**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

 

**FORM 10-Q**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                              |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                           |
|       | **For the quarterly period ended  June 30, 2004**                                                                                                                                                                         |
|       |
| **OR**     |
|       |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                             |
|       |                                                                                                                                                                                                                           |
|       | **For the transition period from                   to                 ** |

 

**Commission file number   0-19368**

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days:  YES   ý   NO   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the ExchangeAct):  YES   ý   NO   o

 

At August 6, 2004, 36,912,314 shares of Common Stock wereoutstanding.

 

 

----

 

COMMUNITY FIRST BANKSHARES, INC.

 

FORM 10-Q

 

QUARTER ENDED JUNE 30, 2004

 

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, Use of Proceeds and Issuer Repurchase of  Equity Securities          |   |
|                            |                                                                                        |   |
| Item 3.                         | Defaults Upon Senior Securities                                                             |   |
|                            |                                                                                        |   |
| Item 4.                         | Submission of Matters to a Vote of Security  Holders                                        |   |
|                            |                                                                                        |   |
| Item 5.                         | Other Information                                                                           |   |
|                            |                                                                                        |   |
| Item 6.                         | Exhibits and Reports on Form 8-K                                                            |   |
|                            |                                                                                        |   |
| SIGNATURES  AND CERTIFICATIONS  |                                                                                        |

 

2

----

 

COMMUNITY FIRST BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OFFINANCIAL CONDITION

 
| **(Dollars in thousands, except per  share data)**                          |   | **June 30,  2004** |      | **December 31,  2003** |   |
|-----------------------------------------------------------------------------|--------|-------------------------|-----------|-----------------------------|--------|
|                                                                        |   | **(unaudited)**         |      |                        |   |
| ASSETS                                                                      |   |                    |      |                        |   |
| Cash and due from banks                                                     |   | $                       | 217,639   |                        | $      | 234,076 |   |
| Interest-bearing deposits                                                   |   | 7,522                   |      | 3,319                       |   |
| Available-for-sale securities                                               |   | 1,560,510               |      | 1,563,419                   |   |
| Loans                                                                       |   | 3,430,827               |      | 3,323,572                   |   |
| Less: Allowance for loan losses                                             |   | (52,762                 | )         | (52,231                     | )      |
| Net loans                                                                   |   | 3,378,065               |      | 3,271,341                   |   |
| Bank premises and equipment, net                                            |   | 133,997                 |      | 131,008                     |   |
| Accrued interest receivable                                                 |   | 28,369                  |      | 28,696                      |   |
| Bank owned life insurance                                                   |   | 84,628                  |      | 83,121                      |   |
| Goodwill                                                                    |   | 63,448                  |      | 63,448                      |   |
| Other intangible assets                                                     |   | 30,519                  |      | 30,402                      |   |
| Other assets                                                                |   | 69,698                  |      | 56,277                      |   |
| Total assets                                                                |   | $                       | 5,574,395 |                        | $      | 5,465,107 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                   |   |                    |      |                        |   |
| Deposits:                                                                   |   |                    |      |                        |   |
| Noninterest-bearing                                                         |   | $                       | 442,076   |                        | $      | 447,648 |   |
| Interest-bearing:                                                           |   |                    |      |                        |   |
| Savings and NOW accounts                                                    |   | 2,607,772               |      | 2,552,056                   |   |
| Time accounts over $100,000                                                 |   | 490,024                 |      | 501,440                     |   |
| Other time accounts                                                         |   | 848,207                 |      | 888,066                     |   |
| Total deposits                                                              |   | 4,388,079               |      | 4,389,210                   |   |
| Federal funds purchased and securities sold  under agreements to repurchase |   | 472,433                 |      | 416,689                     |   |
| Other short-term borrowings                                                 |   | 155,000                 |      | 75,577                      |   |
| Long-term debt                                                              |   | 169,211                 |      | 172,211                     |   |
| Accrued interest payable                                                    |   | 11,871                  |      | 13,081                      |   |
| Other liabilities                                                           |   | 32,224                  |      | 36,539                      |   |
| Total liabilities                                                           |   | 5,228,818               |      | 5,103,307                   |   |
|                                                                        |   |                    |      |                        |   |
| Shareholders’ equity:                                                  |   |                    |      |                        |   |
| Common stock, par value $.01 per share:                                     |   |                    |      |                        |   |
| Authorized Shares – 80,000,000                                         |   |                    |      |                        |   |
| Issued Shares – 51,021,896                                             |   | 510                     |      | 510                         |   |
| Capital surplus                                                             |   | 195,302                 |      | 194,911                     |   |
| Retained earnings                                                           |   | 448,850                 |      | 432,574                     |   |
| Accumulated other comprehensive (loss)  income                              |   | (11,744                 | )         | 7,053                       |   |
| Less cost of common stock in treasury -                                     |   |                    |      |                        |   |
| June 30, 2004 – 14,110,582 shares                                 |   |                    |      |                        |   |
| December 31, 2003 – 13,664,482 shares                             |   | (287,341                | )         | (273,248                    | )      |
| Total shareholders’ equity                                             |   | 345,577                 |      | 361,800                     |   |
| Total liabilities and shareholders’ equity                             |   | $                       | 5,574,395 |                        | $      | 5,465,107 |   |

 

*Seeaccompanying notes*.

 

3

----

 

COMMUNITY FIRST BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 
| **(Dollars in thousands, except per  share data)  (Unaudited)** |     | **For the  Three Months Ended   June 30,** |     | **For the  Six Months Ended  June 30,** |     |
|-----------------------------------------------------------------|----------|-------------------------------------------------|----------|----------------------------------------------|----------|
|                                                            | **2004** | ** **                                      | **2003** | ** **                                   | **2004** | ** ** | **2003** |   |
| Interest income:                                                |     |                                            |     |                                         |     |   |   |   |   |
| Loans                                                           |     | $                                               | 55,608   |                                         | $        | 61,410 |   | $ | 110,151 |   | $ | 124,620 |   |
| Investment securities                                           |     | 15,260                                          |     | 17,651                                       |     | 31,259 |   | 36,434 |   |
| Interest-bearing deposits                                       |     | 17                                              |     | 16                                           |     | 26 |   | 28 |   |
| Federal funds sold and resale agreements                        |     | —                                          |     | 1                                            |     | 1 |   | 1 |   |
| Total interest income                                           |     | 70,885                                          |     | 79,078                                       |     | 141,437 |   | 161,083 |   |
|                                                            |     |                                            |     |                                         |     |   |   |   |   |
| Interest expense:                                               |     |                                            |     |                                         |     |   |   |   |   |
| Deposits                                                        |     | 9,005                                           |     | 12,662                                       |     | 18,207 |   | 27,369 |   |
| Short-term and other borrowings                                 |     | 1,241                                           |     | 1,480                                        |     | 2,326 |   | 2,838 |   |
| Long-term debt                                                  |     | 3,880                                           |     | 4,220                                        |     | 7,807 |   | 8,996 |   |
| Total interest expense                                          |     | 14,126                                          |     | 18,362                                       |     | 28,340 |   | 39,203 |   |
| Net interest income                                             |     | 56,759                                          |     | 60,716                                       |     | 113,097 |   | 121,880 |   |
| Provision for loan losses                                       |     | 2,367                                           |     | 3,487                                        |     | 4,732 |   | 6,974 |   |
| Net interest income after provision for  loan losses            |     | 54,392                                          |     | 57,229                                       |     | 108,365 |   | 114,906 |   |
| Noninterest income:                                             |     |                                            |     |                                         |     |   |   |   |   |
| Service charges on deposit accounts                             |     | 9,724                                           |     | 9,999                                        |     | 18,981 |   | 19,379 |   |
| Insurance commissions                                           |     | 3,837                                           |     | 3,364                                        |     | 8,470 |   | 7,445 |   |
| Fees from fiduciary activities                                  |     | 1,264                                           |     | 1,449                                        |     | 2,570 |   | 2,727 |   |
| Security sales commissions                                      |     | 2,418                                           |     | 2,310                                        |     | 5,618 |   | 4,361 |   |
| Bank owned life insurance income                                |     | 804                                             |     | 871                                          |     | 1,693 |   | 1,724 |   |
| Net gain on sales of available-for-sale  securities             |     | 790                                             |     | 1,795                                        |     | 2,301 |   | 2,259 |   |
| Other                                                           |     | 4,378                                           |     | 3,296                                        |     | 6,501 |   | 7,055 |   |
| Total noninterest income                                        |     | 23,215                                          |     | 23,084                                       |     | 46,134 |   | 44,950 |   |
| Noninterest expense:                                            |     |                                            |     |                                         |     |   |   |   |   |
| Salaries and employee benefits                                  |     | 27,085                                          |     | 28,246                                       |     | 55,845 |   | 56,160 |   |
| Net occupancy                                                   |     | 8,548                                           |     | 8,435                                        |     | 17,337 |   | 17,043 |   |
| FDIC insurance                                                  |     | 166                                             |     | 185                                          |     | 330 |   | 376 |   |
| Legal and accounting                                            |     | 840                                             |     | 879                                          |     | 1,177 |   | 1,286 |   |
| Other professional services                                     |     | 877                                             |     | 1,217                                        |     | 1,864 |   | 2,106 |   |
| Advertising                                                     |     | 1,057                                           |     | 1,023                                        |     | 2,099 |   | 1,953 |   |
| Telephone                                                       |     | 1,438                                           |     | 1,628                                        |     | 2,912 |   | 3,154 |   |
| Acquisition and integration expense                             |     | 925                                             |     | —                                       |     | 925 |   | — |   |
| Data processing                                                 |     | 1,984                                           |     | 1,860                                        |     | 4,028 |   | 3,578 |   |
| Amortization of intangibles                                     |     | 905                                             |     | 840                                          |     | 1,772 |   | 1,671 |   |
| Other                                                           |     | 7,386                                           |     | 7,684                                        |     | 14,674 |   | 15,359 |   |
| Total noninterest expense                                       |     | 51,211                                          |     | 51,997                                       |     | 102,963 |   | 102,686 |   |
|                                                            |     |                                            |     |                                         |     |   |   |   |   |
| Income before income taxes                                      |     | 26,396                                          |     | 28,316                                       |     | 51,536 |   | 57,170 |   |
| Provision for income taxes                                      |     | 8,948                                           |     | 9,230                                        |     | 17,184 |   | 18,683 |   |
| Net income                                                      |     | $                                               | 17,448   |                                         | $        | 19,086 |   | $ | 34,352 |   | $ | 38,487 |   |

 

*See accompanyingnotes.*

 

4

----

 
| **(Dollars in thousands, except per  share data)  (Unaudited)** |     | **For the  Three Months Ended  June 30,** |     | **For the  Six Months Ended  June 30,** |     |
|-----------------------------------------------------------------|----------|------------------------------------------------|----------|----------------------------------------------|----------|
|                                                            | **2004** | ** **                                     | **2003** | ** **                                   | **2004** | ** ** | **2003** |   |
|                                                            |     |                                           |     |                                         |     |   |   |   |   |
| Earnings per common and common equivalent  share:               |     |                                           |     |                                         |     |   |   |   |   |
| Basic net income                                                |     | $                                              | 0.47     |                                         | $        | 0.50 |   | $ | 0.93 |   | $ | 1.00 |   |
| Diluted net income                                              |     | $                                              | 0.47     |                                         | $        | 0.49 |   | $ | 0.92 |   | $ | 0.99 |   |
|                                                            |     |                                           |     |                                         |     |   |   |   |   |
| Average common shares outstanding:                              |     |                                           |     |                                         |     |   |   |   |   |
| Basic                                                           |     | 36,889,249                                     |     | 38,371,159                                   |     | 36,965,297 |   | 38,485,552 |   |
| Diluted                                                         |     | 37,519,873                                     |     | 38,850,493                                   |     | 37,516,977 |   | 38,946,844 |   |
|                                                            |     |                                           |     |                                         |     |   |   |   |   |
| Dividends per share                                             |     | $                                              | 0.24     |                                         | $        | 0.22 |   | $ | 0.48 |   | $ | 0.44 |   |

 

STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
| **(Dollars in thousands)  (Unaudited)**                             |     | **For the  Three Months Ended   June 30,** |     | **For the  Six Months Ended  June 30,** |     |
|---------------------------------------------------------------------|----------|-------------------------------------------------|----------|----------------------------------------------|----------|
|                                                                | **2004** |                                            | **2003** |                                         | **2004** |   | **2003** |   |
|                                                                |     |                                            |     |                                         |     |   |   |   |   |
| Net income                                                          |     | $                                               | 17,448   |                                         | $        | 19,086 |   | $ | 34,352 |   | $ | 38,487 |   |
| Other comprehensive income:                                         |     |                                            |     |                                         |     |   |   |   |   |
| Unrealized gains (losses) on securities:                            |     |                                            |     |                                         |     |   |   |   |   |
| Unrealized holding gains (losses) arising  during period            |     | (40,753                                         | )        | 3,277                                        |     | (28,820 | ) | (3,605 | ) |
| Related taxes                                                       |     | 16,135                                          |     | (1,305                                       | )        | 11,404 |   | 1,418 |   |
| Less: Reclassification adjustment for gains  included in net income |     | (790                                            | )        | (1,795                                       | )        | (2,301 | ) | (2,259 | ) |
| Related taxes                                                       |     | 316                                             |     | 718                                          |     | 920 |   | 904 |   |
| Other comprehensive income (loss)                                   |     | (25,092                                         | )        | 895                                          |     | (18,797 | ) | (3,542 | ) |
| Comprehensive income (loss)                                         |     | $                                               | (7,644   | )                                            | $        | 19,981 |   | $ | 15,555 |   | $ | 34,945 |   |

 

*See accompanyingnotes*.

 

5

----

 

COMMUNITY FIRST BANKSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

 
| **(In thousands)  (Unaudited)**                                                    |     | **For the  Six Months Ended  June 30,** |     |
|------------------------------------------------------------------------------------|----------|----------------------------------------------|----------|
|                                                                               | **2004** |                                         | **2003** |   |
| **Cash flows from operating activities:**                                          |     |                                         |     |   |   |
| Net income                                                                         |     | $                                            | 34,352   |   | $ | 38,487 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |     |                                         |     |   |   |
| Provision for loan losses                                                          |     | 4,732                                        |     | 6,974 |   |
| Depreciation                                                                       |     | 8,988                                        |     | 5,869 |   |
| Amortization of intangibles                                                        |     | 1,772                                        |     | 1,671 |   |
| Net amortization of premiums (discounts) on  securities                            |     | 4,088                                        |     | 3,619 |   |
| Net (gain) on sale of available-for-sale  securities                               |     | (2,301                                       | )        | (2,259 | ) |
| Decrease in interest receivable                                                    |     | 327                                          |     | 3,382 |   |
| Decrease in interest payable                                                       |     | (1,210                                       | )        | (1,857 | ) |
| Other - net                                                                        |     | (8,808                                       | )        | (32,172 | ) |
| Net cash provided by operating activities                                          |     | 41,940                                       |     | 23,714 |   |
|                                                                               |     |                                         |     |   |   |
| **Cash flows from investing activities:**                                          |     |                                         |     |   |   |
| Net increase in interest-bearing deposits                                          |     | (4,203                                       | )        | (777 | ) |
| Purchases of available-for-sale securities                                         |     | (483,974                                     | )        | (816,567 | ) |
| Maturities of available-for-sale securities                                        |     | 332,487                                      |     | 714,554 |   |
| Sales of securities, net of gains                                                  |     | 121,488                                      |     | 178,590 |   |
| Net (increase) decrease in loans                                                   |     | (111,456                                     | )        | 143,048 |   |
| Net increase in bank premises and equipment                                        |     | (11,977                                      | )        | (6,328 | ) |
| Net cash (used in) provided by investing  activities                               |     | (157,635                                     | )        | 212,520 |   |
|                                                                               |     |                                         |     |   |   |
| **Cash flows from financing activities:**                                          |     |                                         |     |   |   |
| Net increase in demand deposits, savings  and NOW accounts and savings accounts    |     | 50,144                                       |     | 10,106 |   |
| Net decrease in time accounts                                                      |     | (51,275                                      | )        | (218,604 | ) |
| Net increase in short-term & other  borrowings                                 |     | 135,167                                      |     | 6,083 |   |
| Net decrease in long-term debt                                                     |     | (3,000                                       | )        | (15,000 | ) |
| Purchase of common stock held in treasury                                          |     | (16,303                                      | )        | (18,599 | ) |
| Sale of common stock held in treasury                                              |     | 2,228                                        |     | 4,100 |   |
| Common dividends paid                                                              |     | (17,703                                      | )        | (16,935 | ) |
| Net cash provided by (used in) financing  activities                               |     | 99,258                                       |     | (248,849 | ) |
| Net decrease in cash and cash equivalents                                          |     | (16,437                                      | )        | (12,615 | ) |
| Cash and cash equivalents at beginning of  period                                  |     | 234,076                                      |     | 242,887 |   |
| Cash and cash equivalents at end of period                                         |     | $                                            | 217,639  |   | $ | 230,272 |   |

 

*See accompanyingnotes*.

 

6

----

 

COMMUNITY FIRST BANKSHARES, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

 

June 30, 2004

 

**Note A – BASIS OFPRESENTATION**

 

The accompanying unaudited condensed consolidated financial statements,which include the accounts of Community First Bankshares, Inc. (the “Company”),its wholly-owned data processing, credit origination and insurance agencysubsidiaries, and its wholly-owned subsidiary bank, have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments consisting of only normal recurring adjustmentsnecessary for fair presentation have been made.  Certain amounts in prior periods have been reclassified toconform to current presentations.

 

**EarningsPer Common Share**

 

Basic earnings per common share is calculated by dividing net income bythe weighted average number of shares of common stock outstanding.

 

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

 

**Note B – BUSINESSCOMBINATIONS**

 

On March 16, 2004, the Company and BancWestCorporation announced that they had entered into an agreement and plan ofmerger pursuant to which BancWest would acquire the Company.  Under the merger agreement, BancWest hasagreed to pay $32.25 for each share of Company common stock.  The boards of directors of BancWestCorporation, the Company, and the board of BancWest’s parent, BNP Paribas haveapproved the transaction.  Thetransaction requires approval of Company shareholders and the Board ofGovernors of the Federal Reserve System. Company shareholders approved the transaction at the June 30, 2004Annual Meeting.  Upon approval of theFederal Reserve and the expiration of the required post-approval waitingperiod, the transaction is expected to close during the third quarter of 2004.  Following the transaction, the Company andits subsidiary Community First National Bank will merge into Bank of the West,at which time all Community First branches will become branches of Bank of theWest, a banking subsidiary of BancWest Corporation.

 

On April 1, 2004, the Company, through its indirect insurancesubsidiary, completed the purchase of: (i) Shepard Insurance Agency inEnglewood, Colorado; (ii) an insurance book of business from Western InsuranceAgency of Cody, Wyoming; (iii) and the renewal rights to client accounts of VanGilder Insurance Corporation, Sterling, Colorado.  At the time of the three transactions, the agencies hadapproximately $891,000 in annual aggregate commission revenue.

 

On January 2, 2004, the Company, through its indirect insurancesubsidiary, completed the purchase of Arnold & Arnold, Inc., an insuranceagency in Littleton, Colorado. At the time of the transaction, the agency hadapproximately $250,000 in annual commission revenue.

 

**Note C – ACCOUNTINGCHANGES**

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”),Consolidation of Variable Interest Entities (as revised).  FIN 46 clarifies the application ofAccounting Research Bulletin No. 51,

 

7

----

 

Consolidated Financial Statement, to certain entities in which equityinvestors do not have the characteristics of a controlling financial interestor do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  The recognition andmeasurement provisions of this Interpretation are effective for newly createdvariable interest entities formed after January 31, 2003, and for existingvariable interest entities, until the end of the first interim or annualreporting period beginning after December 15, 2003. The Company adoptedthe accounting provisions of FIN 46 for existing variable interest entities onOctober 1, 2003.  Adoption of FIN46 with regard to existing variable interest entities did not have a materialeffect on the Company’s financial statements. The Company determined that theprovisions of FIN 46 required de-consolidation of subsidiary trusts whichissued Company-obligated mandatorily redeemable preferred securities (“TrustPreferred Securities”).  Prior to theadoption of FIN 46, the Company consolidated the trusts and included the TrustPreferred Securities of the trusts in the mezzanine section of thestatement of financial condition.  Uponadoption of the accounting provisions of FIN 46, the trusts werede-consolidated and the junior subordinated debentures of the Company owned bythe trusts are reflected as long-term debt in the statements of financialcondition.  The Trust PreferredSecurities currently qualify as Tier 1 capital of the Company for regulatorycapital purposes.  On May 6, 2004, theFederal Reserve issued a proposed rule that would retain trust preferredsecurities as Tier 1 Capital, but after a three-year transition period, wouldbe subject to stricter quantitative limits and clearer qualitative standards.As provided by FIN 46, the Company restated its financial statements to reflectthe adoption for all periods presented.

 

In May 2003, the FASB issued Statement No. 150 (“FAS 150”), “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity,” which establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequities.  FAS 150 was effectiveimmediately for financial instruments entered into or modified after May 31,2003, and otherwise was effective at the beginning of the first interim periodbeginning after June 15, 2003. However, in November 2003, the FASB announced that the provisionsas they relate to certain mandatorily redeemable securities, (including theCompany’s Trust Preferred Securities) were delayed indefinitely.

 

**Note D – STOCK BASEDCOMPENSATION**

 

At June 30, 2004, the Company had one stock-basedemployee compensation plan.  The Companyaccounts for this plan under the recognition and measurement principles of APBOpinion No. 25, Accounting for Stock Issued to Employees, and relatedinterpretations.  No stock-basedemployee compensation expense is reflected in net income, as all optionsgranted under this plan have an exercise price equal to the market value of theunderlying common stock on the date of grant. The following table illustrates the effect on net income and earningsper share if the Company had applied the fair value recognition provisions ofFAS 123 to stock-based employee compensation:

 
|                                                                                                                                                                                                                                    |   | **Three  Months  Ended June 30** |   | **Six Months  Ended June 30** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|------------------------------------|--------|
| **(Dollars in thousands, except per  share data)**                                                                                                                                                                                      |   | **2004**                              |   | **2003**                           |   | **2004** |   | **2003** |   |
| Net income, as reported                                                                                                                                                                                                                 |   | $                                     | 17,448 |                               | $      | 19,086 |   | $ | 34,352 |   | $ | 38,487 |   |
| Deduct:                Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (480                                  | )      | (888                               | )      | (1,025 | ) | (1,541 | ) |
|                                                                                                                                                                                                                                    |   |                                  |   |                               |   |   |   |   |   |
| Pro forma net income                                                                                                                                                                                                                    |   | $                                     | 16,968 |                               | $      | 18,198 |   | $ | 33,327 |   | $ | 36,946 |   |
|                                                                                                                                                                                                                                    |   |                                  |   |                               |   |   |   |   |   |
| Earnings per share:                                                                                                                                                                                                                     |   |                                  |   |                               |   |   |   |   |   |
| Basic – as reported                                                                                                                                                                                                                |   | $                                     | 0.47   |                               | $      | 0.50 |   | $ | 0.93 |   | $ | 1.00 |   |
| Basic – pro forma                                                                                                                                                                                                                  |   | $                                     | 0.46   |                               | $      | 0.47 |   | $ | 0.90 |   | $ | 0.96 |   |
|                                                                                                                                                                                                                                    |   |                                  |   |                               |   |   |   |   |   |
| Diluted – as reported                                                                                                                                                                                                              |   | $                                     | 0.47   |                               | $      | 0.49 |   | $ | 0.92 |   | $ | 0.99 |   |
| Diluted – pro forma                                                                                                                                                                                                                |   | $                                     | 0.45   |                               | $      | 0.47 |   | $ | 0.89 |   | $ | 0.95 |   |

 

8

----

 

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

 

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

 
|                    |   | **Three  Months  Ended June 30** |   | **Six Months  Ended June 30** |   |
|-------------------------|--------|---------------------------------------|--------|------------------------------------|--------|
|                    |   | **2004**                              |   | **2003**                           |   | **2004** |   | **2003** |   |
| Risk free interest rate |   | 3.21                                  | %      | 3.67                               | %      | 3.62 | % | 3.58 | % |
| Dividend yield          |   | 3.27                                  | %      | 3.44                               | %      | 3.49 | % | 3.43 | % |
| Price volatility        |   | .220                                  |   | .256                               |   | .252 |   | .256 |   |
| Expected life (years)   |   | 4.50                                  |   | 7.30                               |   | 7.39 |   | 7.08 |   |

 

**Note E – INVESTMENTS**

 

The following is a summary of available-for-salesecurities at June 30, 2004 (in thousands):

 
|                                |   | **Available-for-Sale  Securities** |      |
|-------------------------------------|--------|------------------------------------|-----------|
|                                |   | **Amortized  Cost**                |      | **Gross  Unrealized  Gains** |   | **Gross  Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
| United States Treasury              |   | $                                  | 41,420    |   | $ | 36 |   | $ | 434 |   | $ | 41,022 |   |
| United States Government agencies   |   | 369,615                            |      | 246 |   | 10,577 |   | 359,284 |   |
| Mortgage-backed securities          |   | 1,075,742                          |      | 6,633 |   | 16,338 |   | 1,066,037 |   |
| Collateralized mortgage obligations |   | 1,559                              |      | 14 |   | — |   | 1,573 |   |
| State and political securities      |   | 59,226                             |      | 1,512 |   | 291 |   | 60,447 |   |
| Other securities                    |   | 32,392                             |      | 43 |   | 288 |   | 32,147 |   |
|                                |   | $                                  | 1,579,954 |   | $ | 8,484 |   | $ | 27,928 |   | $ | 1,560,510 |   |

 

The Company had no held-to-maturity securities at June 30, 2004and 2003.

 

Proceeds from the sale of available-for-salesecurities during the three months ended June 30, 2004 and 2003 were$53,467,000 and $116,501,000, respectively. Gross gains of $1,161,000 and $1,795,000 were realized on sales duringthe three months ended June 30, 2004 and 2003, respectively.  Gross losses of $371,000 and $0 wererealized on sales during the three months ended June 30, 2004 and 2003,respectively.  Gains and losses ondisposition of these securities were computed using the specific identificationmethod.

 

Provided below is a summary of available-for-sale securities which werein an unrealized loss position at June 30, 2004.  Approximately 30.3% of the unrealized loss was comprised ofsecurities in a continuous loss position for twelve months or more.  The Company has the ability and intent tohold these securities until such time as the value recovers or the securitiesmature.  Further, the Company believesthe deterioration in value is attributable to changes in market interest ratesand not credit quality of the issuer.

 
|                                |   | **Less than  12 Months** |      | **12 Months  or More** |   | **Total**       |   |
|-------------------------------------|--------|--------------------------|-----------|------------------------|--------|-----------------|--------|
| **(In thousands)**                  |   | **Fair  Value**          |      | **Unrealized  Losses** |   | **Fair  Value** |   | **Unrealized  Losses** |   | **Fair  Value** |   | **Unrealized  Losses** |   |
| United States Treasury              |   | $                        | 29,915    |                   | $      | (400            | )      | $ | 1,031 |   | $ | (34 | ) | $ | 30,946 |   | $ | (434 | ) |
| United States Government agencies   |   | 263,917                  |      | (6,704                 | )      | 48,828          |   | (3,873 | ) | 312,745 |   | (10,477 | ) |
| Mortgage-backed securities          |   | 704,713                  |      | (12,027                | )      | 123,667         |   | (4,311 | ) | 828,380 |   | (16,338 | ) |
| Collateralized mortgage obligations |   | 0                        |      | 0                      |   | 0               |   | 0 |   | 0 |   | 0 |   |
| State and political securities      |   | 8,672                    |      | (291                   | )      | 0               |   | 0 |   | 8,672 |   | (291 | ) |
| Other securities                    |   | 3,022                    |      | (40                    | )      | 4,355           |   | (248 | ) | 7,377 |   | (288 | ) |
| Total                               |   | $                        | 1,010,239 |                   | $      | (19,462         | )      | $ | 177,881 |   | $ | (8,466 | ) | $ | 1,188,120 |   | $ | (27,928 | ) |

 

9

----

 

**Note F – LOANS**

 

The composition of the loan portfolio at June 30,2004 was as follows (in thousands):

 

| Real estate                    |   | $         | 1,608,437 |   |
|--------------------------------|--------|-----------|-----------|--------|
| Real estate construction       |   | 333,797   |      |
| Commercial                     |   | 565,669   |      |
| Consumer and other             |   | 753,264   |      |
| Agriculture                    |   | 169,660   |      |
|                           |   | 3,430,827 |      |
| Less allowance for loan losses |   | (52,762   | )         |
| Net loans                      |   | $         | 3,378,065 |   |

 

**Note G – FINANCIALINSTRUMENTS WITH OFF-BALANCE SHEET RISK**

 

In the normal course of business, the Company is party to financialinstruments with off-balance sheet risk to meet the financing needs of itscustomers and to manage its interest rate risk.  These financial instruments include commitments to extend creditand letters of credit.  Since theconditions requiring the Company to fund letters of credit may not occur andsince customers may not utilize the total loan commitments, the Company expectsits liquidity requirements to be less than the outstanding commitments.  The contract or notional amounts of thesefinancial instruments at June 30, 2004 were as follows (in thousands):

 
| Commitments to extend credit             |   | $      | 715,168 |   |
|------------------------------------------|--------|--------|---------|--------|
| Standby and commercial letters of credit |   | 33,833 |    |

 

**Note H – GUARANTEESOF INDEBTEDNESS OF OTHERS**

 

Standby letters of credit are conditional commitments the Companyissues to guarantee the performance of a customer to a third-party. Theguarantees frequently support public and private borrowing arrangements,including commercial paper issuances, bond financings and other similartransactions. In the event of a customer’s nonperformance, the Company’s creditloss exposure is the same as in any extension of credit, up to the letter’scontractual amount. Management assesses the borrower’s credit to determine thenecessary collateral, which may include marketable securities, real estate,accounts receivable and inventory. The maximum potential future paymentsguaranteed by the Company under standby letter of credit arrangements atJune 30, 2004, is approximately $26 million with a weighted average termof approximately nine months. The fair value of standby letters of credit isnot material to the Company’s financial statements.

 

**Note I – SUBORDINATEDNOTES**

 

At June 30, 2004, the Company had a $40 million unsecuredsubordinated demand note issued in June 2004, with interest payablemonthly.  The note bears interest at therate of LIBOR, plus 75 basis points.  AtJune 30, 2004, the subsidiary bank had a $25 million unsecuredsubordinated term note, maturing on December 22, 2007.  The subsidiary bank note bears interest atthe rate of LIBOR, plus 140 basis points.

 

**Note J – INCOME TAXES**

 

The reconciliation between the provision for income taxes and theamount computed by applying the statutory federal income tax rate was asfollows (in thousands):

 

10

----

 
|                                          |   | **For the  six months ended,  June 30, 2004** |   |
|-----------------------------------------------|--------|----------------------------------------------------|--------|
| 35% of pretax income                          |   | $                                                  | 18,038 |   |
| State income tax, net of federal tax  benefit |   | 1,437                                              |   |
| Tax-exempt interest                           |   | (1,479                                             | )      |
| Bank owned life insurance                     |   | (593                                               | )      |
| Other                                         |   | (219                                               | )      |
| Provision for income taxes                    |   | $                                                  | 17,184 |   |

 

**Note K – JUNIORSUBORDINATED DEBENTURES**

 

The Company has unconditionally guaranteed the obligation of CFBCapital III, under the $60 million, 8.125% junior subordinated debenturesissued March 27, 2002 and the obligation of CFB Capital IV, under the $60million, 7.60% junior subordinated debentures issued March 4, 2003.  The $60 million Capital III securities,which mature April 15, 2032 may be redeemed any time on or afterApril 15, 2007.  The $60 millionCapital IV securities, which mature March 15, 2033, may be redeemed at anytime on or after March 15, 2008. At June 30, 2004, $120 million incapital securities qualified as Tier I capital under capital guidelines of theFederal Reserve.  Refer to Note C –Accounting Changes for a discussion of FIN 46 and its impact on the recordingand reporting of these securities on the Company’s financial statements.

 

**Note L – SUPLEMENTALDISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **Six months ended June 30 (in  thousands)** |   | **2004** |    | **2003** |   |
|---------------------------------------------------|--------|----------|---------|----------|--------|
| Unrealized loss on available-for-sale  securities |   | $        | (31,121 | )        | $      | (5,864 | ) |
|                                                   |        |          |         |          |        |  |  |

 

11

----

 

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

 

**Basis of Presentation**

 

The following is a discussion of the Company’s financial condition asof June 30, 2004 and December 31, 2003, and its results of operationsfor the three and six-month periods ended June 30, 2004 and 2003.

 

**Merger Transaction**

 

On March 16, 2004, the Company and BancWest Corporation announcedthe signing of a definitive agreement in which BancWest would acquire theCompany.  Under terms of the agreement,BancWest will pay $32.25 for each share of Company common stock.  The boards of directors of BancWestCorporation, the Company, and the board of BancWest’s parent, BNP Paribas, haveapproved the transaction.  Companyshareholders approved the transaction at their June 30, 2004 AnnualMeeting.  The transaction requiresapproval of the Board of Governors of the Federal Reserve System.  Upon approval of the Federal Reserve andexpiration of the required post-approval waiting period, the transaction isexpected to close during the third quarter of 2004.  Following the transaction, the Company and its subsidiaryCommunity First National Bank will merge into Bank of the West, a bankingsubsidiary of BancWest Corporation, at which time, all Community First brancheswill become branches of Bank of the West, a banking subsidiary of BancWestCorporation.

 

The merger agreement includes terms and conditions which affect theconduct of the Company’s business until the merger is completed or theagreement is terminated.  Among otherthings, the merger agreement generally requires the Company to carry onbusiness in the ordinary course consistent with past practice and in accordancewith sound banking practices, and to observe in all material respect its legaland contractual obligations.  The mergeragreement generally restricts the ability of the Company to make materialchanges in any aspect of the conduct of its business without the consent ofBancWest, including significant capital expenditures, new material lines of businessor the disposition of assets or incurring of obligations outside of theordinary course of business.  TheCompany is in compliance with its obligations under the merger agreement.

 

**Strategic Initiatives**

 

The Company implemented a centralized credit process, which, completedduring the second quarter, offers a complete range of decision, origination,documentation and collection services to all Company offices through a Fargo,North Dakota location.

 

During 2003, the Company initiated a strategy, which consists of amarket extension model, wherein the Company intends to open additional officesin selected areas of the Company’s current geographic footprint that theCompany believes are growth or emerging growth markets.  The initial market extension office locatedin Lino Lakes, Minnesota was opened on February 16, 2004.  The Company opened a second office inBlaine, Minnesota during the second quarter of 2004 and anticipates twoadditional offices in Lakeville and Inver Grove Heights, Minnesota later in2004 and two offices in Chaska and Chanhassen, Minnesota in early 2005.  All six of these locations are located inthe Twin Cities metropolitan area. Additional offices are expected to be within the 12-state area withinwhich the Company currently operates, including the suburban Minneapolis-St.Paul, Minnesota and Denver, Colorado areas. Services provided at the new locations will be determined by theopportunities identified in that area, and may include business, retail,investment sales, insurance products, mortgage products and wealth management.The addition of these offices is not expected to have a material impact on theCompany’s financial condition or results of operation during 2004.  The Company has announced that it plans toopen 30 new offices by 2007.

 

During the first quarter of 2004, the Company completed the transitionof 16 Regional Financial Centers to Community Financial Centers. RegionalFinancial Centers offer a broad mix of business and retail activity, whileCommunity Financial Centers maintain a retail focus. Transitioning branchesinto the

 

12

----

 

Community Financial Center model is consistent with the Company’slong-term strategic plan to specifically address the client needs of itsindividual markets through highly targeted service offerings.

 

The Company continues to focus on insurance agency acquisitions and thecommitment to providing insurance in each of its markets.  During 2004, through its insurancesubsidiary, the Company has completed four separate transactions which, at thetime of acquisition, had annual commission revenue of approximately $1.1million.  During 2003, through itsinsurance subsidiary, the Company completed the purchase of five insuranceagencies, which at the time of acquisition, had a combined annual commissionrevenue of approximately $1.3 million.

 

# **CriticalAccounting Policies**

 

The Company has established various accounting policies that govern theapplication of accounting principles generally accepted in the United States inthe preparation of the Company’s financial statements. The significantaccounting policies of the Company are described in the footnotes to theconsolidated financial statements included in the Company’s Annual Report onForm 10-K for the year ended December 31, 2003.  Certain accounting policies involve significant judgments andassumptions by management that have a material impact on the carrying value ofcertain assets and liabilities; management considers such accounting policiesto be critical accounting policies.  Thejudgments and assumptions used by management are based on historical experienceand other factors, that 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 that could have a material impact on the carryingvalues of assets and liabilities and the results of operations of theCompany.  The Company believes that itscritical accounting policies include the allowance for loan losses, goodwillimpairment and income taxes.

 

The Company believes the allowance for loan losses is a criticalaccounting policy that requires the most significant judgment and estimatesused in the preparation of its consolidated financial statements. The currentlevel of the allowance for loan losses is a result of management’s assessmentof the risks within the portfolio based on the information revealed in creditevaluation processes. This assessment of risk takes into account thecomposition of the loan portfolio, previous loan experience, current economicconditions and other factors that, in management’s judgment, deserverecognition. An allowance is recorded for individual loan categories based onthe relative risk characteristics of the loan portfolios. Commercial,commercial real estate, construction and agricultural amounts are based on aquarterly review of the individual loans outstanding, including outstandingcommitments to lend. Residential real estate and consumer amounts are based ona quarterly analysis of the performance of the respective portfolios, includinghistorical and expected delinquency and charge-off statistics.  Ultimate losses may vary from currentestimates, and as adjustments become necessary, the allowance for loan lossesis adjusted in the periods in which such losses become known or fail to occur.Actual loan charge-offs and subsequent recoveries are deducted from and addedto the allowance, respectively.  TheCompany’s recorded allowance for loan losses and related provisions for loanlosses could be materially different than the amounts recorded under differentconditions or using different assumptions.

 

The Company believes the annual testing for impairment of goodwill is acritical accounting policy that requires significant judgment and estimates.The Company performed its initial annual impairment test during the fourthquarter of 2003.  The test indicated noimpairment existed, thus no adjustment to the carrying amount of goodwill wasrecorded.  The Company will perform itsannual impairment test during the fourth quarter of each year.  The Company uses a multi-period discountedearnings model to determine if the equity fair value of the underlyingreporting unit is equal to or greater than the current book value.  The model is based on management’s estimateof the Company’s projected earnings stream over the following five years. Thevaluation model includes various management estimates and assumptions and thus,to the extent these estimates and assumptions vary from actual future results,are subject to error and may not be indicative of actual impairment.

 

13

----

 

The Company also believes the estimation of its income tax liability isa critical accounting policy that requires significant judgment and estimateson the part of management.  The Companyestimates its income tax liability based on an estimate of its current anddeferred taxes, which are based on its estimates of taxable income.  The Company makes its estimate based on itsinterpretations of the existing income tax laws as they relate to the Company’sactivities.  Such interpretations coulddiffer from those of the taxing authorities. Periodically, the Company is examinedby various federal and state tax authorities. In the event management’s estimates and assumptions vary from the viewsof the taxing authorities, adjustments to the periodic tax accruals may benecessary.

 

The Company’s accounting policies for the allowance for loan losses,testing for the impairment of goodwill and estimation of its income taxliability are outlined in the Company’s Form 10-K for the year endedDecember 31, 2003.  The Companyfurther believes that there have been no significant changes to the methodologyused in the assessment of these estimates and judgments, since the prior yearend.

 

**Overview**

 

For the three months ended June 30, 2004, net income was $17.4million, a decrease of $1.7 million or 8.9% from the $19.1 million during the 2003period.  Basic earnings per common sharewas $0.47 for the three months ended June 30, 2004 and $0.50 for the threemonths ended June 30, 2003. Diluted earnings per share for the three months ended June 30, 2004was $0.47 compared to $0.49 for the three months ended June 30, 2003.

 

Return on average assets and return on common equity for the threemonths ended June 30, 2004 were 1.27% and 20.11%, respectively, ascompared to the 2003 ratios of 1.36% and 22.45%.  The decrease in return on assets and return on equity isprincipally due to the decrease in net income.

 

For the six months ended June 30, 2004, net income was $34.4million, a decrease of $4.1 million or 10.6% from $38.5 million during the 2003period.  Basic earnings per common sharefor the six months ended June 30, 2004 were $0.93, compared to $1.00 inthe same period in 2003.  Dilutedearnings per share for the six months ended June 30, 2004 were $0.92 ascompared to $0.99 in the same period in 2003. The decrease in earnings per share is due to the decrease in net income.

 

Return on average assets and return on common equity for the six monthsended June 30, 2004 were 1.26% and 19.54%, respectively, as compared tothe 2003 ratios of 1.37% and 20.73%. The decrease in return on assets and return on equity is principally dueto a decrease in net income.

 

**Results of Operations**

 

**NetInterest Income**

 

Net interest income for the three months ended June 30, 2004 was$56.8 million, a decrease of $3.9 million, or 6.4%, from the net interestincome of $60.7 million earned during the 2003 period. The decrease wasprincipally due to the combination of a $8.2 million reduction in interestincome and a $4.3 million decrease in interest expense resulting from thecontinued low interest rate environment. During the second quarter of 2004,loans comprised 68% of total average earning assets, the same as during thecomparable period in 2003. ** **Thenet interest margin of 4.68% for the period ended June 30, 2004 was downfrom 4.87% for the 2003 period.  Thedecline in interest margin is due primarily to a reduced interest spread anddownward repricing of assets which has outpaced the ability to repriceliabilities and a reduced level of loan fees during the second quarter of2004.  This is a reflection of the currentinterest rate levels as well as the competitive environment in which we areoperating as we pursue the generation of quality loan assets.  A shift in earning asset mix, includingincreased loan demand, will be necessary for the Company to show any significantincrease in net interest margin.  Withthe current economic conditions, the Company expects modest growth in loanvolume in the near term.

 

Net interest income for the six months ended June 30, 2004 was$113.1 million, a decrease of $8.8 million, or 7.2%, from the net interestincome of $121.9 million earned during the corresponding 2003

 

14

----

 

period. The decrease was principally due to the combination of a $19.7million reduction in interest income and a $10.9 million decrease in interestexpense resulting from a $200.4 million decrease in average earning assets,coupled with an 20 basis point decrease in net interest margin.  The net interest margin of 4.69% for theperiod ended June 30, 2004 was down from 4.89% for the corresponding 2003period.

 

**Provisionfor Loan Losses**

 

The provision for loan losses for the three months ended June 30,2004 was $2.4 million, a decrease of $1.1 million, or 31.4%, from the $3.5million provision during the 2003 period. Net charge-offs were $2.2 million or..26 percent (annualized) of average loans for the second quarter of 2004,compared to $4.2 million or .49 percent for the second quarter of 2003.  The second quarter 2003 net charge-offsincluded the partial charge-off of two loans, an agri-business loan and acontractor construction credit, which were previously classified asnonperforming.  Nonperforming assets atJune 30, 2004 were $23.5 million, a decrease of $8.7 million, or 27.0%from $32.2 million at June 30, 2003**.** The decrease in nonperforming assets is attributed primarily to twocredits included in the 2003 period. Nonperforming assets comprised .42 percent and .58 percent of total assetsat June 30, 2004 and June 30, 2003, respectively.

 

The provision for loan losses for the six months ended June 30,2004 was $4.7 million, a decrease of $2.3 million, or 32.9%, from the $7.0million provision during the corresponding 2003 period.

 

**Noninterest Income**

 

Noninterest income for the three months ended June 30, 2004 was$23.2 million, an increase of $131,000, or 0.6%, from the 2003 level of $23.1million. Insurance commissions, which continue to demonstrate strong growth,were $3.8 million for the 2004 quarter, an increase of $473,000 or 14.1% fromthe $3.4 million recorded in the 2003 quarter. Insurance commission growth ispartially due to the addition of five agencies during 2003, which at the timeof acquisition had estimated annual commission revenue of $1.3 million.  During the second quarter of 2004, theCompany, through its insurance subsidiary, completed three insuranceacquisitions, which at the time of acquisition had approximately $891,000 inannual commission revenue.  Commissionson the sale of investment securities were $2.4 million for the quarter ended June 30,2004 which represented an increase of $108,000, or 4.7% from $2.3 million forthe quarter ended June 30, 2003. In line with a 1.4% decrease in average deposits during the three monthsended June 30, 2004, compared to the 2003 period, service charges ondeposit accounts decreased $275,000 or 2.8%, to $9.7 million as ofJune 30, 2004, compared to $10.0 million during the 2003 period. Noninterest income for the three-month period ended June 30, 2003, included$1.0 million more in net gains on the sale of investment securities, thanduring the 2004 period.  These gainswere recognized, in part to offset approximately $530,000 of prepaymentpenalties incurred to prepay long-term Federal Home Loan bank advances during2003. Other income increased $1.1 million or 33.3% from $3.3 million in 2003 to$4.4 million in 2004.  The 2004 periodincluded a $664,000 adjustment to the carrying value of fixed assets.

 

Noninterest income for the six months ended June 30, 2004 was$46.1 million, an increase of $1.1 million, or 2.4%, from the 2003 level of$45.0 million.  Investment salescommissions increased $1.2 million, or 27.3%. Insurance commissions increased $1.1 million or 14.9%.  These increases were offset in part by a$398,000, or 2.1% decrease in service charges on deposit accounts.

 

**NoninterestExpense**

 

Noninterest expense for the three months ended June 30, 2004 was$51.2 million, a decrease of $786,000, or 1.5%, from the level of $52.0 millionduring the 2003 period.  The decreasereflects the Company’s continued focus on expense control.  Salary and benefits for the three monthsended June 30, 2004 was $27.1 million, a decrease of $1.1 million or 3.9%from $28.2 million at June 30, 2003, partially attributed to a lower levelof insurance premiums due to a reduction in the funding requirements of theCompany’s health care plan.  Inaddition, operating efficiencies related to strategic initiatives

 

15

----

 

implemented during 2003 and a slight reduction in staff levelsresulting from the announced acquisition by BancWest have contributed to alower expense level.  Net occupancyincreased $113,000 or 1.3% from $8.4 million during the three-month periodended June 30, 2003 to $8.5 million for the three-month period endedJune 30, 2004.  During the secondquarter of 2004, the Company incurred $925,000 of acquisition and integrationexpense, including $376,000 in legal and accounting fees, $335,000 in printingand distribution cost associated with rescheduling the annual shareholdersmeeting and $214,000 of other expenses, all related to the announcedacquisition of the Company by BancWest.

 

Noninterest expense for the six months ended June 30, 2004 was$103.0 million, an increase of $277,000, or 0.3%, from the level of $102.7million during the 2003 period.  The2003 period included a $530,000 early payment penalty, wherein the Companyelected to pay off various Federal Home Loan Bank borrowings, which carriedhigher than market interest rates.

 

**Provisionfor Income Taxes**

 

The provision for income taxes for the three months ended June 30,2004 was $8.9 million, a decrease of $282,000, or 3.1%, from the 2003 level of$9.2 million. The decrease was due principally to the decrease in pre-tax netincome.  The effective tax rate for thethree months ended June 30, 2004 was 33.90%, as compared to 32.60% for thethree months ended June 30, 2003.

 

The provision for income taxes for the six months ended June 30,2004 was $17.2 million, a decrease of $1.5 million, or 8.0%, from the 2003level of $18.7 million.  The decreasewas due primarily to the decrease in pre-tax net income.

 

**Financial Condition**

 

**Loans**

 

Total loans were $3.4 billion at June 30, 2004, an increase of$107 million, or 3.2% from $3.3 billion at December 31, 2003.  The increase reflects improved quality loanopportunities. The Company continues to stress disciplined loan underwritingand strong credit administration.  Loanvolumes are below our targets due to pre-payments, aggressive competition andlimited new quality loan opportunities throughout the marketplace.

 

The Company continues to experience strong activity in select marketsand loan segments, specifically indirect consumer and commercial real estateportfolios.  Some markets continue towitness strong commercial and single-family home activity. Growth in theconsumer loan portfolio is due to an expanded network of automobile dealersserved by the Company’s centralized indirect lending function.  The Company expects continued growth in thisportfolio.

 

The following table presents the Company’s balance of each majorcategory of loans:

 
|                           |   | **June 30,  2004**      |       | **December 31,  2003** |   |
|--------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                           |   | **Amount**                   |       | **Percent of  Total Loans** |   | **Amount** |   | **Percent of  Total Loans** |   |
|                           |   | **(Dollars  in Thousands )** | ** ** |
| Loan category:                 |   |                         |       |                        |   |   |   |   |   |
| Real estate                    |   | $                            | 1,608,437  |                        | 46.9   | % | $ | 1,562,443 |   | 47.0 | % |
| Real estate construction       |   | 333,797                      |       | 9.7                         | %      | 321,323 |   | 9.7 | % |
| Commercial                     |   | 565,669                      |       | 16.5                        | %      | 582,861 |   | 17.5 | % |
| Consumer and other             |   | 753,264                      |       | 22.0                        | %      | 678,457 |   | 20.4 | % |
| Agricultural                   |   | 169,660                      |       | 4.9                         | %      | 178,488 |   | 5.4 | % |
| Total loans                    |   | 3,430,827                    |       | 100.0                       | %      | 3,323,572 |   | 100.0 | % |
| Less allowance for loan losses |   | (52,762                      | )          |                        |   | (52,231 | ) |   |   |
| Total                          |   | $                            | 3,378,065  |                        |   |   | $ | 3,271,341 |   |   |   |

 

16

----

 

#### **Nonperforming Assets**

 

At June 30, 2004, nonperforming assets were $23.5 million, adecrease of $2.8 million or 10.6% from the $26.3 million level atDecember 31, 2003. At June 30, 2004, nonperforming loans as a percentof total loans were .56%, down from the December 31, 2003 level of .63%.OREO was $4.1 million at June 30, 2004, a decrease of $1.4 million, or25.5% from $5.5 million at December 31, 2003.

 

Nonperforming assets of the Company are summarized in the followingtable:

 
| **(Dollars in thousands)**                              |   | **June 30,  2004** |   | **December 31,  2003** |   |
|---------------------------------------------------------|--------|-------------------------|--------|-----------------------------|--------|
| Loans                                                   |   |                    |   |                        |   |
| Nonaccrual loans                                        |   | $                       | 19,177 |                        | $      | 20,630 |   |
| Restructured loans                                      |   | 170                     |   | 188                         |   |
| Nonperforming loans                                     |   | 19,347                  |   | 20,818                      |   |
| Other real estate owned                                 |   | 4,112                   |   | 5,461                       |   |
| Nonperforming assets                                    |   | $                       | 23,459 |                        | $      | 26,279 |   |
| Loans 90 days or more past due but still  accruing      |   | $                       | 3,819  |                        | $      | 3,220 |   |
| Nonperforming loans as a percentage of  total loans     |   | 0.56                    | %      | 0.63                        | %      |
| Nonperforming assets as a percentage of  total assets   |   | 0.42                    | %      | 0.48                        | %      |
| Nonperforming assets as a percentage of  loans and OREO |   | 0.68                    | %      | 0.79                        | %      |

 

#### **Allowance for Loan Losses**

 

At June 30, 2004, the allowance for loan losses was $52.8 million,a decrease of $1.4 million from the June 30, 2003 balance of $54.2million.  Net charge-offs during thethree months ended June 30, 2004 were $2.2 million, a decrease of $2.0million or 47.6% from the $4.2 million during the three months endedJune 30, 2003. The decrease in net charge-offs was due principally to thepartial charge-off during the second quarter of 2003 of two specific credits,an agri-business loan and a construction contractor credit. Management believesthe current allowance for loan losses is appropriate based on management’sassessment of losses inherent in the remaining nonperforming asset portfolioand the reduction in total loans outstanding.

 

At June 30, 2004, the allowance for loan losses as a percentage oftotal loans was 1.54%, a decrease from the June 30, 2003 level of 1.58%.

 

The following table sets forth the Company’s allowance for loan lossesfor the quarter ended::

 
|                                                     |   | **June 30,** |      |
|----------------------------------------------------------|--------|-------------------|-----------|
| **(Dollars in thousands)**                               |   | **2004**          |      | **2003** |   |
| Balance at beginning of period                           |   | $                 | 52,558    |   | $ | 54,895 |   |
| Charge-offs:                                             |   |              |      |   |   |
| Real estate                                              |   | 369               |      | 309 |   |
| Real estate construction                                 |   | 338               |      | 17 |   |
| Commercial                                               |   | 625               |      | 1,782 |   |
| Consumer and other                                       |   | 1,898             |      | 2,315 |   |
| Agricultural                                             |   | 53                |      | 1,288 |   |
| Total charge-offs                                        |   | 3,283             |      | 5,711 |   |
| Recoveries:                                              |   |              |      |   |   |
| Real estate                                              |   | 44                |      | 35 |   |
| Real estate construction                                 |   | —            |      | — |   |
| Commercial                                               |   | 169               |      | 326 |   |
| Consumer and other                                       |   | 893               |      | 1,153 |   |
| Agricultural                                             |   | 14                |      | 2 |   |
| Total recoveries                                         |   | 1,120             |      | 1,516 |   |
| Net charge-offs                                          |   | 2,163             |      | 4,195 |   |
| Provision charged to operations                          |   | 2,367             |      | 3,487 |   |
| Balance at end of period                                 |   | $                 | 52,762    |   | $ | 54,187 |   |
| Allowance as a percentage of total loans                 |   | 1.54              | %         | 1.58 | % |
| Annualized net charge-offs to average loans  outstanding |   | 0.26              | %         | 0.49 | % |
|                                                     |   |              |      |   |   |
| Total Loans                                              |   | $                 | 3,430,827 |   | $ | 3,425,902 |   |
| Average Loans                                            |   | 3,364,033         |      | 3,456,376 |   |

 

17

----

 

#### **Investments**

 

The investment portfolio, consisting of available-for-sale securities,was $1.6 billion at June 30, 2004, and December 31, 2003.  At June 30, 2004, the investmentportfolio represented 28.0% of total assets, compared with 28.6% atDecember 31, 2003.  In addition toinvestment securities, the Company had investments in interest-bearing depositsof $7.5 million at June 30, 2004, an increase of $4.2 million, or 127.3%from $3.3 million at December 31, 2003. The unrealized loss on available-for-sale securities of $19.4 million atJune 30, 2004 represents a $31.1 million decrease from the unrealized gainon available-for-sale securities at December 31, 2003.  The decrease in the market value of thecurrent investment portfolio is attributed principally to the increase inmarket interest rates during the first six months of 2004.

 

**Deposits**

 

Total deposits were $4.4 billion at June 30, 2004 andDecember 31, 2003.  Noninterest-bearingdeposits at June 30, 2004 were $442 million, a decrease of $6.0 million,or 1.3%, from $448 million at December 31, 2003.  The slight decrease in total deposits was principally the resultof continued low interest rate environment and the Company’s focus onmaintaining interest bearing liabilities at interest rate levels thatcontribute to a strong net interest margin. The Company’s core deposits whichare all deposits, excluding time accounts over $100,000, as a percent of totaldeposits were 88.8% and 88.6% as of June 30, 2004 and December 31,2003, respectively.  Interest-bearingdeposits were $3.9 billion at June 30, 2004 and at December 31, 2003.

 

**Borrowings**

 

Federal funds purchased and securities sold under agreements torepurchase were $472.4 million as of June 30, 2004, an increase of $55.7million, or 13.4% from $416.7 million at December 31, 2003.

 

Short-term borrowings of the Company were $155.0 million as ofJune 30, 2004, an increase of $79.4 million, or 105.0%, from $75.6 millionas of December 31, 2003.  Theincrease reflects the Company’s strategy of funding short-term liquidity needsin the most cost-effective manner.  TheCompany borrowed $40 million on an unsecured basis from a non-affiliated bankto repay in part $50 million of 7.30% subordinated notes that the Companyissued in 1997.  Short-term borrowingsinclude borrowing arrangements wherein the original maturity is less than oneyear.

 

Long-term debt of the Company was $169.2 million as of June 30,2004, a decrease of $3 million, or 1.7%, from the $172.2 million as ofDecember 31, 2003.

 

**Asset and LiabilityManagement**

 

*LIQUIDITY MANAGEMENT*

 

Liquidity management is an effort of management to provide a continuingflow of funds to meet its financial commitments, customer borrowing needs anddeposit withdrawal requirements. The liquidity position of the Company and itssubsidiary bank is monitored by the Asset and Liability Management Committee(“ALCO”) of the Company. The largest category of assets representing a readysource of liquidity for the Company is its short-term financial instruments,which include federal funds sold, interest-bearing deposits at other financialinstitutions, U.S. Treasury securities and other securities maturing within oneyear. Liquidity is also provided through the regularly scheduled maturities ofassets. The investment portfolio contains a number of high quality issues withvarying maturities and regular principal payments. Maturities in the loanportfolio also provide a steady flow of funds, and strict adherence to the

 

18

----

 

credit policies of the Company helps ensure the collectability of theseloans. The liquidity position of the Company is also greatly enhanced by itssignificant base of core deposits.

 

In the normal course of business, the Company is party to financialinstruments with off-balance-sheet risk. Because many of the commitments areexpected to expire without being drawn upon, total commitment amounts do notnecessarily represent the Company’s future liquidity requirements. Theseinstruments are further described in Note H - Financial Instruments WithOff-Balance Sheet Risk.

 

The liquidity ratio is one measure of a bank’s ability to meet itscurrent obligations and is defined as the percentage of liquid assets todeposits. Liquid assets include cash and due from banks, unpledged investmentsecurities with maturities of less than one year and federal funds sold. AtJune 30, 2004 and December 31, 2003, the liquidity ratio was 5.03%and 5.53%, respectively. The level of loans maturing within one year greatlyadd to the Company’s liquidity position. Including loans maturing within oneyear, he liquidity ratio was 17.58% and 21.87%, respectively, for the sameperiods.  The decrease in both liquidityratios is principally due to the $16 million reduction in cash and the $167million reduction in the volume of loans maturing in less than one year.

 

The Company has revolving lines of credit with its primary lenders,which provide for borrowing up to $85 million. These lines could be utilized tofinance stock repurchase activity, underwrite commercial paper and fund otheroperating expenses. At June 30, 2004, the Company had no balance incommercial paper outstanding.

 

The Company maintains available lines of federal funds borrowings atthe Federal Reserve Bank of Minneapolis. The Company’s subsidiary bank has theability to borrow an aggregate of $587 million in federal funds from fourteennonaffiliated financial institutions. At June 30, 2004, the Company had$208 million outstanding on these lines.

 

The Company also has a $136 million line of credit from the FederalReserve under its Primary Credit program, which permits financial institutionswith collateralized lines of credit at the Federal Reserve to borrow funds on ashort-term basis.  Funds are priced at aspread above the federal funds target rate and are available on an as neededbasis.  At June 30, 2004, there wasno balance owing on this line.

 

Additionally, the Company’s subsidiary bank is a member of the FederalHome Loan Bank (“FHLB”) System. As part of membership, the Company’s subsidiarybank purchased a modest amount of stock of FHLB and obtained advance lines ofcredit that represent an aggregate of $439 million in additional fundingcapacity.  At June 30, 2004, theCompany had $136 million outstanding on this line.

 

The $50 million, 7.30% Subordinated Notes issued in June 1997 werepaid on June 30, 2004, principally from proceeds of a $40 millionunsecured subordinated demand loan from a non-affiliate bank bearing interestat the rate of LIBOR, plus 75 basis points.

 

INTEREST RATE SENSITIVITY

 

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

 

ALCO attempts to structure the Company’s balance sheet to provide foran approximately equal amount of rate-sensitive assets and rate-sensitiveliabilities. In addition to facilitating liquidity needs, this strategy assistsmanagement in maintaining relative stability in net interest income despiteunexpected fluctuations in interest rates. ALCO uses three methods formeasuring and managing interest rate risk: Repricing Mismatch Analysis, BalanceSheet Simulation Modeling and Equity Fair Value Modeling.

 

19

----

 

Repricing Mismatch Analysis

 

Management performs a Repricing Mismatch Analysis (“Gap Analysis”)which represents a point in time net position of assets, liabilities andoff-balance sheet instruments subject to repricing in specified time periods.Gap Analysis is performed quarterly. However, management believes Gap Analysis alone does not accuratelymeasure the magnitude of changes in net interest income because changes ininterest rates do not impact all categories of assets, liabilities andoff-balance sheet instruments equally or simultaneously.

 

Balance Sheet Simulation Modeling

 

Balance Sheet Simulation Modeling allows management to analyze theshort-term (12 months or less) impact of interest rate fluctuations onprojected earnings.  Using financialsimulation computer software, management has built a model that projects anumber of interest rate scenarios.  Eachscenario captures the impact of contractual obligations embedded in theCompany’s assets and liabilities.  Thesecontractual obligations include maturities, loan and security payments,repricing dates, interest rate caps, and interest rate floors.  The projection results also measure theimpact of various management assumptions including loan and deposit volumetargets, security and loan prepayments, pricing spreads and implied repricingcaps and floors on variable rate non-maturity deposits. Management completes anearnings simulation quarterly.  Thesimulation process is the Company’s primary interest rate risk management tool.

 

While management strives to use the best assumptions possible in thesimulation process, all assumptions are uncertain by definition.  Due to numerous market factors, and thepotential for changes in management strategy over time, actual results may deviatefrom model projections.

 

Based on the results of the simulation model as of June 30, 2004,management would expect net interest income to decrease 2.19%, assuming a 100basis point increase in market rates. This exposure exceeds the ALCO guidelines of 1.40%. Assuming ratesdropped 100 basis points, management would expect net interest income todecline 2.88%.  This decline exceeds theCompany’s internal ALCO guidelines of 1.40%.

 

Several factors mitigate the Company’s projected exposure to rising anddeclining rates.  First, management-establishedrisk guidelines are measured against instantaneous rate shocks.  Gradual rate shifts over several monthsreduce the level of projected risk under both rising and declining ratescenarios.  Also, the current modelassumes that there is no room to downprice non-maturity transactiondeposits.  Management has effectivelyfloored these liability accounts at current levels in its model.  As an abundance of caution, managementbelieves this is an appropriate assumption for risk management purposes, but managementbelieves there would be the potential for some downpricing on this sizeablevolume of liabilities.

 

In addition to earnings at risk, the simulation process is also used asa tool in liquidity and capital management. Management models the impact of interest rate fluctuations on theanticipated cash flows from various financial instruments, ultimately measuringthe impact that changing rates will have on the Company’s liquidityprofile.  Management also reviews theimplications of strategies that impact asset mix and capital levels, measuringseveral key regulatory capital ratios under various interest rate scenarios.

 

Equity Fair Value Modeling

 

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

 

20

----

 

Similar to the simulation process, fair value results are heavilydriven by management assumptions.  Whilemanagement strives to use the best assumptions possible, due to numerous marketfactors, actual results may deviate from model projections.

 

Based on the model results from June 30, 2004, management wouldexpect equity fair value to decline 6.40% assuming a 100 basis point increasein rates.  This exposure is within theALCO established guidelines of 10.00%. Assuming rates declined 100 basis points, the model projects a increasein equity fair value of 1.10%.  Thisexposure is also within the ALCO established policy guidelines of 10.00%.

 

The Company does not engage in the speculative use of derivativefinancial instruments.

 

**CapitalManagement**

 

Shareholders’ equity was $346 million at June 30, 2004, a decreaseof $16 million, or 4.4% from $362 million at December 31, 2003.  Unrealized gain or loss onavailable-for-sale securities, net of taxes, decreased $18.8 million, or 264.8%from $7.1 million at December 31, 2003 to $(11.7) million at June 30,2004.  At June 30, 2004, theCompany’s Tier 1 capital, total risk-based capital and leverage ratios were9.64%, 11.27%, and 6.91%, respectively, compared to minimum required levels of4%, 8% and 3%, respectively (subject to change and the discretion of regulatoryauthorities to impose higher standards in individual cases).  Ratios of 6%, 10%, and 5%, respectively, aregenerally regarded as well capitalized ratios. At June 30, 2004, the Company had risk-weighted assets of $4.0billion.  The June 30, 2004 capitalratios include both the $60 million 7.60% junior subordinated debentures issuedMarch 4, 2003 and the $60 million 8.125% junior subordinated debenturesissued March 27, 2002.  Capital andleverage ratios remain substantially within minimum regulatory capital limitsfor a well-capitalized institution.

 

**Stock Repurchases**

 

The Company did not repurchase any shares of its common stock duringthe second quarter of 2004, as the Company has suspended its repurchase programdue to the merger with BancWest.  Duringthe first quarter of 2004, the Company repurchased 582,500 shares of its commonstock at prices ranging from $27.28 to $28.33. The Company has 1,783,000 sharesthat remain authorized for repurchase under existing authorizations.  Since the first quarter of 2000, the Companyhas repurchased a total of 14.9 million shares of its common stock, whichrepresents approximately 30% of the shares that were outstanding as ofMarch 2000.  For more informationon the share repurchase program, see Part II, Item 2.

 

**Off-Balance SheetArrangements, Contractual Obligations and Other Commercial Commitments**

 

**Off-BalanceSheet Arrangements**

 

In the normal course of business, the Company enters into variousbusiness arrangements wherein it may be required by the terms of thearrangement to guarantee or invest additional capital as a result of investmentopportunities and financial performance.

 

***Mortgage Loan JointVenture:*** The Company, through its subsidiary bank, and Wells Fargo & Company,through its mortgage subsidiary, formed a joint venture mortgage company forthe purpose of providing mortgage origination, documentation, servicing processand support for substantially all the residential mortgage business of theCompany.  The Company has 50% ownershipand 50% voting rights over the affairs of the joint venture and accordinglyrecords its investment and its continuing share of the income or loss of thejoint venture under the equity method of accounting.  As a 50% holder of the joint venture, the Company may be requiredto increase its investment in the joint venture in the event additionalinvestment capital were required.  As ofJune 30, 2004, the Company’s investment in the joint venture totaled$495,000.

 

***Federal ReserveStock:***  TheCompany’s affiliate bank is required by Federal banking regulations to

 

21

----

 

be a member of the Federal Reserve System.  As a member of the Federal Reserve System, the Company may berequired to maintain stock ownership in the Federal Reserve System in an amountequal to six percent of the affiliate bank’s paid-in capital and surplus.  The affiliate bank is required and currentlyhas purchased an amount of common stock equal to three percent, or one-half thebank’s subscription amount.  At thediscretion of the Federal Reserve System, the bank may be required to increaseits investment to an amount equal to the full six percent of its total paid-incapital and surplus.  At June 30,2004, the Company’s investment in the Federal Reserve System totaled $7.9million.

 

**ContractualObligations and Other Commercial Commitments:**

 

In the normal course of business, the Company arranges financingthrough entering into debt arrangements with various creditors for the purposeof financing specific assets or providing a funding source.  The contract or notional amounts of thesefinancing arrangements at June 30, 2004, as well as the maturity of thesecommitments are (in thousands):

 
|                                            |   | **Payment  Due by Period** |       |
|-------------------------------------------------|--------|----------------------------|------------|
| **Contractual Obligations**                     |   | **Total**                  |       | **Less than  1 Year** |   | **1-3  Years** |   | **3-5  Years** |   | **More than  5 Years** |   |
| **(in thousands)**                              |   |                       | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Capital lease obligations                       |   | $                          | 5,375      |   | $ | 1,479 |   | $ | 2,958 |   | $ | 902 |   | $ | 36 |   |
| Operating leases                                |   | 9,718                      |       | 2,317 |   | 3,474 |   | 2,062 |   | 1,865 |   |
| Demand deposits                                 |   | 442,076                    |       | 442,076 |   | — |   | — |   | — |   |
| Savings deposits and interest-bearing  checking |   | 2,607,772                  |       | 2,607,772 |   | — |   | — |   | — |   |
| Time deposits                                   |   | 1,338,231                  |       | 982,054 |   | 287,761 |   | 68,005 |   | 411 |   |
| Federal funds purchased                         |   | 208,000                    |       | 208,000 |   | — |   | — |   | — |   |
| Securities sold under agreement to  repurchase  |   | 264,433                    |       | 264,433 |   | — |   | — |   | — |   |
| Short term debt                                 |   | 155,000                    |       | 155,000 |   | — |   | — |   | — |   |
| Long term debt                                  |   | 169,211                    |       | 500 |   | 8,000 |   | 37,000 |   | 123,711 |   |
| Lines of credit                                 |   | 715,168                    |       | 483,308 |   | 90,518 |   | 36,279 |   | 105,063 |   |
| Standby letters of credit                       |   | 26,121                     |       | 19,061 |   | 6,094 |   | 785 |   | 181 |   |
| Commercial letters of Credit                    |   | 7,712                      |       | 7,500 |   | 109 |   | 103 |   | 0 |   |
| Total                                           |   | $                          | 5,948,817  |   | $ | 5,173,500 |   | $ | 398,914 |   | $ | 145,136 |   | $ | 231,267 |   |

 

***Long Term Debt:***  At June 30, 2004, the Company had longterm debt outstanding of $169.2 million. The subsidiary bank had Federal HomeLoan Bank advances totaling $20.5 million outstanding at June 30, 2004.

 

Also at June 30, 2004, the subsidiary bank had a $25 millionunsecured subordinated term note payable to a non-affiliated bank, with amaturity date of December 22, 2007. The subsidiary bank note payable is subject to covenants that includeremaining in compliance with all regulatory agency requirements, providingtimely financial information and providing access to certain Companyrecords.  The Company believes it is infull compliance with all long-term debt covenants at June 30, 2004.

 

At June 30, 2004, the Company has unconditionally guaranteed theobligation of CFB Capital IV, under the $60 million, 7.60% junior subordinateddebentures issued March 4, 2003, and the obligation of CFB Capital III,under the $60 million, 8.125% junior subordinated debentures issuedMarch 27, 2002. The $60 million Capital IV securities, which matureMarch 15, 2033, may be redeemed any time on or after March 15,2008.  The $60 million Capital IIIsecurities, which mature April 15, 2032, may be redeemed any time on orafter April 15, 2007.

 

***Capital LeaseObligations:*** The Company frequently acquires the rights to equipment used in theoperation of the Company by entering into long-term capital leases.  At June 30, 2004, the Company wasliable for the payment of lease schedules associated with the acquisition ofequipment and premises totaling $4,681,000, exclusive of finance charges.  The effect of capital leases recorded atJune 30, 2004

 

22

----

 

is summarized in the table above.

 

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

 

***Commitments toextend credit***are legally binding and have fixedexpiration dates or other termination clauses. The Company’s exposure to creditloss on commitments to extend credit, in the event of nonperformance by thecounterparty, is represented by the contractual amounts of the commitments. TheCompany monitors its credit risk for commitments to extend credit by applyingthe same credit policies in making commitments as it does for loans and byobtaining collateral to secure commitments based on management’s creditassessment of the counterparty. Collateral held by the Company may include marketablesecurities, receivables, inventory, agricultural commodities, equipment andreal estate. Because many of the commitments are expected to expire withoutbeing drawn upon, total commitment amounts do not necessarily represent theCompany’s future liquidity requirements. In addition, the Company also offersvarious consumer credit line products to its customers that are cancelable uponnotification by the Company, which are included above in commitments to extendcredit.

 

***Standby letters ofcredit*** are conditional commitments issued by theCompany to guarantee the financial performance of a customer to a third party.Those guarantees are primarily issued to support public and private borrowingarrangements.

 

***Commercial lettersof credit*** are issued by the Company on behalf ofcustomers to ensure payments of amounts owed or collection of amountsreceivable in connection with trade transactions. The Company’s exposure tocredit loss in the event of nonperformance by the counterparty is thecontractual amount of the letter of credit and represents the same exposure asthat involved in extending loans.

 

**Forward-looking Statements**

 

**This Form 10-Q contains forward-looking statements underthe Private Securities Litigation Reform Act of 1995 that are subject to certainrisks and uncertainties that could cause actual results to differ materiallyfrom historical earnings and those presently anticipated or projected. TheCompany wishes to caution readers not to place undue reliance on any suchforward-looking statements, which speak only as of the date made.  Forward-looking statements can be identifiedby the fact that they do not relate strictly to historical or current facts.They often include words such as “believe,” “expect,” “anticipate,” “intend,”“plan,” “estimate,” or words of similar meaning, or future or conditional verbssuch as “will,” “would,” “should,” “could” or “may.” Factors that could causeactual results to differ from the results discussed in the forward-lookingstatements include, but are not limited to: risk of loans and investments, including dependence on local economicconditions; competition for the company’s customers from other providers offinancial services; possible adverse effects of changes in interest rates;balance sheet and critical ratio risks related to the share repurchase program;risks related to the company’s acquisition and market extension strategy,including risks of adversely changing results of operations and factorsaffecting the company’s ability to consummate further acquisitions or extendits market, and other risks detailed in the company’s filings with theSecurities and Exchange Commission including the risks identified in theCompany’s Form 10-K filed with the Commission on March 12, 2004, all ofwhich are difficult to predict and many of which are beyond the control of theCompany.**

 

23

----

 

**Item 3. Quantitative**and Qualitative Disclosure AboutMarket Risk

 

There have been no material changes in market risk exposures thataffect the quantitative and qualitative disclosures presented as ofDecember 31, 2003 in the Company’s Form 10-K and Annual Report.

 

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

 

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

 

**PART II - OTHER INFORMATION**

 

Item 1.             Legal Proceedings:

 

None.

 

Item 2.             Changes in Securities, Use ofProceeds and Issuer Repurchase of Securities:

 

The following table provides information about purchases by the Companyduring the quarter ended June 30, 2004 of Common Stock.

 

Company Purchases of Equity Securities

 
| **Period**      |   | **Total  Number  of Shares  Purchased** |   | **Average  Price Paid  Per Share** |   | **Total  Number of  Shares Purchased  as Part of Plan** |   | **Maximum  Number of Shares  Yet to Purchase** |   |
|-----------------|--------|-----------------------------------------|--------|------------------------------------|--------|---------------------------------------------------------|--------|------------------------------------------------|--------|
| April 2004 |   | 0                                       |   | n/a                                |   | 1,217,000                                               |   | 1,782,900                                      |   |
| May 2004        |   | 0                                       |   | n/a                                |   | 1,217,100                                               |   | 1,782,900                                      |   |
| June 2004  |   | 0                                       |   | n/a                                |   | 1,217,100                                               |   | 1,782,900                                      |   |

 

(1)              The Company did not repurchase any sharesof common stock during the quarter pursuant to the repurchase program that theCompany announced on April 24, 2003 (the “Program”).

 

(2)              The Company’s board of directors approvedthe repurchase by the Company of up to an aggregate of 3,000,000 shares ofcommon stock, without limitation to aggregate value, pursuant to theProgram.  Unless terminated earlier byresolution of the board of directors, the Program will expire when the Companyhas repurchased all shares authorized for repurchase thereafter.

 

(3)              At the present time, the Company does notintend to make further purchases under this Program.  The Company has suspended its repurchase program due to themerger with BancWest.  The mergeragreement contains a covenant prohibiting the Company from repurchasing itscommon stock.

 

On June 30, 2004, the Company redeemed its $50 million 7.30%subordinated notes. The Company funded the redemption in part from the proceedsof a short-term debt arrangement.

 

24

----

 

Item 3.             Defaultsupon Senior Securities:

 

None.

 

Item 4.             Submission of Matters to a Vote ofSecurity Holders:

 

The Company held its Annual Meeting of Shareholders on June 30,2004.  The shareholders took thefollowing actions:

 

(i)                         The shareholders ratified andapproved the Company’s acquisition by BancWest Corporation.  25,628,594 votes were cast for theresolution; 811,242 were cast against the resolution; 6,023,763 brokernon-votes were cast; and 108,913 votes abstained.

 

(ii)                      The shareholders elected elevendirectors to hold office until the next Annual Meeting of Shareholders or untiltheir successors are elected.  Theshareholders present in person or by proxy cast the following numbers of votesin connection with the election of directors, resulting in the election of allof the nominees.

 
|               |   | **Votes For** |   | **Votes  Withheld** |   |
|--------------------|--------|---------------|--------|---------------------|--------|
| Mark A. Anderson   |   | 31,876,747    |   | 695,763             |   |
| Patrick Delaney    |   | 29,989,018    |   | 2,583,492           |   |
| John H. Flittie    |   | 31,603,133    |   | 969,377             |   |
| Thomas Gallagher   |   | 31,619,833    |   | 952,677             |   |
| Darrell G. Knudson |   | 31,896,025    |   | 676,485             |   |
| Dawn R. Elm        |   | 31,891,340    |   | 681,170             |   |
| Rahn Porter        |   | 31,617,029    |   | 955,481             |   |
| Marilyn Seymann    |   | 31,853,929    |   | 718,581             |   |
| Harvey L. Wollman  |   | 31,889,578    |   | 682,932             |   |
| Lauris N. Molbert  |   | 31,609,373    |   | 963,137             |   |
| Karen M. Meyer     |   | 31,894,492    |   | 678,018             |   |

 

(iii)                   The shareholders ratified andapproved the election of Ernst & Young LLP as the independent publicaccountants for the Company for the current fiscal year.  31,614,726 votes were cast for theresolution; 896,597 votes were cast against the resolution; and 61,187 votesabstained.

 

Item 5.             Other Information:

 

On March 16, 2004, the Company and BancWest Corporation announcedthey had signed a definitive agreement wherein the Company would be acquired byBancWest Corporation, issued a press release and filed a current report on Form8-K with the Commission.

 

25

----

 

Item 6.             Exhibits and Reports on Form 8-K:

 

(a)                      Exhibits:

 

10.1               Harris Bank Line of Credit Agreement and$40 million demand note dated June 29, 2004.

 

12.1               Statement re computation of ratios.

 

31.1               Certification of principal executiveofficer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules13a-14 and 15-d-14 of the Exchange Act)

 

31.2               Certification of principal financialofficer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules13a-14 and 15-d-14 of the Exchange Act).

 

32                        Certifications pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350).

 

(b)                     Reports on Form 8-K:

 

During the quarter, theCompany furnished to or filed with the Commission the following reports on Form8-K.

 

On April 15, 2004, the Company furnished a current report underItems 9 and 12 on Form 8-K related to a press release dated April 15, 2004announcing the Company’s results for the quarter ended March 31, 2004.

 

26

----

 

**SIGNATURES**

 

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

 
|                            | **COMMUNITY FIRST  BANKSHARES, INC.**                |
|---------------------------------|------------------------------------------------------|
|                            |                                                 |
|                            |                                                 |
| Date:  August 6, 2004 | /s/ Mark A. Anderson                                 |   |
|                            | Mark A. Anderson                                     |
|                            | President and Chief Executive Officer                |
|                            |                                                 |
|                            |                                                 |
| Date:  August 6, 2004 | /s/ Craig A. Weiss                                   |   |
|                            | Craig A. Weiss                                       |
|                            | Executive Vice President and Chief Financial Officer |

 

27

----