**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-Q**

 

**ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

 

**for the quarterly period ended September 30, 2002**

** **

**or**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGEACT OF 1934**

 

**for the transition periodfrom              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)                   |   | (IRS Employer  Identification No.) |
|                                                                               |   |                               |
| **520  Main Avenue, Fargo, North Dakota    58124**                       |
| (Address of principal  executive offices)                                          |
|                                                                               |   |                               |
| **(701)  298-5600**                                                                |
| (Registrant’s telephone  number, including area code)                         |
|                                                                               |   |                               |
|                                                                               |   |                               |
| (Former name, former  address and former fiscal year if changed since last report) |

 

 

                Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  ý Yes oNo

 

At November 8, 2002, 39,158,936 shares of common stockwere outstanding.

 

 

----

COMMUNITY FIRSTBANKSHARES, INC.

 

FORM 10-Q

 

QUARTER ENDED SEPTEMBER 30, 2002

 

INDEX

 

 

 
| PART I - FINANCIAL  INFORMATION: |   |                                                                                        |   |
|----------------------------------|--------|---------------------------------------------------------------------------------------------|--------|
|                             |   |                                                                                        |
| Item  1.                         |   | Condensed  Consolidated Financial Statements and Notes                                      |
|                             |   |                                                                                        |
| Item  2.                         |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                             |   |                                                                                        |
| Item  3.                         |   | Quantitative  and Qualitative Disclosure About Market Risk                                  |
|                             |   |                                                                                        |
| 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                       |   |                                                                                        |   |
|                                  |        |                                                                                             |        |  |  |  |  |

 

2

----

COMMUNITY FIRSTBANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIALCONDITION

 
| **(Dollars  in thousands, except per share data)**

(**Unaudited**)                                                                                  |   | **September  30,**

**2002** |      | **December  31,**

**2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|-----------------------------|--------|
| ASSETS                                                                                                                                               |   |                         |      |                        |   |
| Cash and due  from banks                                                                                                                             |   | $                            | 222,439   |                        | $      | 248,260 |   |
| Federal funds  sold and securities purchased under agreements to resell                                                                              |   | 32,000                       |      | —                      |   |
| Interest-bearing  deposits                                                                                                                           |   | 2,812                        |      | 341                         |   |
| Available-for-sale  securities                                                                                                                       |   | 1,382,789                    |      | 1,437,066                   |   |
| Held-to-maturity  securities (fair value: 9/30/02 -   $79,282, 12/31/01 - $76,765)                                                              |   | 79,282                       |      | 76,765                      |   |
| Loans                                                                                                                                                |   | 3,647,133                    |      | 3,736,692                   |   |
| Less: Allowance  for loan losses                                                                                                                     |   | (56,106                      | )         | (54,991                     | )      |
| Net loans                                                                                                                                            |   | 3,591,027                    |      | 3,681,701                   |   |
| Bank premises  and equipment, net                                                                                                                    |   | 128,256                      |      | 125,947                     |   |
| Accrued interest  receivable                                                                                                                         |   | 39,943                       |      | 39,491                      |   |
| Goodwill                                                                                                                                             |   | 62,903                       |      | 62,903                      |   |
| Other intangible  assets                                                                                                                             |   | 33,383                       |      | 34,554                      |   |
| Other assets                                                                                                                                         |   | 44,868                       |      | 65,298                      |   |
| Total assets                                                                                                                                         |   | $                            | 5,619,702 |                        | $      | 5,772,326 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                           |   |                         |      |                        |   |
| Deposits:                                                                                                                                            |   |                         |      |                        |   |
| Noninterest-bearing                                                                                                                                  |   | $                            | 427,702   |                        | $      | 487,864 |   |
| Interest-bearing:                                                                                                                                    |   |                         |      |                        |   |
| Savings and NOW  accounts                                                                                                                            |   | 2,376,193                    |      | 2,367,255                   |   |
| Time accounts  over $100,000                                                                                                                         |   | 700,005                      |      | 692,315                     |   |
| Other time  accounts                                                                                                                                 |   | 1,136,852                    |      | 1,203,379                   |   |
| Total deposits                                                                                                                                       |   | 4,640,752                    |      | 4,750,813                   |   |
| Federal funds  purchased and securities sold under agreements to repurchase                                                                          |   | 253,844                      |      | 318,859                     |   |
| Other short-term  borrowings                                                                                                                         |   | 33,949                       |      | 23,780                      |   |
| Long-term debt                                                                                                                                       |   | 136,500                      |      | 136,841                     |   |
| Accrued interest  payable                                                                                                                            |   | 19,406                       |      | 29,966                      |   |
| Other  liabilities                                                                                                                                   |   | 32,875                       |      | 35,362                      |   |
| Total  liabilities                                                                                                                                   |   | 5,117,326                    |      | 5,295,621                   |   |
| Company-obligated  mandatorily redeemable preferred securities of CFB Capital                                                                        |   | 120,000                      |      | 120,000                     |   |
| Shareholders’  equity:                                                                                                                          |   |                         |      |                        |   |
| Common stock,  par value $.01 per share:

    Authorized Shares — 80,000,000

    Issued Shares — 51,021,896 |   | 510                          |      | 510                         |   |
| Capital surplus                                                                                                                                      |   | 192,687                      |      | 193,103                     |   |
| Retained  earnings                                                                                                                                   |   | 382,083                      |      | 348,101                     |   |
| Unrealized gain  on available-for-sale securities, net of tax                                                                                        |   | 22,847                       |      | 3,847                       |   |
| Less cost of  common stock in treasury - September 30, 2002 — 11,701,800 shares December  31, 2001 — 10,775,857 shares                     |   | (215,751                     | )         | (188,856                    | )      |
| Total shareholders’  equity                                                                                                                     |   | 382,376                      |      | 356,705                     |   |
| Total  liabilities and shareholders’ equity                                                                                                     |   | $                            | 5,619,702 |                        | $      | 5,772,326 |   |

* *

*See accompanying notes*.

 

3

----

COMMUNITY FIRST BANKSHARES, INC.

CONDENSED CONSOLIDATEDSTATEMENTS OF INCOME

 

 

 
|                                                                                          | **For the  Three Months Ended September 30,** |     | **For the  Nine Months Ended   September 30,** |     |
|-----------------------------------------------------------------------------------------------|----------------------------------------------------|----------|------------------------------------------------|----------|
| **(Dollars in thousands, except per share data)**

**(Unaudited)**                            |                                               | **2002** |                                           | **2001** |   | **2002** |   | **2001** |   |
| Interest income:                                                                              |                                               |     |                                           |     |   |   |   |   |   |
| Loans                                                                                         |                                               | $        | 69,514                                         |     | $ | 84,542 |   | $ | 209,994 |   | $ | 258,592 |   |
| Investment  securities                                                                        |                                               | 19,517   |                                           | 22,761   |   | 61,416 |   | 75,568 |   |
| Interest-bearing  deposits                                                                    |                                               | 13       |                                           | 39       |   | 31 |   | 178 |   |
| Federal funds  sold and resale agreements                                                     |                                               | 65       |                                           | 29       |   | 92 |   | 83 |   |
| Total interest  income                                                                        |                                               | 89,109   |                                           | 107,371  |   | 271,533 |   | 334,421 |   |
| Interest  expense:                                                                            |                                               |     |                                           |     |   |   |   |   |   |
| Deposits                                                                                      |                                               | 18,114   |                                           | 32,388   |   | 58,272 |   | 111,795 |   |
| Short-term and  other borrowings                                                              |                                               | 1,550    |                                           | 3,319    |   | 4,957 |   | 13,303 |   |
| Long-term debt                                                                                |                                               | 2,017    |                                           | 2,257    |   | 5,994 |   | 6,539 |   |
| Total interest  expense                                                                       |                                               | 21,681   |                                           | 37,964   |   | 69,223 |   | 131,637 |   |
| Net interest  income                                                                          |                                               | 67,428   |                                           | 69,407   |   | 202,310 |   | 202,784 |   |
| Provision for  loan losses                                                                    |                                               | 3,352    |                                           | 5,301    |   | 9,964 |   | 14,221 |   |
| Net interest income after provision for loan losses                                           |                                               | 64,076   |                                           | 64,106   |   | 192,346 |   | 188,563 |   |
| Noninterest  income:                                                                          |                                               |     |                                           |     |   |   |   |   |   |
| Service charges  on deposit accounts                                                          |                                               | 9,154    |                                           | 9,626    |   | 26,831 |   | 29,217 |   |
| Insurance  commissions                                                                        |                                               | 3,758    |                                           | 3,489    |   | 10,365 |   | 9,467 |   |
| Fees from  fiduciary activities                                                               |                                               | 1,272    |                                           | 1,337    |   | 4,101 |   | 4,262 |   |
| Security sales  commissions                                                                   |                                               | 1,827    |                                           | 1,456    |   | 7,417 |   | 4,617 |   |
| Net gain (loss)  on sales of available-for-sale securities                                    |                                               | 56       |                                           | 19       |   | (115 | ) | 251 |   |
| Other                                                                                         |                                               | 3,628    |                                           | 3,627    |   | 8,650 |   | 9,829 |   |
| Total  noninterest income                                                                     |                                               | 19,695   |                                           | 19,554   |   | 57,249 |   | 57,643 |   |
| Noninterest  expense:                                                                         |                                               |     |                                           |     |   |   |   |   |   |
| Salaries and  employee benefits                                                               |                                               | 28,105   |                                           | 28,687   |   | 85,864 |   | 86,314 |   |
| Net occupancy                                                                                 |                                               | 8,671    |                                           | 7,889    |   | 24,654 |   | 23,638 |   |
| FDIC insurance                                                                                |                                               | 194      |                                           | 226      |   | 611 |   | 702 |   |
| Legal and  accounting                                                                         |                                               | 781      |                                           | 945      |   | 2,433 |   | 2,865 |   |
| Other  professional services                                                                  |                                               | 943      |                                           | 891      |   | 2,850 |   | 3,304 |   |
| Restructuring  charge                                                                         |                                               | —   |                                           | —   |   | — |   | 7,656 |   |
| Data processing                                                                               |                                               | 663      |                                           | 1,033    |   | 2,155 |   | 2,985 |   |
| Advertising                                                                                   |                                               | 1,077    |                                           | 1,318    |   | 3,070 |   | 3,918 |   |
| Telephone                                                                                     |                                               | 1,340    |                                           | 1,430    |   | 4,298 |   | 4,236 |   |
| Company-obligated  mandatorily redeemable preferred securities of CFB Capital I, II & III |                                               | 2,450    |                                           | 2,561    |   | 7,957 |   | 7,712 |   |
| Amortization of  intangibles                                                                  |                                               | 833      |                                           | 2,374    |   | 2,487 |   | 7,493 |   |
| Other                                                                                         |                                               | 8,124    |                                           | 8,361    |   | 23,535 |   | 24,919 |   |
| Total  noninterest expense                                                                    |                                               | 53,181   |                                           | 55,715   |   | 159,914 |   | 175,742 |   |
|                                                                                          |                                               |     |                                           |     |   |   |   |   |   |
| Income before  income taxes                                                                   |                                               | 30,590   |                                           | 27,945   |   | 89,681 |   | 70,464 |   |
| Provision for  income taxes                                                                   |                                               | 10,221   |                                           | 9,505    |   | 30,194 |   | 24,063 |   |
| Net income                                                                                    |                                               | $        | 20,369                                         |     | $ | 18,440 |   | $ | 59,487 |   | $ | 46,401 |   |

 

*See accompanying notes* 

 

4

----

 
|                                                               |   | **For the  Three Months Ended September 30,** |   | **For the  Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|------------|
|                                                               |   |                                          |
| **(Dollars in thousands, except per share data)**

**(Unaudited)** |   | **2002**                                      |   | **2001**                                     |       | **2002** |   | **2001** |   |
| Earnings per  common and common equivalent share:                  |   |                                          |   |                                         |       |   |   |   |   |
| Basic net income                                                   |   | $                                             | 0.52   |                                         | $          | 0.45 |   | $ | 1.50 |   | $ | 1.13 |   |
| Diluted net  income                                                |   | $                                             | 0.51   |                                         | $          | 0.45 |   | $ | 1.47 |   | $ | 1.11 |   |
|                                                               |   |                                          |   |                                         |       |   |   |   |   |
| Average common  shares outstanding:                                |   |                                          |   |                                         |       |   |   |   |   |
| Basic                                                              |   | 39,424,624                                    |   | 40,697,521                                   |       | 39,724,971 |   | 41,135,096 |   |
| Diluted                                                            |   | 40,073,077                                    |   | 41,359,956                                   |       | 40,409,350 |   | 41,660,439 |   |
|                                                               |   |                                          |   |                                         |       |   |   |   |   |
| Dividends per  share                                               |   | $                                             | 0.21   |                                         | $          | 0.18 |   | $ | 0.59 |   | $ | 0.50 |   |

 

 

STATEMENTS OFCOMPREHENSIVE INCOME

 
|                                                                         |   | **For the  Three Months Ended**

**September  30,** |   | **For the  Nine Months Ended**

**September  30,** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                         |   |                                                |   |
| **(Dollars in thousands)**

**(Unaudited)**                                  |   | **2002**                                            |   | **2001**                                           |   | **2002** |   | **2001** |   |
| Net income                                                                   |   | $                                                   | 20,369 |                                               | $      | 18,440 |   | $ | 59,487 |   | $ | 46,401 |   |
| Other  comprehensive income, net of tax:                                     |   |                                                |   |                                               |   |   |   |   |   |
| Unrealized gains  and losses on securities:                                  |   |                                                |   |                                               |   |   |   |   |   |
| Unrealized  holding gains arising during period                              |   | 8,404                                               |   | 11,762                                             |   | 18,931 |   | 25,001 |   |
| Less:  Reclassification adjustment for (gains) losses included in net income |   | (34                                                 | )      | (11                                                | )      | 69 |   | (151 | ) |
| Other  comprehensive income                                                  |   | 8,370                                               |   | 11,751                                             |   | 19,000 |   | 24,850 |   |
| Comprehensive  income                                                        |   | $                                                   | 28,739 |                                               | $      | 30,191 |   | $ | 78,487 |   | $ | 71,251 |   |

 

*See accompanying notes*.

 

5

----

COMMUNITY FIRSTBANKSHARES, INC.

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                                                 |   | **For the  Nine Months Ended September 30,** |       |
|------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
| **(In thousands)**                                                                                         |   |                                         | ** ** |   | ** ** |
| **(Unaudited)**                                                                                            |   | **2002**                                     |       | **2001** | ** ** |
| **Cash flows from operating  activities:**                                                                 |   |                                         |       |   |   |
| Net income                                                                                                 |   | $                                            | 59,487     |   | $ | 46,401 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                         |   |                                         |       |   |   |
| Provision for  loan losses                                                                                 |   | 9,964                                        |       | 14,221 |   |
| Depreciation                                                                                               |   | 10,708                                       |       | 10,100 |   |
| Amortization of  intangibles                                                                               |   | 2,487                                        |       | 7,493 |   |
| Net amortization  of premiums (discounts) on securities                                                    |   | 1,208                                        |       | (455 | ) |
| (Increase)  decrease in interest receivable                                                                |   | (452                                         | )          | 4,154 |   |
| (Decrease)  increase in interest payable                                                                   |   | (10,560                                      | )          | (9,780 | ) |
| Other - net                                                                                                |   | 4,170                                        |       | 10,227 |   |
| Net cash  provided by operating activities                                                                 |   | 77,012                                       |       | 82,361 |   |
|                                                                                                       |   |                                         |       |   |   |
| **Cash flows from investing  activities:**                                                                 |   |                                         |       |   |   |
| Net increase in  interest-bearing deposits                                                                 |   | (2,471                                       | )          | (2,331 | ) |
| Purchases of  available-for-sale securities                                                                |   | (809,359                                     | )          | (273,106 | ) |
| Maturities of  available-for-sale securities                                                               |   | 838,999                                      |       | 657,923 |   |
| Sales of  available-for-sale securities, net of gains                                                      |   | 54,886                                       |       | 30,907 |   |
| Purchases of  held-to-maturity securities                                                                  |   | (2,517                                       | )          | (2,639 | ) |
| Net decrease  (increase) in loans                                                                          |   | 80,710                                       |       | (81,634 | ) |
| Net increase in  bank premises and equipment                                                               |   | (13,017                                      | )          | (14,061 |   |
| Net cash  provided by investing activities                                                                 |   | 147,231                                      |       | 315,059 |   |
|                                                                                                       |   |                                         |       |   |   |
| **Cash flows from financing  activities:**                                                                 |   |                                         |       |   |   |
| Net decrease in  demand deposits, NOW accounts and savings accounts                                        |   | (51,224                                      | )          | (104,030 | ) |
| Net decrease in  time accounts                                                                             |   | (58,837                                      | )          | (160,484 | ) |
| Net decrease in  short-term and other borrowings                                                           |   | (54,846                                      | )          | (121,112 | ) |
| Net (decrease)  increase  in long-term debt                                                           |   | (341                                         | )          | 16,031 |   |
| Net cost of  redemption of Company-obligated mandatorily redeemable preferred securities  of CFB Capital I |   | (1,118                                       | )          | — |   |
| Purchase of  common stock held in treasury                                                                 |   | (32,972                                      | )          | (40,523 | ) |
| Sale of common  stock held in treasury                                                                     |   | 4,719                                        |       | 2,514 |   |
| Common stock  dividends paid                                                                               |   | (23,445                                      | )          | (20,543 | ) |
| Net cash used in  financing activities                                                                     |   | (218,064                                     | )          | (428,147 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                      |   | 6,179                                        |       | (30,727 | ) |
| Cash and cash  equivalents at beginning of period                                                          |   | 248,260                                      |       | 256,136 |   |
| Cash and cash  equivalents at end of period                                                                |   | $                                            | 254,439    |   | $ | 225,409 |   |

 

*See accompanying notes*. 

 

6

----

COMMUNITY FIRSTBANKSHARES, INC.

 

NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

SEPTEMBER 30, 2002

 

**Note A - BASIS OF PRESENTATION**

 

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

 

**Earnings Per Common Share**

 

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

 

Dilutedearnings per common share is calculated by adjusting the weighted averagenumber of shares of common stock outstanding for shares that would be issuedassuming the exercise of stock options and warrants during each period.  Such adjustments to the weighted average numberof shares of common stock outstanding are made only when such adjustmentsdilute earnings per share.

 

**Note B — BUSINESS DIVESTITURES**

 

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

 

**Note C — ACCOUNTING CHANGES**

 

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

 

Effective January 1, 2002, the Company adopted Statement142.  During the first quarter of 2002,the Company performed the first of the required impairment tests of goodwill asof January 1, 2002.  The Company tested  for impairment using the two-step processdescribed in Statement 142.  The firststep was a review for potential impairment, while the second step measures theamount of the impairment, if any. The Company found no impairment of goodwill;therefore, the Company did not record any transitional impairment as acumulative effect of a change in accounting principle.

 

The following table sets forth the computation of net income and basicand diluted earnings per share as though goodwill amortization had not beenrecorded as an expense during the three and nine month periods ended September30  (dollars in thousands, except pershare data):

 

 

7

----

** **
|                                                    |   | **For the  Three Months Ended September 30** |   | **For the  Nine Months Ended September 30** |   |
|---------------------------------------------------------|--------|----------------------------------------------|--------|---------------------------------------------|--------|
|                                                    |   | **2002**                                     |   | **2001**                                    |   | **2002** |   | **2001** |   |
| Reported net  income                                    |   | $                                            | 20,369 |                                        | $      | 18,440 |   | $ | 59,487 |   | $ | 46,401 |   |
|                                                    |   |                                         |   |                                        |   |   |   |   |   |
| Effect of SFAS  142                                     |   |                                         |   |                                        |   |   |   |   |   |
| After-tax  goodwill amortization included in net income |   | —                                       |   | 1,244                                       |   | — |   | 3,737 |   |
| Adjusted net  income                                    |   | 20,369                                       |   | 19,684                                      |   | 59,487 |   | 50,138 |   |
|                                                    |   |                                         |   |                                        |   |   |   |   |   |
| Adjusted basic  earnings per share                      |   | $                                            | 0.52   |                                        | $      | 0.48 |   | $ | 1.50 |   | $ | 1.22 |   |
| Adjusted diluted  earnings per share                    |   | $                                            | 0.51   |                                        | $      | 0.48 |   | $ | 1.47 |   | $ | 1.20 |   |

 

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

 
| For year ended  December 31, 2002 |   | $     | 3,317 |
|-----------------------------------|--------|-------|-------|
| For year ended  December 31, 2003 |   | 3,316 |
| For year ended  December 31, 2004 |   | 3,300 |
| For year ended  December 31, 2005 |   | 3,255 |
| For year ended  December 31, 2006 |   | 3,183 |

 

 

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

 
| ** **                    |   | **Gross  Carrying**

**Amount** |   | **Accumulated**

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

 

 

**Note D- INVESTMENTS**

 

The following is asummary of available-for-sale and held-to-maturity securities at September 30,2002 (in thousands):

 
|                                 |   | **Available-for-Sale  Securities** |      |                                 |
|--------------------------------------|--------|------------------------------------|-----------|--------------------------------------|
|                                 |   | **Amortized  Cost**                |      | **Gross**

**Unrealized**

**Gains** |   | **Gross**

**Unrealized**

**Losses** |   | **Estimated**

**Fair**

**Value** |   |   |
| United States  Treasury              |   | $                                  | 55,029    |                                 | $ | 1,305 |   | $ | 0 |   | $ | 56,334 |   |
| United States  Government agencies   |   | 252,037                            |      | 6,035                                |   | 4 |   | 258,068 |   |   |
| Mortgage-backed  securities          |   | 869,606                            |      | 28,444                               |   | 175 |   | 897,875 |   |   |
| Collateralized  mortgage obligations |   | 3,782                              |      | 77                                   |   | 0 |   | 3,859 |   |   |
| State and  political securities      |   | 77,047                             |      | 3,699                                |   | 0 |   | 80,746 |   |   |
| Other securities                     |   | 87,462                             |      | 1,368                                |   | 2,923 |   | 85,907 |   |   |
|                                 |   | $                                  | 1,344,963 |                                 | $ | 40,928 |   | $ | 3,102 |   | $ | 1,382,789 |   |
|                                      |        |                                    |           |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

8

----

 
|             |   | **Held-to-Maturity  Securities** |   |
|------------------|--------|----------------------------------|--------|
|             |   | **Amortized**

**Cost**          |   | **Gross**

**Unrealized**

**Gains** |   | **Gross**

**Unrealized**

**Losses** |   | **Estimated**

**Fair**

**Value** |   |
|             |
|             |
| Other securities |   | $                                | 79,282 |   | — |   | — |   | $ | 79,282 |   |
|             |   | $                                | 79,282 |   | $ | — |   | $ | — |   | $ | 79,282 |   |
|                  |        |                                  |        |  |  |  |  |  |  |  |  |  |  |

 

 

Proceeds from thesale of available-for-sale securities during the three months ended September30, 2002 and 2001 were $46,895,000 and $4,564,000, respectively.  Gross gains of $1,531,000 and $19,000 wererealized on sales during the third quarter of 2002 and 2001, respectively.  Gross losses of $1,475,000 and $0 wererealized on sales during the third quarter of 2002 and 2001, respectively.  Gains and losses on disposition of thesesecurities were computed using the specific identification method.

 

**Note E - LOANS**

 

The composition ofthe loan portfolio at September 30, 2002 was as follows (in thousands):

 

| Real estate                     |   | $         | 1,576,442 |   |
|---------------------------------|--------|-----------|-----------|--------|
| Real estate  construction       |   | 454,418   |      |
| Commercial                      |   | 756,049   |      |
| Consumer and  other             |   | 627,017   |      |
| Agriculture                     |   | 233,207   |      |
|                            |   | 3,647,133 |      |
| Less allowance  for loan losses |   | (56,106   | )         |
| Net loans                       |   | $         | 3,591,027 |   |

 

 

**Note F - FINANCIAL INSTRUMENTS WITHOFF-BALANCE SHEET RISK**

 

In the normal course ofbusiness, the Company is party to financial instruments with off-balance sheetrisk to meet the financing needs of its customers and to manage its interestrate risk.  These financial instrumentsinclude commitments to extend credit and letters of credit.  The contract or notional amounts of thesefinancial instruments at September 30, 2002 were as follows (in thousands):

 
| Commitments to  extend credit |   | $      | 623,637 |   |
|-------------------------------|--------|--------|---------|--------|
| Letters of  credit            |   | 30,305 |    |

 

**Note G- SUBORDINATED NOTES**

 

Long-term debt atSeptember 30, 2002 included $60 million of 7.30% Subordinated Notes issued inJune 1997.  These notes are due June 30,2004, with interest payable semi-annually. At September 30, 2002, $12 million qualified as Tier 2 capital. AtSeptember 30, 2002, the subsidiary bank had a $25 million unsecuredsubordinated term note, maturing on December 22, 2007.  The subsidiary bank note bears an interestrate of LIBOR, plus 140 basis points.

 

**Note H - INCOME TAXES**

 

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

 
|                                          |   | **For the  Nine Months Ended, September 30, 2002** |   |
|-----------------------------------------------|--------|----------------------------------------------------|--------|
|                                          |   |                                               |
| 35% of pretax  income                         |   | $                                                  | 31,388 |   |
| State income  tax, net of federal tax benefit |   | 1,561                                              |   |
| Tax-exempt  interest                          |   | (2,980                                             | )      |
| Other                                         |   | 225                                                |   |
| Provision for  income taxes                   |   | $                                                  | 30,194 |   |

 

9

----

 

**Note I — COMPANY OBLIGATEDMANDATORILY REDEEMABLE PREFERRED SECURITIES**

 

On March 27, 2002,the Company issued $60 million of 8.125% Cumulative Capital Securities, throughCFB Capital III, a Delaware business trust subsidiary organized in February2002.  The proceeds of the offering wereinvested by CFB Capital III in Junior Subordinated Debentures of the Company.  The debentures can be redeemed no earlier thanApril 15, 2007, and mature April 15, 2032. The capital securities qualified as Tier I capital under capitalguidelines of the Federal Reserve.  OnMay 1, 2002, the Company used the net proceeds to redeem all of the 8 7/8%Junior Subordinated Debentures that it issued in 1997, thereby triggering theredemption of all 2,400,000 of the 8 7/8% Cumulative Capital Securities issuedby CFB Capital I, a Delaware business trust. 

 

**Note J - SUPPLEMENTAL DISCLOSURES TOCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **Nine months  ended September 30 (in thousands)** |   | **2002** |   | **2001** |   |
|----------------------------------------------------|--------|----------|--------|----------|--------|
| Unrealized gain  on available-for-sale securities  |   | $        | 31,457 |     | $      | 41,148 |   |
|                                                    |        |          |        |          |        |  |  |  |

 

10

----

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Community FirstBankshares, a $5.6 billion financial services company, provides a complete lineof banking, investment, insurance, mortgage and trust products to individualsand businesses.  The company’s extensiveoffering of financial products and services is marketed through full-serviceoffices in 136 communities in 12 states — Arizona, California, Colorado, Iowa,Minnesota, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsinand Wyoming.

 

**Basis of Presentation**

 

The following is adiscussion of the Company’s financial condition as of September 30, 2002 andDecember 31, 2001, and the results of its operations for the three and ninemonth periods ended September 30, 2002 and 2001.

 

**Strategic Initiatives**

 

On March 22, 2001the Company announced a series of strategic initiatives designed to improvecustomer service and strengthen its position as a provider of diversifiedfinancial services.  Initiativesincluded a redefinition of the Company’s delivery model and the sale or closureof banking offices.  These initiativesare continuing in 2002 and the results of operations for the three and ninemonth periods ended September 30, 2002 reflect the Company’s continuing effortsat implementing the initiatives described below.

 

In an effort toproperly align resources with market opportunities and provide the deliverysupport structure to optimize individual market potential, each of theCompany’s offices was redefined as either a Regional Financial Center or aCommunity Financial Center.  RegionalFinancial Centers are those locations exhibiting strong commercial bankingpotential; requiring a broader based support structure.  Community Financial Centers, which are lessgeographically concentrated, typically offer greater retail opportunities,including emphasis on insurance and investment product sales.

 

In conjunctionwith the restructuring of the banking network, the Company sold 13 offices andclosed eight additional offices. Offices sold, in four separate transactions, included nine Arizonaoffices, three Nebraska offices and one office in North Dakota.  Four of the eight offices closed werelocated in communities where the Company maintains one or more additionaloffices, thus continuing to serve those customers from existing locations.

 

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

 

As a result ofthese initiatives, the Company recorded a one-time after-tax restructuringcharge totaling $5.1 million.  Thecharge was recorded during the first quarter of 2001 and representsapproximately $0.12 per share.

 

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

 

Under the redesigned delivery support structure, the Company isimplementing a centralized consumer credit process. Once fully operational, thecentral structure will offer a complete range of decision, origination,documentation and collection services to all Company offices through a Fargo,North Dakota location. Centralization is expected to be completed by late 2003.

 

11

----

Community First is proactively implementing tools to enhance serviceand maximize opportunities by providing more products and new ways to accessthem, including online offerings. Its online business banking product waslaunched in 2002. Platform and teller systems to enhance services and customerrelationship management tools to maximize cross-selling opportunities arescheduled in the course of the next 18 months.

 

The Company is building a sales culture for long-term success. It hascombined its investment, insurance and bank sales forces and measuresperformance through a balanced scorecard, with compensation tied to salesperformance.

 

To further strengthen business banking relationships, the Company isdeveloping and implementing cash management strategies to offer value-addedservices for business customers, while enhancing revenue opportunities withinCommunity First.  The Company continuesto build on its Regional Financial Center-Community Financial Center franchisemodel and plans for market extension-based expansion in 2003 and beyond.

# **Critical Accounting Policies**

 

The Company has established various accounting policies which governthe application of accounting principles generally accepted in the UnitedStates in the preparation of the Company’s financial statements. Thesignificant accounting policies of the Company are described in the footnotesto the annual consolidated financial statements included in the Company’sAnnual Report on Form 10-K.  Certainaccounting policies involve significant judgments and assumptions by managementwhich have a material impact on the carrying value of certain assets andliabilities; management considers such accounting policies to be criticalaccounting policies.  The judgments andassumptions used by management are based on historical experience and otherfactors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments andassumptions made by management, actual results could differ from thesejudgments and estimates which could have a material impact on the carryingvalues of assets and liabilities and the results of operations of the Company.

 

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

 

**Overview**

 

For the three months ended September 30, 2002, netincome was $20.4 million, an increase of $2.0 million or 10.9% from $18.4million during the 2001 period.  Basicearnings per common share for the three months ended September 30, 2002 were$0.52, compared to $0.45 in the same period in 2001.  Diluted earnings per share for the three months ended September30, 2002 were $0.51.

 

Return on average assets and return on common equity for the threemonths ended September 30, 2002 were 1.45% and 21.83%, respectively, ascompared to the 2001 ratios of 1.26% and 20.89%.  The increase in return on assets is due to the increase in netincome and a $219 million decrease in average assets.  The increase in return on equity is principally due to theincrease in net income.

 

For the ninemonths ended September 30, 2002, net income was $59.5 million, an increase of$13.1 million or 28.2% from $46.4 million during the 2001 period.  Basic earnings per common share for the ninemonths ended September 30, 2002 were $1.50, compared to $1.13 in the same periodin 2001.  Diluted earnings per share forthe nine months ended September 30, 2002 were $1.47.  In addition to increased core earnings, the increase in earningsper share is also due to a one-time after-tax charge of $5.1 million, or 12cents per share, to account for the financial impact of a restructuring chargerecorded in the first quarter of 2001 and, the write-off of the Company’slargest non-performing loan and the recognition of a special loan lossprovision equal to the amount of the write-off of $1.5 million after-tax, or 4cents per share.  Excluding the

 

12

----

 

one-time chargeand the special loan loss provision, diluted earnings per share would have been$1.27 cents per share for the nine months ended September 30, 2001.  The 2002 period includes the positive impactof 3 cents per share per quarter for a cumulative impact of 9 cents per share,year to date, due to the accounting change ending the amortization ofgoodwill.  The nine months ended September30, 2001 includes $4.9 million in goodwill amortization.

 

Return on average assetsand return on common equity for the nine months ended September 30, 2002 were1.42% and 22.04%, respectively, as compared to the 2001 ratios of 1.05% and17.91%.  The increase in return onassets and return on equity is principally due to an increase in net income,resulting from higher earnings in 2002 and the restructuring charge and specialloan loss provision recorded in 2001. In addition, average assets for the nine months ended September 30, 2002decreased $287 million or 4.9% from the same period in 2001.  Return on average assets and return onaverage common equity, exclusive of the one-time charge and the special loanloss provision recorded in the first quarter of 2001, would have been 1.20% and20.45%, respectively for the nine months ended September 30, 2001.

 

**Results of Operations**

 

**Net Interest Income**

 

Net interestincome for the three months ended September 30, 2002 was $69.4 million, on atax-equivalent basis, a decrease of $2.1 million, or 2.9%, from the netinterest income of $71.5 million earned during the 2001 period. The netinterest margin of 5.38% for the three months ended September 30, 2002 was upslightly from 5.35% for the corresponding 2001 period.  Average interest earning assets during thethird quarter of 2002 decreased $180 million or 3.4% from the 2001 period,while average interest bearing liabilities during the third quarter of 2002decreased $243 million, or 5.6% from the 2001 period.

 

Net interestincome for the nine months ended September 30, 2002 was $208.4 million, on atax-equivalent basis, a decrease of $542,000, or 0.3%, from the net interestincome of $209.0 million earned during the corresponding 2001 period. The netinterest margin of 5.41% for the period ended September 30, 2002 was up from5.18% for the corresponding 2001 period. Average interest earning assets during the nine-month period endedSeptember 30, 2002 decreased $244 million, or 4.5% from the same period in 2001,while average interest bearing liabilities during the nine-month period endingSeptember 30, 2002 decreased $323 million from the same period during 2001.

 

**Provision for Loan Losses**

 

The provision for loan losses for the three months ended September 30, 2002was $3.4 million, a decrease of $1.9 million, or 35.8% from the corresponding2001 period.  Net charge-offs were $2.8million or .30 percent (annualized) of average loans for the third quarter of2002, compared to $3.4 million or .35 percent for the third quarter of 2001. AtSeptember 30, 2002, nonperforming assets were $25.9 million, an increase of$885,000, or 3.5% from $25.0 million at September 30, 2001.  Nonperforming assets comprised .46% of totalassets at September 30, 2002 and .44% of total assets at September 30, 2001.

 

The provision for loanlosses for the nine months ended September 30, 2002 was $10.0 million, adecrease of $4.2 million, or 29.6%, from the $14.2 million provision during thecorresponding 2001 period.  The 2001 periodincludes a $2.4 million special loan loss provision to reflect the charge-offof the Company’s largest non-performing asset, an Arizona based creditfacility.

 

**Noninterest Income**

 

Noninterest incomefor the three months ended September 30, 2002 was $19.7 million, an increase of$141,000, or 0.7%, from the 2001 level of $19.6 million. Commissions on thesale of investment securities were $1.8 million, a $371,000 or 25.5% increasefrom the $1.5 million recorded in the 2001 period due principally to anincrease in the Company’s customer base as a result of special sales campaignsduring 2002 and 2001.       Insurancecommissions were $3.8 million for the 2002 quarter, an increase of $269,000 or7.7% from the $3.5 million recorded in the 2001 quarter attributed primarily toan increase in the Company’s

 

13

----

 

customer base as aresult of agency acquisitions during 2002 and 2001.  Service charges on deposit accounts decreased $472,000 or 4.9%,to $9.2 million as of September 30, 2002, compared to $9.6 million during the2001 period due principally to a $178 million reduction in average depositsduring the 2002 period, from the 2001 period.

 

Noninterest incomefor the nine months ended September 30, 2002 was $57.2 million, a slight decreaseof $394,000, or 0.7%, from the 2001 level of $57.6 million. Investment salescommissions increased $2.8 million, or 60.6%, as a result of a sales campaigncompleted during the 2002 period. Insurance commissions increased $898,000 or 9.5%, due in part to theacquisition of five insurance agencies during 2002 and 2001.  These increases were offset by a $2.4million, or 8.2% decrease in service charges on deposit accounts due in part toa reduction in average deposit levels, and a $1.1 million, or 11.2% decrease inother income. The decrease in other income was principally due to a $783,000decrease in fees earned on the issuance of money orders.  The 2002 period included a $115,000 loss onthe sale of investment securities, compared to a $251,000 gain in thecorresponding 2001 period.

 

**Noninterest Expense**

 

Noninterest expense for the three months ended September 30, 2002 was$53.2 million, a decrease of $2.5 million, or 4.5%, from the level of $55.7million during the corresponding 2001 period. Net occupancy expense increased$782,000, or 9.9% due in part to increased depreciation of equipment associatedwith the Company’s strategic initiatives implemented during 2002 and 2001.  Data processing expense decreased $370,000,or 35.8% due principally to an increase in the level of offsetting feesassociated with the processing of electronic banking transactions.  The 2001 period included $1.6 million ofgoodwill amortization.

 

Noninterest expense forthe nine months ended September 30, 2002 was $159.9 million, a decrease of$15.8 million, or 9.0%, from the level of $175.7 million during the 2001period. The decrease was principally due to the $7.7 million one-timerestructuring charge recorded in the first quarter of 2001.  The 2001 period included $4.9 million ingoodwill amortization.  Discretionaryadvertising expenses decreased $848,000, or 21.6%, from $3.9 million in the2001 period, to $3.1 million in the 2002 period.  Data processing expense decreased $830,000, or 27.8%, from $3.0million in the 2001 period, to $2.2 million in the 2002 period, due principallyto increased efficiency in recovering electronic banking costs.  During the first quarter of 2001, theCompany also recorded a $462,000 early payment penalty, when it elected to payoff various Federal Home Loan Bank borrowings, which carried higher than marketinterest rates.

 

**Provision for Income Taxes**

 

The provision forincome taxes for the three months ended September 30, 2002 was $10.2 million,an increase of $716,000, or 7.5%, from the 2001 level of $9.5 million. Theincrease was due principally to the increase in pre-tax net income.  The effective tax rate for the three monthsended September 30, 2002 was 33.41%, as compared to 34.01% in the correspondingperiod in 2001.

 

The provision forincome taxes for the nine months ended September 30, 2002 was $30.2 million, anincrease of $6.1 million, or 25.3%, from the 2001 level of $24.1 million.  The increase was due primarily to theincrease in pre-tax net income including the impact of the one-timerestructuring charge, which included the write-off of various non-deductibleintangible assets and the special loan loss provision recorded in the 2001period.  The effective tax rate for thenine months ended September 30, 2002 was 33.67%, as compared to 34.15% in thecorresponding period in 2001.

 

14

----

 

**Financial Condition**

 

Total loans were$3.6 billion at September 30, 2002 and $3.7 billion at December 31, 2001.

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

 
|                            |   | **September  30, 2002**    |      | **December  31, 2001**           |   |
|---------------------------------|--------|----------------------------|-----------|----------------------------------|--------|
|                            |   | **Amount**                 |      | **Percent of**

**Total  Loans** |   | **Amount** |   | **Percent of**

**Total  Loans** |   |
|                            |   | **(Dollars in Thousands)** |      |
| Loan category:                  |   |                       |      |
| Real estate                     |   | $                          | 1,576,442 |                             | 43.2   | % | $ | 1,515,118 |   | 40.5 | % |
| Real estate  construction       |   | 454,418                    |      | 12.5                             | %      | 519,031 |   | 13.9 | % |
| Commercial                      |   | 756,049                    |      | 20.7                             | %      | 824,318 |   | 22.1 | % |
| Consumer and  other             |   | 627,017                    |      | 17.2                             | %      | 627,034 |   | 16.8 | % |
| Agricultural                    |   | 233,207                    |      | 6.4                              | %      | 251,191 |   | 6.7 | % |
| Total loans                     |   | 3,647,133                  |      | 100.00                           | %      | 3,736,692 |   | 100.0 | % |
| Less allowance  for loan losses |   | (56,106                    | )         |                             |   | (54,991 | )  |   |   |
| Total                           |   | $                          | 3,591,027 |                             |   |   | $ | 3,681,701 |   |   |   |

#### ** **

#### **Nonperforming Assets**

 

At September 30,2002, nonperforming assets were $25.9 million, an increase of $2.0 million or8.4% from the $23.9 million level at December 31, 2001. The increase innon-performing assets was driven by an increase in the level of non-accrualloans, originated principally within the commercial and commercial real estateportfolios.  The increase in non-accrualloans was dispersed throughout the Company’s markets and does not signify anyindustry or geographic concentration. At September 30, 2002, nonperforming loans as a percent of total loanswere .68%, up from the December 31, 2001 level of .56%.  Other Real Estate Owned (“OREO”) was $1.2million at September 30, 2002, a decrease of $1.7 million from $2.9 million atDecember 31, 2001, which is the result of completing the sale of real estateproperties held at December 31, 2001.

 

Nonperformingassets of the Company are summarized in the following table:

 
| **(Dollars  in thousands)**                             |   | **September  30, 2002** |      | **December  31, 2001** |   |
|---------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
| Loans                                                   |   |                    |      |                   |   |
| Nonaccrual loans                                        |   | $                       | 24,527    |                   | $      | 20,818 |   |
| Restructured  loans                                     |   | 228                     |      | 252                    |   |
| Nonperforming  loans                                    |   | 24,755                  |      | 21,070                 |   |
| Other real  estate owned                                |   | 1,159                   |      | 2,869                  |   |
| Nonperforming  assets                                   |   | $                       | 25,914    |                   | $      | 23,939 |   |
| Loans 90 days or  more past due but still accruing      |   | $                       | 3,409     |                   | $      | 6,270 |   |
| Nonperforming  loans as a percentage of total loans     |   | .68                     | %         | .56                    | %      |
| Nonperforming  assets as a percentage of total assets   |   | .46                     | %         | .41                    | %      |
| Nonperforming  assets as a percentage of loans and OREO |   | .71                     | %         | .64                    | %      |
|                                                    |   |                    |      |                   |   |
| Total Loans                                             |   | $                       | 3,647,133 |                   | $      | 3,736,692 |   |
| Total Assets                                            |   | 5,619,702               |      | 5,772,326              |   |

 

#### ** **

#### **Allowance for LoanLosses**

 

At September 30, 2002 theallowance for loan losses was $56.1 million, an increase of $1.3 million fromthe September 30, 2001 balance of $54.8 million.  Net charge-offs during the three months ended September 30, 2002were $574,000 less than those incurred during the three months ended September30, 2001.

 

At September 30, 2002,the allowance for loan losses as a percentage of total loans was 1.54%, anincrease from the September 30, 2001 level of 1.44%.  The increase in the allowance of loan losses as a percentage ofloans is attributed in part to a $161 million decrease in average loans.

 

15

----

 

                The following table sets forth the Company’sallowance for loan losses:

 
|                                                     |   | **For the  Nine Months Ended September 30,** |      |
|----------------------------------------------------------|--------|----------------------------------------------|-----------|
| **(Dollars in thousands)**                               |   | **2002**                                     |      | **2001** |   |
| Balance at  beginning of period                          |   | $                                            | 54,991    |   | $ | 52,168 |   |
| Charge-offs:                                             |   |                                         |      |   |   |
| Real estate                                              |   | 2,314                                        |      | 1,386 |   |
| Real estate  construction                                |   | 50                                           |      | 2,480 |   |
| Commercial                                               |   | 4,719                                        |      | 4,000 |   |
| Consumer and  other                                      |   | 8,112                                        |      | 7,002 |   |
| Agricultural                                             |   | 169                                          |      | 305 |   |
| Total  charge-offs                                       |   | 15,364                                       |      | 15,173 |   |
| Recoveries:                                              |   |                                         |      |   |   |
| Real estate                                              |   | 225                                          |      | 188 |   |
| Real estate  construction                                |   | 1,269                                        |      | 4 |   |
| Commercial                                               |   | 658                                          |      | 617 |   |
| Consumer and  other                                      |   | 4,198                                        |      | 2,564 |   |
| Agricultural                                             |   | 165                                          |      | 231 |   |
| Total recoveries                                         |   | 6,515                                        |      | 3,604 |   |
| Net charge-offs                                          |   | 8,849                                        |      | 11,569 |   |
| Provision  charged to operations                         |   | 9,964                                        |      | 14,221 |   |
| Balance at end  of period                                |   | $                                            | 56,106    |   | $ | 54,820 |   |
| Allowance as a  percentage of total loans                |   | 1.54                                         | %         | 1.44 | % |
| Annualized net  charge-offs to average loans outstanding |   | 0.32                                         | %         | 0.41 | % |
|                                                     |   |                                         |      |   |   |
| Total Loans                                              |   | $                                            | 3,647,133 |   | $ | 3,808,267 |   |
| Average Loans                                            |   | 3,681,546                                    |      | 3,778,399 |   |

 

 

#### **Investments**

 

The investment portfolio,including available-for-sale securities and held-to-maturity securities, was$1.5 billion at September 30, 2002 and December 31, 2001.  At September 30, 2002, the investmentportfolio represented 26.0% of total assets, compared with 26.2% at December31, 2001.  In addition to investmentsecurities, the Company had investments in interest-bearing deposits of $2.8million at September 30, 2002, an increase of $2.5 million from $341,000 atDecember 31, 2001.

 

**Deposits**

 

Total deposits were $4.6billion at September 30, 2002, a decrease of $110.1 million, or 2.3%, from $4.8billion at December 31, 2001. Noninterest-bearing deposits at September 30, 2002 were $428 million, adecrease of $60 million, or 12.3%, from $488 million at December 31, 2001.  The decrease in total deposits andnoninterest bearing deposits was principally due to the impact of the sale ofCompany offices during 2001 and 2002, which had $134 million in deposits at thetime of sale.  The Company’s coredeposits as a percent of total deposits were 84.5% and 85.3% as of September30, 2002 and December 31, 2001, respectively. Interest-bearing deposits were $4.2 billion at September 30, 2002, adecrease of $50 million, or 1.2% from $4.3 billion at December 31, 2001.

 

**Borrowings**

 

Short-term borrowings ofthe Company were $34 million as of September 30, 2002, an increase of $10million, or 41.7%, from $24 million as of December 31, 2001.  The increase is due primarily to thefluctuation in the level of daily deposits and its impact on short-termliquidity, and reflects the Company’s strategy of funding short-term liquidityneeds in the most cost effective manner.

 

Long-term debt of theCompany was $137 million as of September 30, 2002 and December 31, 2001.

 

16

----

 

**Capital Management**

 

Shareholders’ equityincreased $25 million to $382 million at September 30, 2002 from $357 millionat December 31, 2001.  Unrealized gainon available-for-sale securities, net of taxes, increased $19.0 million fromDecember 31, 2001.  At September 30,2002, the Company’s Tier 1 capital, total risk-based capital and leverageratios were 9.27%, 11.42%, and 6.87%, respectively, compared to minimum requiredlevels of 4%, 8% and 3%, respectively (subject to change and the discretion ofregulatory authorities to impose higher standards in individual cases).  At September 30, 2002, the Company hadrisk-weighted assets of $4.1 billion.

 

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

 

#### **Stock Repurchases**

 

In August 2001,the Company adopted a common stock repurchase program providing for therepurchase of up to 3 million shares of the Company’s common stock.  Previously, in April 2000 and in August2000, the Company had adopted similar repurchase programs for up to 5 millionshares each.  During 2000 and 2001, theCompany repurchased all shares authorized under the 2000 programs.  During the third quarter of 2002, theCompany repurchased 356,000 shares under the 2001 program, at prices rangingfrom $22.55 to $27.05.  At September 30,2002, the Company may purchase up to 2.1 million shares under the currentrepurchase authorization.

 

17

----

 

**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; execution and implementation ofthe series of strategic initiatives announced during 2001; balance sheet andcritical ratio risks related to the share repurchase program; risks related tothe Company’s acquisition strategy, including risks of adversely changingresults of operations and factors affecting the Company’s ability to consummatefurther acquisitions, and other risks detailed in the Company’s filings withthe Securities and Exchange Commission including the risks identified in theCompany’s Form 10-K filed with the Commission on March 18, 2002, all of whichare difficult to predict and many of which are beyond the control of the Company.**

 

18

----

 

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

 

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

 

**Item 4.  Controls and Procedures.**

 

a.               Evaluation of Disclosure Controls and Procedures.

 

The Company’s ChiefExecutive Officer, Mark A. Anderson, and Chief Financial Officer, Craig A. Weiss,have reviewed the Company’s disclosure controls and procedures within 90 daysprior to the filing of this report. Based upon this review, these officers believe that the Company’sdisclosure controls and procedures are effective in ensuring that materialinformation related to the Company is made known to them by others within theCompany.

 

b.              Changes in Internal Controls.

 

                        There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls during the quarter covered by this report or from the end of thereporting period to the date of this Form 10-Q.

 

19

----

 

**PART II - OTHER INFORMATION**

 
| Item 1. |   | Legal Proceedings:                                   |
|---------|--------|------------------------------------------------------|
|    |   |                                                 |
|    |   | None.                                                |
|    |   |                                                 |
| Item 2. |   | Changes in Securities:                               |
|    |   |                                                 |
|    |   | None                                                 |
|    |   |                                                 |
| Item 3. |   | Defaults upon Senior Securities:                     |
|    |   |                                                 |
|    |   | None.                                                |
|    |   |                                                 |
| Item 4. |   | Submission of Matters to a Vote of Security Holders: |
|    |   |                                                 |
|    |   | None.                                                |
|    |   |                                                 |
| Item 5. |   | Other Information:                                   |
|    |   |                                                 |
|    |   | None.                                                |
|    |   |                                                 |
| Item 6. |   | Exhibits and Reports on Form 8-K:                    |
|    |   |                                                 |

 
|   | (a)    | Exhibits:            |
|--------|--------|----------------------|
|   |   | 99.1                 | Certificate pursuant to  18 U.S.C. §1350. |
|   |   |                 |
|   |   |                 |
|   | (b)    | Reports on Form 8-K: |
|   |   | None                 |

 

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|   |             | Community First Bankshares, Inc. |
|--------|------------------|----------------------------------|
|   |             | (Registrant)                     |
|   |             |                             |
|   |             |                             |
| Date:  | November 8, 2002 |                             | /s/ Mark A.  Anderson |
|   |             |                             | President and |
|   |             |                             | Chief Executive  Officer |
|   |             |                             |   |
| Date:  | November 8, 2002 |                             | /s/ Craig A.  Weiss |
|   |             |                             | Chief Financial  Officer |
|   |             |                             |

 

 

 

20

----

 

**CERTIFICATIONS**

I, Mark A. Anderson, certify that:

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

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3. Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport;

4. The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

a) designed such disclosure controls and procedures to ensurethat material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

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

c) presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a) all significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6. The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  | November 8, 2002 |                                   | /s/ Mark A. Anderson |
|--------|------------------|----------------------------------------|----------------------|
|   |             | President and

Chief Executive Officer |

 

 

21

----

 

I, Craig A. Weiss, certify that:

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

2. Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

3. Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport;

4. The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

a) designed such disclosure controls and procedures to ensurethat material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

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

c) presented in this quarterly report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

a) all significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

6. The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  | November 8, 2002 |                    | /s/ Craig A. Weiss |
|--------|------------------|-------------------------|--------------------|
|   |             | Chief Financial Officer |

 

22

----