loans                |   | 1.57          | %         | 1.52 | % |
| Annualized net  charge-offs to average loans outstanding |   | 0.54          | %         | 0.32 | % |
|                                                     |   |          |      |   |   |
| Total Loans                                              |   | $             | 3,494,772 |   | $ | 3,654,691 |   |
| Average Loans                                            |   | 3,587,067     |      | 3,732,033 |   |

 

**Investments**

 

The investment portfolio, including available-for-salesecurities and held-to-maturity securities, was $1.8 billion at March 31, 2003,an increase of $31 million or 1.8% from $1.8 billion at December 31, 2002.  At March 31, 2003, the investment portfoliorepresented 31.0% of total assets, compared with 30.1% at December 31,2002.  In addition to investmentsecurities, the Company had investments in interest-bearing deposits of $8.2million at March 31, 2003, an increase of $3.6 million, or 78.3% from $4.6million at December 31, 2002.

 

15

----

 

**Deposits**

 

Total deposits were $4.5 billion at March 31, 2003, adecrease of $127 million, or 2.7%, from $4.7 billion at December 31, 2002.  Noninterest-bearing deposits at March 31,2003 were $369 million, a decrease of $102 million, or 21.7%, from $471 millionat December 31, 2002.  The decrease intotal deposits and noninterest bearing deposits was principally due to thecontinued low interest rate environment and the Company’s focus on maintaininginterest bearing liabilities at interest rate levels which contribute to astrong net interest margin. The Company’s core deposits which are all deposits,excluding time accounts over $100,000, as a percent of total deposits were86.7% and 85.6% as of March 31, 2003 and December 31, 2002, respectively.  Interest-bearing deposits were $4.2 billionat March 31, 2003, and December 31, 2002.

 

**Borrowings**

 

Short-term borrowings of the Company were $31 millionas of March 31, 2003, a decrease of $45 million, or 59.2%, from $76 million asof December 31, 2002.  The decrease isdue primarily to the fluctuation in the level of daily deposits and its impacton short-term liquidity, and reflects the Company’s strategy of fundingshort-term liquidity needs in the most cost effective manner.

 

Long-term debt of the Company was $118 million as ofMarch 31, 2003, a decrease of $10 million, or 7.8%, from the $128 million as ofDecember 31, 2002.  The $10 milliondecrease is a result of the Company repurchasing $10 million of its 7.30%Subordinated Notes issued in June 1997 and maturing June 30, 2004.  As a result, the Company was able to reduceits borrowing costs while maintaining capital adequacy.  The 7.30% Notes will no longer qualify asTier 2 Capital after June 30, 2003.

 

**Asset and Liability Management**

 

*LIQUIDITYMANAGEMENT*

 

Liquidity management is an effort of management toprovide a continuing flow of funds to meet its financial commitments, customerborrowing needs and deposit withdrawal requirements. The liquidity position ofthe Company and its subsidiary bank is monitored by the Asset and LiabilityManagement Committee (“ALCO”) of the Company. The largest category of assetsrepresenting a ready source of liquidity for the Company is its short-termfinancial instruments, which include federal funds sold, interest-bearingdeposits at other financial institutions, U.S. Treasury securities and othersecurities maturing within one year. Liquidity is also provided through theregularly scheduled maturities of assets. The investment portfolio contains anumber of high quality issues with varying maturities and regular principalpayments. Maturities in the loan portfolio also provide a steady flow of funds,and strict adherence to the credit policies of the Company helps ensure thecollectability of these loans. The liquidity position of the Company is alsogreatly enhanced by its significant base of core deposits.

 

In the normal course of business, the Company is partyto financial instruments with off-balance-sheet risk. Because many of thecommitments are expected to expire without being drawn upon, total commitmentamounts do not necessarily represent the Company’s future liquidityrequirements. These instruments are further described in Note G - FinancialInstruments With Off Balance-Sheet Risk.

 

The liquidity ratio is one measure of a bank’s abilityto meet its current obligations and is defined as the percentage of liquidassets to deposits. Liquid assets include cash and due from banks, unpledgedinvestment securities with maturities of less than one year and federal fundssold. At March 31, 2003 and December 31, 2002, the liquidity ratio was 4.94%and 8.32%, respectively. The level of loans maturing within one year greatlyadd to the Company’s liquidity position. Including loans maturing within oneyear, the liquidity ratio was 40.57% and 27.94%, respectively, for the sameperiods.

 

16

----

 

The Company has revolving lines of credit with itsprimary lenders, which provide for borrowing up to $85 million. These lineswould be utilized to finance stock repurchase activity, underwrite commercialpaper, and fund other operating expenses. At March 31, 2003, the Company had$27 million in commercial paper outstanding, underwritten by the Company’srevolving line of credit.

 

The Company maintains available lines of federal fundsborrowings at the Federal Reserve Bank of Minneapolis. The Company’s subsidiarybank has the ability to borrow an aggregate of $238 million in federal fundsfrom ten nonaffiliated financial institutions. At March 31, 2003, the Companyhad $135 million outstanding on these lines.

 

Additionally, the Company’s subsidiary bank is amember of the Federal Home Loan Bank (“FHLB”) System. As part of membership,the Company’s subsidiary bank purchased a modest amount of stock of FHLB andobtained advance lines of credit which represent an aggregate of $456 millionin additional funding capacity.  AtMarch 31, 2003, the Company had $47 million outstanding on this line.

 

Subsequent to quarter end, the Company obtainedanother federal fund line with a nonaffiliated financial institution.  This new line provides for additionalovernight borrowing capacity of $50 million. Also following quarter end, the Company completed its filing andobtained approval for a $294 million line from the Federal Reserve under itsnew Primary Credit program, which permits financial institutions withcollateralized lines of credit at the Federal Reserve to borrow funds on ashort-term basis.  Funds are priced at aspread above the federal funds target rate and are available on an as neededbasis.

 

INTEREST RATE SENSITIVITY

 

Interest rate sensitivity indicates the exposure of afinancial institution’s earnings to future fluctuations in interest rates.Management of interest rate sensitivity is accomplished through the compositionof loans and investments and by adjusting the maturities on earning assets andinterest-bearing liabilities. Rate sensitivity and liquidity are related sinceboth are affected by maturing assets and liabilities. However, interest ratesensitivity also takes into consideration those assets and liabilities withinterest rates that are subject to change prior to maturity.

 

ALCO attempts to structure the Company’s balance sheetto provide for an approximately equal amount of rate sensitive assets and ratesensitive liabilities. In addition to facilitating liquidity needs, thisstrategy assists management in maintaining relative stability in net interest incomedespite unexpected fluctuations in interest rates. ALCO uses three methods formeasuring and managing interest rate risk: Repricing Mismatch Analysis, BalanceSheet Simulation Modeling and Equity Fair Value Modeling.

 

Repricing MismatchAnalysis

 

Management performs a Repricing Mismatch Analysis(“Gap Analysis”) which represents a point in time net position of assets,liabilities and off-balance sheet instruments subject to repricing in specifiedtime periods. Gap Analysis is performed quarterly.  However, management believes Gap Analysis alone does notaccurately measure the magnitude of changes in net interest income sincechanges in interest rate do not impact all categories of assets, liabilitiesand off-balance sheet instruments equally or simultaneously.

 

Balance Sheet SimulationModeling

 

Balance Sheet Simulation Modeling allows management toanalyze the short-term (12 months or less) impact of interest rate fluctuationson projected earnings.  Using financialsimulation computer software, management has built a model that projects anumber of interest rate scenarios.  Eachscenario captures the impact of contractual obligations embedded in theCompany’s assets and liabilities.  Thesecontractual obligations include maturities, loan and security payments,repricing dates, interest rate caps, and interest rate floors.  The projection results also measure theimpact of various management assumptions including loan and deposit volumetargets, security and loan prepayments, pricing spreads and implied repricingcaps and floors on variable rate non-maturity deposits. Management completes an

 

17

----

 

earnings simulationquarterly.  The simulation process isthe Company’s primary interest rate risk management tool.

 

While management strives to use the best assumptionspossible in the simulation process, all assumptions are uncertain bydefinition.   Due to numerous marketfactors, and the potential for changes in management strategy over time, actualresults may deviate from model projections.

 

Based on the results of the simulation model as ofMarch 31, 2003, management would expect net interest income to decline 0.71%,assuming a 100 basis point rate increase in market rates.  This expected result is within the ALCOestablished guidelines of 1.40%. Assuming rates dropped 100 basis points, management would expect netinterest income to decline 2.53%.  Thisdecline exceeds the ALCO guidelines of 1.40%. The decline in net interest income under both of the preceding scenariosdepicts the Company’s exposure to repricing mismatches and embeddedoptions.  Assuming rising rates, theCompany’s liabilities are projected to reprice faster than its assets.  Under declining rates, because of projectedsecurity prepayments and the assumed floor on transaction account pricing,assets reprice faster than liabilities.

 

Several factors mitigate the Company’s projectedexposure to declining rates.  First,management-established risk guidelines are measured against instantaneous rateshocks.  Gradual rate shifts overseveral months reduce the level of projected risk under both rising anddeclining rate scenarios.  Also, thecurrent model assumes that there is no room to downprice non-maturitytransaction deposits.  Management haseffectively floored these liability accounts at current levels in itsmodel.  As an abundance of caution,management believes this is an appropriate assumption for risk managementpurposes, but management believes there would be the potential for somedownpricing on this sizeable volume of liabilities.

 

In addition to earnings at risk, the simulationprocess is also used as a tool in liquidity and capital management.  Management models the impact of interestrate fluctuation on the anticipated cash flows from various financialinstruments, ultimately measuring the impact that changing rates will have onthe 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 ValueModeling

 

Because Balance Sheet Simulation Modeling is dependenton accurate volume forecasts, its usefulness as a risk management tool islimited to relatively short time frames.  As a complement to the simulation process, management uses EquityFair Value Modeling to measure long-term interest rate risk exposure.  This method estimates the impact of interestrate changes on the discounted future cash flows of the Company’s currentassets, liabilities and off-balance sheet instruments.  This risk model does not incorporateprojected volume assumptions.

 

Similar to the simulation process, fair value resultsare heavily driven by management assumptions. While management strives to use the best assumptions possible, due tonumerous market factors, actual results may deviate from model projections.

 

Based on the model results from March 31, 2003,management would expect equity fair value to decline 2.70% assuming a 100 basispoint increase in rates.  This exposureis within the ALCO established guidelines of 10.00%.  Assuming rates declined 100 basis points, the model projects adecline in equity fair value of 2.74%. This exposure is also within the ALCO established policy guidelines of10.00%.

 

The Company does not engage in the speculative use ofderivative financial instruments.

 

18

----

 

**Capital Management**

 

Shareholders’ equity was $378 million at March 31,2003 and December 31, 2002.  Unrealizedgain on available-for-sale securities, net of taxes, decreased $4.4 millionduring the first quarter of 2003.  AtMarch 31, 2003, the Company’s Tier 1 capital, total risk-based capital andleverage ratios were 9.44%, 12.92%, and 6.72%, 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, 2003,the Company had risk-weighted assets of $4.1 billion.  The March 31, 2003 capital ratios include both the $60 million7.60% Junior Subordinated Debentures issued March 4, 2003 and the $60 million8.20% Junior Subordinated Debentures. The 8.20% Junior Subordinated Debentures were subsequently redeemed onApril 14, 2003.  As a result of theApril 4, 2003 redemption, the Tier 2 and Total Capital ratios will be reduced,although remaining substantially within minimum regulatory capital limits for awell-capitalized institution.

 

On March 4, 2003, the Company issued $60 million in7.60% Cumulative Capital Securities, through CFB Capital IV, a statutory trustsubsidiary organized in February 2003. All $60 million of the capital securities qualify as Tier I Capital forregulatory capital calculation purposes. The proceeds from the offering were used on April 4, 2003 to redeem the$60 million of 8.20% junior subordinated debentures that were issued inFebruary 1997.  The Company hasunconditionally guaranteed the obligations of CFB Capital IV under the 7.60%cumulative capital securities.

 

#### **Stock Repurchases**

 

During the first quarter of 2003, the Companyrepurchased 330,500 shares of its common stock at prices ranging from $24.49 to$26.47.  At March 31, 2003, 759,000shares remain under the current repurchase authorization.  On April 24, 2003, the Company announcedthat the Board of Directors approved an additional common stock repurchaseauthorization wherein the Company may repurchase up to an additional 3 millionshares of its common stock outstanding. The shares will be repurchased primarily on the open market, with timingdependent on market condition and any pending acquisitions.  Thus, 3,759,000 shares remain authorized forrepurchase.  Since the first quarter of2000, the Company has repurchased a total of 13.0 million shares of its commonstock, which represents approximately 25% of the shares outstanding.

 

**Off-BalanceSheet Arrangements, Contractual Obligations and Other Commercial Commitments**

 

**Off-Balance Sheet Arrangements**

 

In the normal course of business, the Company entersinto various business arrangements wherein it may be required by the terms ofthe arrangement to guarantee or invest additional capital as a result ofinvestment 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 theCompany.  The Company has 50% ownershipand 50% voting rights over the affairs of the joint venture and accordinglyrecords its investment and its continuing share of the income or loss of thejoint venture under the equity method of accounting.  As a 50% holder of the joint venture, the Company may be requiredto increase its investment in the joint venture in the event additionalinvestment capital were required.  As ofMarch 31, 2003, the Company’s investment in the joint venture totaled $361,000.

 

***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 March 31, 2003, the Company’s investmentin the Federal Reserve System totaled $9.6 million.

 

19

----

 

**Contractual Obligations and Other Commercial Commitments:**

 

In the normal course of business, the Company arrangesfinancing through entering into debt arrangements with various creditors forthe purpose of financing specific assets or providing a funding source.   The contract or notional amounts of thesefinancing arrangements at March 31, 2003, as well as the maturity of these commitmentsare (in thousands):

 
|                           |   | **Payment Due by Period** |    |
|--------------------------------|--------|---------------------------|---------|
| **Contractual  Obligations**   |   | **Total**                 |    | **Less than  1 Year** |   | **1-3  Years** |   | **3-5  Years** |   | **More than  5 Years** |   |
|                           |   |                      |    |   |   |   |   |   |   |   |   |
| Long Term Debt                 |   | $                         | 117,500 |   | $ | 24,500 |   | $ | 58,000 |   | $ | 8,000 |   | $ | 27,000 |   |
| Capital Lease  Obligations     |   | 7,223                     |    | 1,356 |   | 3,081 |   | 2,606 |   | 180 |   |
| Operating Leases               |   | 7,727                     |    | 2,727 |   | 1,597 |   | 1,121 |   | 2,282 |   |
|                           |   |                      |    |   |   |   |   |   |   |   |   |
| Total  Contractual Obligations |   | $                         | 132,450 |   | $ | 28,583 |   | $ | 62,678 |   | $ | 11,727 |   | $ | 29,462 |   |

 

***Long Term Debt:***  At March 31, 2003, the Company had long termdebt outstanding of $117.5 million.   Long-term debt includes $50 million of unsecured subordinated notespayable, bearing interest at a rate of 7.30%, payable semi-annually, thatmature June 30, 2004.  The subordinatednotes, whose terms include certain covenants pertaining to regulatorycompliance, financial performance, timely reporting, failure to pay principalat maturity, failure to make scheduled payments, and bankruptcy, insolvency orreorganization of the Company, may not be paid early. The subsidiary bank hadFederal Home Loan Bank advances totaling $42.5 million outstanding at March 31,2003.  Also at March 31, 2003, thesubsidiary bank 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 including, remaining in compliance with all regulatory agencyrequirements, providing timely financial information and providing access tocertain Company records.

 

***Capital Lease Obligations:***  The Company frequently acquires the rightsto equipment used in the operation of the Company by entering into long-termcapital leases.  At March 31, 2003, theCompany was liable for the payment of lease schedules associated with theacquisition of equipment and premises totaling $6,016,000, exclusive of financecharges.  The effect of capital leasesrecorded at March 31, 2003 are summarized in the table above.

 

***Operating Leases:***  In the normal course of business the Companyenters 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: ***AtMarch 31, 2003, the Company has unconditionally guaranteed the obligation ofCFB Capital IV, under the $60, million, 7.60% Cumulative Capital Securitiesissued March 4, 2003; the obligation of CFB Capital III, under the $60 million,8.125% Cumulative Capital Securities issued March 27, 2002; and the obligationof CFB Capital II, under the $60 million 8.20% Cumulative Capital Securitiesissued December 10, 1997.  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 be redeemedany time on or after April 15, 2007. The $60 million Capital II securities, which had a maturity date ofDecember 15, 2027, were redeemed April 4, 2003.

 

In the normal course of business, the Company is partyto financial instruments with off-balance-sheet risk. These transactions enablecustomers to meet their financing needs. These financial instruments includecommitments to extend credit and letters of credit. The contract or notionalamounts of these financial instruments at March 31, 2003, as well as thematurity of these commitment are (in thousands):

 

20

----

 
|                              |   | **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     |   | $                                            | 683,480 |   | $ | 480,020 |   | $ | 57,522 |   | $ | 17,178 |   | $ | 128,760 |   |
| Standby Letters  of Credit        |   | 18,703                                       |    | 14,977 |   | 2,798 |   | 91 |   | 837 |   |
| Commercial  Letters of Credit     |   | 10,534                                       |    | 9,565 |   | 879 |   | 90 |   | 0 |   |
|                              |   |                                         |    |   |   |   |   |   |   |   |   |
| Total Commercial  Commitments     |   | $                                            | 712,717 |   | $ | 504,562 |   | $ | 61,199 |   | $ | 17,359 |   | $ | 129,597 |   |

 

***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 securecommitments based on management’s credit assessment of the counterparty.Collateral held by the Company may include marketable securities, receivables,inventory, agricultural commodities, equipment and real estate. Because many ofthe commitments are expected to expire without being drawn upon, totalcommitment amounts 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.

 

***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 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 19, 2003, all of whichare difficult to predict and many of which are beyond the control of thecompany.

 

21

----

 

**Item3.  Quantitative and Qualitative****DisclosureAbout Market Risk**

 

There have been no material changes in market riskexposures that affect the quantitative and qualitative disclosures presented asof December 31, 2002 in the Company’s Form 10-K and Annual Report.

 

**Item 4.  Controls****and Procedures**

 

**Quarterly evaluation of the Company’s Disclosure Controls andInternal Controls.** Within the 90 days prior to the date of this Quarterly Report on Form10-Q, the Company evaluated the effectiveness of the design and operation ofits “disclosure controls and procedures” (the “Disclosure Controls”), and its“internal controls and procedures for financial reporting” (the “InternalControls”).  This evaluation (the“Controls Evaluation”) was done under the supervision and with theparticipation of management, including the Chief Executive Officer (“CEO”) andChief Financial Officer (“CFO”).  Rulesadopted by the Securities and Exchange Commission (the “SEC” or “Commission”)require that in this section of the Quarterly Report we present the conclusionsof the CEO and the CFO about the effectiveness of the Company’s DisclosureControls and Internal Controls based on and as of the date of the ControlsEvaluation.

 

**CEO and CFO Certifications.**  Appearing in this Quarterly Report are twoseparate forms of “Certifications” of the CEO and the CFO.  The first form of Certification, immediatelyfollowing the Signatures section, is required in accord with Section 302 of theSarbanes-Oxley Act of 2002 (the “Section 302 Certification”).  This section of Form 10-Q containsinformation concerning the Controls Evaluation referred to in the Section 302Certifications and this information should be read in conjunction with theSection 302 Certifications for a more complete understanding of the topicspresented.  The second Certification ispursuant to Section 906 of Sarbanes-Oxley and concerns compliance anddisclosure under the Securities Exchange Act of 1934.

 

**Disclosure Controls and Internal Controls.**  Disclosure Controls are procedures that aredesigned to ensure that information required to be disclosed in our reportsfiled under the Securities Exchange Act of 1934 (the “Exchange Act”), such asthis Quarterly Report, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms.  Disclosure Controls are also designed toensure that such information is accumulated and communicated to the Company’smanagement, including the CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure.  InternalControls are procedures designed to provide reasonable assurance that (1) theCompany’s transactions are properly authorized; (2) the Company’s assets aresafeguarded against unauthorized or improper use; and (3) the Company’stransactions are properly recorded and reported, all of which assists thepreparation of financial statements in conformity with generally acceptedaccounting principles.

 

**Limitations on the Effectiveness of Controls.**  The Company’s management, including the CEOand CFO, does not expect that the Disclosure Controls or the Internal Controlswill prevent all error and all fraud.  Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met.  Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs.  Because of the inherent limitations in allcontrol systems no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the Company have beendetected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake.  Additionally, controls can be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of the control. The design of any system of controls also is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions; over time, control may become inadequate becauseof changes in conditions, or the degree of compliance with the policies orprocedures may deteriorate.  Because ofthe inherent limitations in a cost-effective control system, misstatements dueto error or fraud may occur and not be detected.

 

22

----

 

**Scope of the Controls Evaluation.**  The CEO/CFO evaluation of DisclosureControls and Internal Controls included a review of the controls’ objectivesand design, the controls’ implementation by the Company and the effect of thecontrols on the information generated for use in this Quarterly Report.  In the course of the Controls Evaluation, wesought to identify data errors, controls problems or acts of fraud and toconfirm that appropriate corrective action, including process improvements,were being undertaken.  This type ofevaluation will be done on a quarterly and annual basis so that the conclusionsconcerning controls effectiveness can be reported in the Company’s QuarterlyReports on Form 10-Q and in the Company’s Annual Reports on Form 10-K.  Internal Controls are also evaluated on anongoing basis by our Internal Audit Department, by other personnel in theCompany and by the Company’s independent auditors in connection with theiraudit and review activities.  Theoverall goals of these various evaluation activities are to monitor ourDisclosure Controls and our Internal Controls and to make modifications asnecessary; the Company’s intent in this regard is that the Disclosure Controlsand the Internal Controls will be maintained as dynamic systems that change(including with improvements and corrections) as conditions warrant.

 

Among other matters, the Company sought in theevaluation to determine whether there were any “significant deficiencies” or“material weakness” in the Company’s Internal Controls, or whether the Companyhad identified any acts of fraud involving personnel who a have significantrole in the Company’s Internal Controls. This information was important both for the Controls Evaluationgenerally and because items 5 and 6 in the Section 302 Certifications of theCEO and CFO require that the CEO and CFO disclose such information to ourBoard’s Audit Committee and to the independent auditors and to report onrelated matters in this section of the Quarterly Report.  In the professional auditing literature,“significant deficiencies” are referred to as “reportable conditions”; these arecontrol issues that could have a significant adverse effect on the ability torecord, process, summarize and report financial data in the financialstatements.  A “material weakness” isdefined as a particularly serious reportable condition where the internalcontrol does not reduce to a relatively low level the risk that misstatementscaused by error or fraud may occur in amounts that would be material inrelation to the financial statements and not be detected within a timely periodby employees in the normal course of performing their assigned functions.  The Company has sought to deal with othercontrols matters in the Controls Evaluation, and in each case if a problem wasidentified, the Company considered what revision, improvement and/or correctionto make in accord with its on-going procedures.

 

In accord with SEC requirements, the CEO and CFO notethat, since the date of the Controls Evaluation to the date of this QuarterlyReport, there have been no significant changes in Internal Controls or in otherfactors that could significantly affect Internal Controls, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

**Conclusions. **Basedupon the Controls Evaluation, the CEO and CFO have concluded that, subject tothe limitations noted above, the Company’s Disclosure Controls are effective toensure that material information relating to the Company and its consolidatedsubsidiaries is made known to management, including the CEO and CFO,particularly during the period when periodic reports are being prepared, andthat the Company’s Internal Controls are effective to provide reasonableassurance that the financial statements are fairly presented in conformity withgenerally accepted accounting principles.

 

23

----

 

**PART II****- OTHERINFORMATION**

 
| Item 1. |   | Legal Proceedings:                                                                                                                                                                                                                                                                                                                                                                             |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| Item 2. |   | Changes in Securities:                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   | On April 4, 2003, the Company redeemed its $60  million 8.20% junior subordinated debentures which triggered the redemption  of CFB Capital II’s 8.20% Cumulative Capital Securities that CFB Capital II  issued in December 1997.  The Company  funded the redemption from the proceeds of its issuance of 7.60% Cumulative  Capital Securities of CFB Capital IV on March 4, 2003. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| Item 3. |   | Defaults upon Senior Securities:                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| Item 4. |   | Submission of Matters to a Vote of Security Holders:                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| Item 5. |   | Other Information:                                                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| Item 6. |   | Exhibits and Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   | (a)                                                                                                                                                                                                                                                                                                                                                                                            | Exhibits: |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           | 12.1         Statement regarding computation of  ratios. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           | 99.1         Certification  pursuant to 18 U.S.C. § 1350. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   | (b)                                                                                                                                                                                                                                                                                                                                                                                            | Reports on Form 8-K: |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                           | On March 6, 2003, the Company filed a Form 8-K  related to the offering on 7.60% Cumulative Capital Securities of CFB Capital  IV, and the redemption of 8.20% Cumulative Capital Securities of CFB Capital  II. |

 

24

----

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                     | **COMMUNITY  FIRST BANKSHARES, INC.** |
|--------------------------|---------------------------------------|
|                     |                                  |
|                     |                                  |
| Date:  May 9,  2003 | /s/                                   | Mark A. Anderson |
|                     | Mark A. Anderson                      |
|                     | President and Chief Executive Officer |

 

 
| Date:  May 9,  2003 | /s/                     | Craig A. Weiss |
|--------------------------|-------------------------|----------------|
|                     | Craig A. Weiss          |
|                     | Chief Financial Officer |

 

25

----

 

**CERTIFICATIONS**

 

I, Mark A. Anderson, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of CommunityFirst Bankshares, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: May 9, 2003 |
|-------------------|
|              | /s/ | Mark A. Anderson |
|              | Mark A. Anderson |
|              | President and  Chief Executive Officer |

 

26

----

 

**CERTIFICATIONS**

 

I, Craig A. Weiss, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of CommunityFirst Bankshares, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date: May 9, 2003 |                                                 |
|-------------------|------------------------------------------------------|
|              | /s/                                                  | Craig A. Weiss |
|              | Craig A. Weiss                                       |
|              | Executive Vice President and Chief Financial Officer |
|                   |                                                      |  |  |

 

27

----