**Exhibit 13**

 

| **MANAGEMENT’S  DISCUSSION AND ANALYSIS** |   | **COMMUNITY FIRST BANKSHARES, INC.** |
|------------------------------------------------|--------|--------------------------------------|

 

**BASIS OFPRESENTATION**

 

The following represents management’s discussion and analysis ofCommunity First Bankshares, Inc.’s (the “Company”) financial condition as ofDecember 31, 2002 and 2001, and its results of operations for the years endedDecember 31, 2002, 2001 and 2000. This discussion should be read in conjunctionwith the consolidated financial statements and related footnotes and the fiveyear summary of selected financial data. The information has been restated toreflect significant mergers accounted for as a pooling of interests as if theyhad occurred at the beginning of the first period presented.

 

The Company is a bankholding company which at the end of 2002, conducted banking operations in 136communities located throughout the Midwest, Inter-mountain and Southwestregions. The Company’s community banks provide a full range of banking servicesthrough 51 Regional Financial Centers and 28 Community Financial Centers. Inaddition to its primary emphasis on commercial and consumer banking services,the Company offers trust, mortgage, insurance and non-deposit investmentproducts and services. The Company’s principal source of income is interestincome from loans and investment securities, including held-to-maturity andavailable-for-sale securities. Additional sources of income include fees on deposit accounts and other non-interest incomeincluding commissions from the sale of insurance and non-depositinvestment products and services. Among the key drivers of the Company’sprofitability has been the interest rate environment, from both a depositpricing and a loan pricing perspective. Profitability is impacted by theCompany’s ability to find risk appropriate investment opportunities; theCompany’s ability to maintain and grow its deposit base in the face ofhistorically low interest rates; increasing competition from other providers offinancial services and the Company’s ability to control its noninterest expense,while at the same time keeping pace with necessary technological improvements.Other key factors affecting the Companyinclude national, regional and local economic conditions that affectdemand for loans and impact the rate of loan defaults.

 

**CRITICALACCOUNTING POLICIES**

 

The Company has established various accounting policies which governthe application of accounting principles generally accepted in the UnitedStates in the preparation of the Company’s financial statements. Thesignificant accounting policies of the Company are described in the footnotesto the consolidated financial statements. Certain accounting policies involvesignificant judgments and assumptions by management which have a materialimpact on the carrying value of certain assets and liabilities; managementconsiders such accounting policies to be critical accounting policies. Thejudgments and assumptions used by management are based on historical experienceand other factors, which are believed to be reasonable under the circumstances.Because of the nature of the judgments and assumptions made by management,actual results could differ from these judgments and estimates which could havea material impact on the carrying values of assets and liabilities and theresults of operations of the Company. The Company believes that its criticalaccounting policies include the allowance for loan losses, goodwill impairmentand income taxes.

 

The Company believes theallowance for loan losses is a critical accounting policy that requires the mostsignificant judgment and estimates used in preparation of its consolidatedfinancial statements. Refer to the section entitled Allowance for Loan Losses,Note 1, Significant Accounting Polices and Note 9, Financial Instruments withOff-Balance Sheet Risk and Concentration of Credit Risk for a detaileddescription of the Company’s estimation process and methodology related to theallowance for loan losses and for the Company’s exposure to concentrations ofcredit. The Company’s recorded allowance for loan losses and related provisionsfor loan losses could be materially different than the amounts recorded underdifferent conditions or using different assumptions.

 

The Company believes theannual testing for impairment of goodwill is a critical accounting policy thatrequires significant judgment and estimates. The Company performed its initial impairment testduring the first quarter of 2002 and its annual impairment test during the fourth quarter of 2002. Both tests indicatedno impairment existed, thus no adjustment to the carrying cost of goodwill wasrecorded. The Company uses a multi-period discounted earnings model todetermine if the equity fair value of the underlying reporting unit is equal toor greater than the current book value. The model is based on management’sestimate of the Company’s projected earnings stream over the following fiveyears. The 2002 impairment tests indicated the equity fair value exceeded thecurrent book value, thus eliminating the need to perform the second step, measuringimpairment, as no impairment was noted. The valuation model includes variousmanagement estimates and assumptions and thus, to the extent these estimatesand assumptions vary from actual future results, are subject to error and maynot be indicative of future impairment tests.

 

TheCompany also believes the estimation of its income tax liabilityis a critical accounting policy that requires significant judgment andestimates on the part of management. The Company estimates its income taxliability based on an estimate of its current and deferred taxes based on itsestimates 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 could differ from those of the taxingauthorities. Periodically, the Company is examined by various federal and statetax authorities. In the event management’s estimates and assumptions vary fromthe views of the taxing authorities, adjustments to the periodic tax accrualsmay be necessary.

** **

**OVERVIEW**

 

**GENERAL**

For the year ended December 31, 2002, theCompany reported net income of $79.2 million, an increase of $14.1 million, or21.7%, from the $65.1 million earned during 2001. Diluted earnings per sharewere $1.97, compared to $1.57 in 2001. Return on average assets was 1.40% for2002, compared with 1.11% for 2001. Return on average common shareholders’equity for 2002 and 2001 was 21.76% and 18.66%, respectively. The increase inreturn on assets is principally due to the combination of an increase in netincome and a $219 million decrease in average assets, while the increase inreturn on equity is principally due to an increase in net income. Earnings pershare for 2002 included a positive full-year cumulative impact of 12 cents pershare, due to the accounting standards change ending the amortization ofgoodwill.

 

For the year endedDecember 31, 2001, the Company reported net income of $65.1 million, a decreaseof $6.5 million, or 9.1%, from the $71.6 million earned during 2000. Dilutedearnings per share were $1.57, compared to $1.54 in 2000. Return on averageassets was 1.11% for 2001, compared with 1.16% for 2000. Return on averagecommon shareholders’ equity for 2001 and 2000 was

 

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18.66% and 19.90%, respectively. Thedecrease in return on assets and return on equity is principally due to areduction in net income, caused primarily by a one-time after-tax chargerecorded in the first quarter of 2001 related to the impact of a $5.1 millionrestructuring charge and a $1.5 million special loan loss provision to maintainthe current loan loss reserve level, after the Company charged off its largestnonperforming asset.

 

Total assets were $5.8billion at December 31, 2002 and 2001, respectively.This stability was principally due to the Company’s balance sheetmanagement strategy in the current economic environment. Management wasreluctant to pursue asset growth at the risk of compromising asset quality, butrather, chose to focus on improving profitability through the pursuit ofincreased non-interest income, including commissions on the sale of insuranceand non-deposit investment products.

 

**STRATEGIC INITIATIVESAND RELATED RESTRUCTURING CHARGE**

During the first quarter of 2001, theCompany announced a series of strategic initiatives designed to improvecustomer service and strengthen its position as a provider of diversifiedfinancial services. Initiatives included a redefinition of the Company’sdelivery model and the sale or closure of banking offices.

 

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

 

Inconjunction with the restructuring of the banking network during2001, the Company sold 13 offices and closed eight additional offices. Officessold included nine Arizona offices, three Nebraska offices and one office inNorth Dakota. Four of the eight offices closed were located in communitieswhere the Company maintains one or more additional offices, thus the Companycontinues to serve those customers from existing locations.

 

The initiatives resultedin changes in staffing needs within the Company. To accommodate these staffingneeds, the Company made available an early-out program that was accepted by 21eligible management personnel.

 

As a result of theseinitiatives, the Company recorded a one-time after-tax restructuring chargetotaling $5.1 million, or $0.12 per share, during the first quarter of 2001.The restructuring charge included approximately $3.1 million related to assetwrite-down, data processing, and legal and accounting fees. Additionally theCompany recorded an after-tax expense of approximately $2.0 million to providefor severance-related costs associated with the early-out andreduction-in-force programs.

 

As of December 31, 2002,all expected expenditures associated with the restructuring have beenrecognized and recorded.

 

In preparation for thesale of nine Arizona offices, the Company charged off its largestnon-performing asset, a credit facility that originated in the Arizona bankprior to the Company’s acquisition of the Arizona operation in 1997. Tomaintain the current loan loss reserve level, the Company recorded a specialloan loss provision equal to the amount of the charge-off. The specialprovision of $2.4 million, or approximately $0.04 per share after tax, wasrecorded during the first quarter of 2001. During 2002, $1.2 million of thischarge-off was recovered.

 

Under the redesigneddelivery structure, the Company implemented a centralized consumer creditprocess. When fully operational, the centralized structure will offer acomplete range of decision, origination, documentation and collection servicesto all Company offices through a Fargo, North Dakota, location. As of December 31, 2002, all indirect consumerunderwriting, administration, documentation and collection has beencentralized. Centralization of the underwriting, administration, documentationand collection of direct consumer loans, as well as documentation of commercialand agricultural loans, continues on schedule. Completion of the loan processingcentralization process is planned for the fourth quarter of 2003.

 

During 2001, the Companycompleted the consolidation of its South Dakota state chartered bank into itsnational chartered bank. As a result of the consolidation, all banking operationsare conducted under a single national charter.

 

**MORTGAGE LOAN JOINTVENTURE**

In June 2001, the Company, through itssubsidiary bank, and Wells Fargo & Company formed a joint venture mortgagecompany named Community First Mortgage,LLC. This joint venture mortgage company provides mortgage origination,documentation, servicing process and support for substantially all of theresidential mortgage business of the Company. The joint venture provides theCompany access to competitive technology and the benefits of futuretechnological developments, as well as expertise in the processing and loanservicing of mortgage products. The alliance allows the Company to expand itsmortgage origination business through access to a broader range of mortgageproducts, while improving efficiency and reducing operating, credit and capitalmarket risks. The Company has 50% ownership and 50% voting rights over theaffairs of the joint venture and records its investment and its continuingshare of the income or loss of the joint venture under the equity method. As aresult of the formation of the joint venture, mortgage originations areeffected through the joint venture rather than through the Company.

 

**STOCK REPURCHASE PLAN**

Since April 2000, the Company hasconducted common stock repurchase programs providing for the systematicrepurchase of the Company’s common stock. Under these programs, the shares are purchased primarily on the open market, withtiming depending upon market conditions. The program provides theCompany with an alternative opportunity for capital utilization. In addition,the shares acquired can be used for the issuance of common stock upon exerciseof stock options, under the Company’s compensation plans and for otherpurposes, including business combinations. As of December 31, 2002, the Companyhad repurchased 12.7 million shares of common stock under these plans, atprices ranging from $15.25 to $27.90. The Company repurchased 1.9 million and2.0 million shares of common stock during 2002 and 2001, respectively. As ofDecember 31, 2002, 1.1 million shares remain available for repurchase.

 

**RESULTSOF OPERATIONS**

 

**NETINTEREST INCOME**

The principal source of the Company’searnings is net interest income, the difference between total interest incomeon earning assets such as loans and investments and interest paid on depositsand other interest-bearing liabilities. The net interest margin is net interestincome, on a tax-equivalent basis, expressed as a percentage

 

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of average earning assets. The margin isaffected by volume and mix of earning assets and interest-bearing liabilities,the level of interest-free funding sources, interest rate environment andincome tax rates. As discussed later, management actively monitors its interestrate sensitivity and seeks an approximately equal amount of rate sensitiveassets and rate sensitive liabilities to minimize the impact of changes in theinterest rate environment.

 

The following tablepresents the Company’s average balance sheets, interest earned or paid and therelated yields and rates on major categories of the Company’s earning assetsand interest-bearing liabilities on a tax-equivalent basis for the periodsindicated:

 
| **Years Ended December 31**                      |   | **2002**             |      | **2001**     |    | **2000**                        |   |
|--------------------------------------------------|--------|----------------------|-----------|--------------|---------|---------------------------------|--------|
| **(Dollars  in thousands)**                      |   | **Average  Balance** |      | **Interest** |    | **Interest  Yields and  Rates** |   | **Average  Balance** |   | **Interest** |   | **Interest  Yields and  Rates** |   | **Average  Balance** |   | **Interest** |   | **Interest  Yields and  Rates** |   |
| **ASSETS**                                       |   |                 |      |         |    |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                      |   | $                    | 3,689,015 |         | $       | 281,768                         |   | 7.64 | % | $ | 3,785,553 |   | $ | 341,287 |   | 9.02 | % | $ | 3,706,144 |   | $ | 357,034 |   | 9.63 | % |
| Investment  securities(2)                        |   | 1,481,634            |      | 84,315       |    | 5.69                            | %      | 1,561,896 |   | 100,602 |   | 6.44 | % | 1,909,479 |   | 128,490 |   | 6.73 | % |
| Other  earning assets                            |   | 12,424               |      | 201          |    | 1.62                            | %      | 11,923 |   | 391 |   | 3.28 | % | 12,375 |   | 628 |   | 5.07 | % |
| Total  earning assets                            |   | 5,183,073            |      | 366,284      |    | 7.07                            | %      | 5,359,372 |   | 442,280 |   | 8.25 | % | 5,627,998 |   | 486,152 |   | 8.64 | % |
| Noninterest-earning  assets                      |   | 457,868              |      |         |    |                            |   | 500,240 |   |   |   |   |   | 551,194 |   |   |   |   |   |
| Total  assets                                    |   | $                    | 5,640,941 |         |    |                            |   |   | $ | 5,859,612 |   |   |   |   |   | $ | 6,179,192 |   |   |   |   |   |
|                                             |   |                 |      |         |    |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**    |   |                 |      |         |    |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  checking                       |   | 924,102              |      | 5,869        |    | 0.64                            | %      | 872,642 |   | 9,943 |   | 1.14 | % | 845,079 |   | 13,437 |   | 1.59 | % |
| Savings  deposits                                |   | 923,098              |      | 8,331        |    | 0.90                            | %      | 971,915 |   | 19,428 |   | 2.00 | % | 1,059,736 |   | 35,673 |   | 3.37 | % |
| Time  deposits                                   |   | 1,818,771            |      | 61,372       |    | 3.37                            | %      | 2,053,548 |   | 109,171 |   | 5.32 | % | 2,132,327 |   | 120,171 |   | 5.64 | % |
| Short-term  borrowings                           |   | 339,193              |      | 6,340        |    | 1.87                            | %      | 361,563 |   | 15,001 |   | 4.15 | % | 568,540 |   | 34,303 |   | 6.03 | % |
| Long-term  borrowings                            |   | 134,991              |      | 8,016        |    | 5.94                            | %      | 133,030 |   | 8,677 |   | 6.52 | % | 95,814 |   | 6,697 |   | 6.99 | % |
| Total  interest-bearing liabilities              |   | 4,140,155            |      | 89,928       |    | 2.17                            | %      | 4,392,698 |   | 162,220 |   | 3.69 | % | 4,701,496 |   | 210,281 |   | 4.47 | % |
| Demand  deposits                                 |   | 948,353              |      |         |    |                            |   | 921,855 |   |   |   |   |   | 931,556 |   |   |   |   |   |
| Noninterest-bearing  liabilities                 |   | 62,594               |      |         |    |                            |   | 76,383 |   |   |   |   |   | 66,138 |   |   |   |   |   |
| Trust  preferred securities                      |   | 125,753              |      |         |    |                            |   | 120,000 |   |   |   |   |   | 120,000 |   |   |   |   |   |
| Common  shareholders’ equity                |   | 364,086              |      |         |    |                            |   | 348,676 |   |   |   |   |   | 360,002 |   |   |   |   |   |
|                                             |   | 1,500,786            |      |         |    |                            |   | 1,466,914 |   |   |   |   |   | 1,477,696 |   |   |   |   |   |
| Total  liabilities and shareholders’ equity |   | $                    | 5,640,941 |         |    |                            |   |   | $ | 5,859,612 |   |   |   |   |   | $ | 6,179,192 |   |   |   |   |   |
| Net  interest income                             |   |                 |      | $            | 276,356 |                            |   |   |   |   | $ | 280,060 |   |   |   |   |   | $ | 275,871 |   |   |   |
| Net  interest spread                             |   |                 |      |         |    | 4.90                            | %      |   |   |   |   | 4.56 | % |   |   |   |   | 4.17 | % |
| Net  interest margin                             |   |                 |      |         |    | 5.33                            | %      |   |   |   |   | 5.23 | % |   |   |   |   | 4.90 | % |

 

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*(1)** **Includesnonaccrual loans and loan fees.*

*(2)** **Interestyields on loans and investments are presented on a tax-equivalent basis toreflect the tax-exempt nature of certain assets. The incremental tax rateapplied was 35%.*

 

The following tablepresents the components of changes in net interest income by volume and rate ona tax-equivalent basis. The net change attributable to the combined impact ofvolume and rate has been allocated solely to the change in volume:

 
| **(In thousands)**                              |   | **2002 COMPARED TO 2001** |    | **2001  COMPARED TO 2000** |   |
|-------------------------------------------------|--------|---------------------------|---------|----------------------------|--------|
|                                            |   | **Volume**                |    | **Rate**                   |   | **Total** |   | **Volume** |   | **Rate** |   | **Total** |   |
| Interest income:                                |   |                      |    |                       |   |   |   |   |   |   |   |   |   |
| Loans(1)                                        |   | $                         | (8,703  | )                          | $      | (50,816 | ) | $ | (59,519 | ) | $ | 7,650 |   | $ | (23,397 | ) | $ | (15,747 | ) |
| Investment  securities(1)                       |   | (5,170                    | )       | (11,117                    | )      | (16,287 | ) | (23,389 | ) | (4,499 | ) | (27,888 | ) |
| Other earning assets                            |   | 16                        |    | (206                       | )      | (190 | ) | (23 | ) | (214 | ) | (237 | ) |
| Total interest income                           |   | $                         | (13,857 | )                          | $      | (62,139 | ) | $ | (75,996 | ) | $ | (15,762 | ) | $ | (28,110 | ) | $ | (43,872 | ) |
| Interest expense:                               |   |                      |    |                       |   |   |   |   |   |   |   |   |   |
| Savings deposits and  interest-bearing checking |   | $                         | (389    | )                          | $      | (14,782 | ) | $ | (15,171 | ) | $ | (2,518 | ) | $ | (17,221 | ) | $ | (19,739 | ) |
| Time deposits                                   |   | (12,481                   | )       | (35,318                    | )      | (47,799 | ) | (4,440 | ) | (6,560 | ) | (11,000 | ) |
| Short-term borrowings                           |   | (928                      | )       | (7,733                     | )      | (8,661 | ) | (12,488 | ) | (6,814 | ) | (19,302 | ) |
| Long-term borrowings                            |   | 127                       |    | (788                       | )      | (661 | ) | 2,601 |   | (621 | ) | 1,980 |   |
| Total interest expense                          |   | $                         | (13,671 | )                          | $      | (58,621 | ) | $ | (72,292 | ) | $ | (16,845 | ) | $ | (31,216 | ) | $ | (48,061 | ) |
| Increase (decrease) in  net interest income     |   | $                         | (186    | )                          | $      | (3,518 | ) | $ | (3,704 | ) | $ | 1,083 |   | $ | 3,106 |   | $ | 4,189 |   |

 

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*(1)** **Feeson loans have been included in interest on loans. Interest income is reportedon a tax-equivalent basis. The incremental tax rate applied was 35%.*

 

Net interest income on atax-equivalent basis in 2002 was $276.4 million, a $3.7 million decrease from2001. The decrease was primarily due to a 3.3% decrease in earning assetspartially offset by a 10 basis point increase in the net interest margin. Thedecrease in earning assets reflect management’s reluctance to compromise itsloan quality standards in the current economic environment which presents fewerquality loan growth opportunities. The Company was able to acquire core depositsat lower rates due to the relatively

 

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unattractiveinvestment alternatives for depositors. Average investmentsecurities in 2002 were $80 million less than in 2001. Average loans in 2002decreased $97 million from the 2001 average. Net interest income on atax-equivalent basis in 2001 was $280.1 million, a $4.2 million increase from2000. The increase was primarily due to a 4.8% reduction in earning assetspartially offset by a 33 basis point increase in the net interest margin.

 

The net interest marginwas 5.33%, 5.23%, and 4.90% in 2002, 2001 and 2000, respectively. This increasein margin was due to a change in the mix of earning assets, including a 118basis point decrease in rates on earning assets and a 152 basis point decreasein interest bearing liabilities. However, average earning assets decreased $176million, from 2001 to 2002. Average loans to average earning assets was 71.2%in 2002 compared to 70.6% in 2001 and to 65.9%in 2000. Management anticipates continued downward pressure on theCompany’s net interest margin as a result of the current unprecedented interestrate environment. The sluggish economy makes growth of the loan portfoliochallenging. Record low interest rates, mortgage-backed security prepaymentsand fewer high yielding reinvestment opportunities will contribute to marginpressure.

 

**PROVISION FOR LOANLOSSES**

Annual fluctuations in the provision forloan losses result from management’s regular assessment of the adequacy of theallowance for loan losses. The provisionfor loan losses for 2002 was $13.3 million, a decrease of $4.2 millionor 24.0%, from $17.5 million during 2001. The decrease in the loan lossprovision was principally due to the Company’s credit experience as reflectedin a decrease in net charge-offs. Charge-offs in 2001 included a $2.4 millioncharge-off of the Company’s largest non-performing asset, an Arizona-basedcredit facility of which $1.2 million was recovered in 2002. The amount of theloan loss provision to be recorded in future periods will depend onmanagement’s assessment of the adequacy of the allowance for loan losses inrelation to the entire loan portfolio. The provision for loan losses for 2001was $17.5 million, an increase of $1.7 million, or 10.8% from the 2000provision of $15.8 million. The increase was primarily due to the $2.4 millioncharge-off on the Arizona-based credit facility in 2001.

 

**NONINTEREST INCOME**

The Company continues to expandnoninterest income associated with the Company’s community banking operations.The primary sources of noninterest income consist of service charges on depositaccounts, insurance commissions, fees from the sale of investment products andfees for trust services. Management is working to increase the contribution ofnoninterest income to operating results byincreasing the delivery of financial products and services, includingtrust services, insurance policy sales and security sales through a third partyprovider of standardized securities products.

 

Noninterest income for2002 was $81.3 million, an increase of $1.7 million, or 2.1%, from the $79.6million earned in 2001. The increase was principally due to an increase incommissions from the sale of investment securities in 2002 to $9.5 million from$6.6 million in 2001, an increase of $2.9 million, or 43.9%, and resulted inpart from the Company’s sales campaigns during 2002, which focused on providingnon-deposit investment alternatives to meet customer needs. Insurancecommissions increased to $13.8 million in 2002, from $12.5 million in 2001, anincrease of $1.3 million, or 10.4%. Service charges on deposit accountsdecreased to $40.1 million in 2002, from $41.9 million in 2001, a decrease of$1.8 million, or 4.3%. Trust revenue decreased to $5.4 million in 2002, from$5.7 million in 2001, a decrease of $256,000 or 4.5%. Net gains on the sale ofinvestment securities were $431,000 less in 2002 than in 2001.

 

Noninterest income for2001 was $79.6 million, an increase of $1.7 million, or 2.2%, from the $77.9 millionearned in 2000. The increase was principally due to an increase of $1.9 millionor 17.9% in insurance commissions to $12.5 million, from $10.6 million in 2000,and an increase of $739,000 in net gains onsales of investment securities, to $804,000 in 2001 from $65,000 in2000. Service charges on deposit accounts decreased $342,000, or 0.8%, from$42.2 million in 2000 to $41.9 million in2001. Commissions from the sale of investment securities decreased to$6.6 million in 2001 from $6.8 million in 2000,a decrease of $161,000 or 2.4%, due primarily to a softer market forinvestment products. Trust revenue decreased $150,000, or 2.6%, to $5.7 millionin 2001 from $5.8 million in 2000.

 

**NONINTEREST EXPENSE**

Noninterest expense consists of salariesand benefits, occupancy, equipment and other expenses such as legal and postagenecessary for the operation of the Company. Management is committed toimproving the quality of service while controlling such costs through improvedefficiency and consolidation of certain activities to achieve economies ofscale.

 

The following tablepresents the components of noninterest expense for the periods indicated:

 
| **Years Ended December 31 (In thousands)**                                          |   | **2002** |    | **2001** |   | **2000** |   |
|-------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Salaries and employee  benefits                                                     |   | $        | 113,994 |     | $      | 115,743  |   | $ | 110,024 |   |
| Net occupancy                                                                       |   | 32,832   |    | 31,593   |   | 31,941   |   |
| FDIC insurance                                                                      |   | 800      |    | 915      |   | 1,039    |   |
| Legal and accounting                                                                |   | 3,138    |    | 3,764    |   | 3,874    |   |
| Other professional  services                                                        |   | 4,340    |    | 4,634    |   | 4,415    |   |
| Advertising                                                                         |   | 3,983    |    | 5,037    |   | 4,545    |   |
| Telephone                                                                           |   | 5,575    |    | 5,633    |   | 5,203    |   |
| Restructuring charge                                                                |   | —   |    | 7,656    |   | —   |   |
| Data processing                                                                     |   | 7,210    |    | 6,940    |   | 7,200    |   |
| Company-obligated  mandatorily redeemable preferred securities of subsidiary trusts |   | 10,405   |    | 10,273   |   | 10,245   |   |
| Amortization of  intangibles                                                        |   | 3,318    |    | 9,928    |   | 10,481   |   |
| Other                                                                               |   | 31,960   |    | 33,200   |   | 33,007   |   |
| Total noninterest  expense                                                          |   | $        | 217,555 |     | $      | 235,316  |   | $ | 221,974 |   |

 

Noninterest expensedecreased $17.7 million to $217.6 million in 2002. The decrease was principallydue to a $6.6 million, or 66.7% decrease in the amortization of intangiblesfrom $9.9 million in 2001 to $3.3 million in 2002, due to the accountingstandards change ending the amortization of goodwill. During 2001, a $7.7million restructuring charge was recorded as a result of strategic initiativesimplemented in 2001. Salary and employee benefits decreased to $114.0 millionin 2002, from $115.7 million in 2001, a decrease of $1.7 million or 1.5%. Thedecrease was attributed to a reduction in the number of employees during 2002,in response partially to the strategic initiatives announced in 2001.

 

Noninterest expenseincreased $13.3 million to $235.3 million in 2001, compared to 2000. Theincrease was principally due to an increase in salary and employee benefits andthe restructuring charge. Salaries and employee benefits increased to $115.7million in 2001, from $110.0 million in 2000, an increase of $5.7 million, or5.2%. Additionally, the Company incurred a non-recurring charge of $7.7 millionas a result of a series of strategic initiatives designed to improve customerservice and strengthen the Company’s position as a provider of diversifiedfinancial services.

 

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**PROVISION FORINCOME TAXES**

The Company records a provision forincome taxes currently payable and for taxes payable in the future because ofdifferences in the timing of recognition of certain items for financialstatement and income tax purposes. The effective income tax rate differs fromthe statutory rate primarily due to tax-exempt income from loans andinvestments and state income taxes. The 2002 effective tax rate is similar tothe Company’s anticipated effective tax rates in future periods. The effectivetax rate was 33.3%, 34.0%, and 33.3% for 2002, 2001 and 2000, respectively.

 

**FINANCIALCONDITION**

 

**INVESTMENTOF FUNDS**

 

**Loans**

At December 31, 2002, total loans were$3.6 billion as compared to $3.7 billion at December 31, 2001. The Companyexperienced a $108 million decrease in loans in the Company’s existing markets,and the planned amortization of $51 million in purchased loans which continuedto be repaid in accordance with the original loan agreements during 2002.

 

During2000, the Company elected to discontinue active solicitationof purchased loans. Many of these assets have been originated by selectedMidwestern regional banks and national leasing and finance companies, withwhich the Company has had ongoing relationships. The Company’s portfolio ofpurchased loan assets was $35 million at December 31, 2002, compared to $86million at December 31, 2001. It is anticipated that the purchased loan assetvolume will continue to decrease during 2003.

 

***General***.The Company’s loan mix remained relatively constant from 2001 to 2002. Realestate loans continued to be the largest category of loans, representing 56.1%of the total loan portfolio.

 

***Real Estate and Real Estate Construction Loans***.A significant portion of the Company’s real estate loan portfolio consists ofresidential real estate first mortgages that have been underwritten and documentedto meet secondary mortgage requirements. Substantially all of the Company’sreal estate loans are based in the Company’s primary market area. As ofDecember 31, 2002, $680 million, or 33.9%, of the Company’s real estate loanportfolio consisted of residential real estate loans, including home equityloans, $154 million, or 7.7%, were secured by farmland, $734 million, or 36.5%,represented commercial and other real estate loans and $440 million, or 21.9%,represented construction loans. Residential real estate loans decreased $86million from 2001 to 2002, due partially to the impact of the Company’sstrategic initiative wherein residential mortgages are now originatedprincipally through Community First Mortgage, LLC.

 

***Commercial Loans***.Loans in this category include loans to retail, wholesale, manufacturing andservice businesses, including agricultural service businesses and the Company’spurchased loan asset portfolio. Commercial loans are underwritten based on thefinancial strength and repayment ability of the borrower, as well as thecollateral securing the loans.

 

***Consumer and Other Loans***.Loans classified as consumer and other loans include automobile, personalloans, consumer lines of credit and overdrafts. The consumer loan portfolioalso includes dealer-generated installment contracts for consumer goods,including automobiles and major homeappliances. The majority of these indirect loans are installment loanswith fixed interest rates, which, as a result of the Company’s strategicinitiative to implement a centralized consumer credit process, were originatedand processed through a centralized process.

 

***Agricultural Loans***.Agricultural loans are made principally to farmers and ranchers. The Companyprovides short-term credit for operating loans and intermediate-term loans formachinery purchases and other improvements.

 

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

 
|                            |   | **2002**   |      | **2001**                     |   | **2000**   |   | **1999**                     |   | **1998**   |   |
|---------------------------------|--------|------------|-----------|------------------------------|--------|------------|--------|------------------------------|--------|------------|--------|
| **(Dollars  in thousands)**     |   | **Amount** |      | **Percent  of Total  Loans** |   | **Amount** |   | **Percent  of Total  Loans** |   | **Amount** |   | **Percent  of Total  Loans** |   | **Amount** |   | **Percent  of Total  Loans** |   | **Amount** |   | **Percent  of Total  Loans** | ** ** |
| Loan  category:                 |   |       |      |                         |   |       |   |                         |   |       |   |   |   |   |   |   |   |   |   |   |   |
| Real  estate                    |   | $          | 1,568,710 |                         | 43.8   | %          | $      | 1,515,118                    |   | 40.5       | %      | $ | 1,458,494 |   | 39.0 | % | $ | 1,319,678 |   | 35.8 | % | $ | 1,291,287 |   | 36.5 | % |
| Real  estate construction       |   | 439,536    |      | 12.3                         | %      | 519,031    |   | 13.9                         | %      | 466,616    |   | 12.5 | % | 434,924 |   | 11.8 | % | 366,277 |   | 10.4 | % |
| Commercial                      |   | 723,530    |      | 20.2                         | %      | 824,318    |   | 22.1                         | %      | 872,824    |   | 23.4 | % | 994,624 |   | 26.9 | % | 966,404 |   | 27.3 | % |
| Consumer  and other             |   | 625,429    |      | 17.5                         | %      | 627,034    |   | 16.8                         | %      | 686,064    |   | 18.3 | % | 681,423 |   | 18.5 | % | 618,530 |   | 17.5 | % |
| Agricultural                    |   | 220,688    |      | 6.2                          | %      | 251,191    |   | 6.7                          | %      | 254,204    |   | 6.8 | % | 259,704 |   | 7.0 | % | 295,039 |   | 8.3 | % |
| Total  loans                    |   | $          | 3,577,893 |                         | 100.0  | %          | $      | 3,736,692                    |   | 100.0      | %      | $ | 3,738,202 |   | 100.0 | % | $ | 3,690,353 |   | 100.0 | % | $ | 3,537,537 |   | 100.0 | % |
| Less  allowance for loan losses |   | (56,156    | )         |                         |   | (54,991    | )      |                         |   | (52,168    | )      |   |   | (48,878 | ) |   |   | (51,860 | ) |   |   |
| Total                           |   | $          | 3,521,737 |                         |   |       | $      | 3,681,701                    |   |       |   | $ | 3,686,034 |   |   |   | $ | 3,641,475 |   |   |   | $ | 3,485,677 |   |   |   |

 

**Investments**

The Company supplements the quality ofits loan portfolio by maintaining what itconsiders to be a high quality investment portfolio oriented toward U.S.Treasury, U.S. Government agency and government guaranteed mortgage-backedsecurities. The investment portfolio also provides the opportunity to structurematurities and repricing timetables in a flexible manner and to meet applicablerequirements for pledging securities. Mortgage-backed securities, which areprincipally fixed and adjustable rate pools, are used as tools in managing the Company’s interest rateexposure and enhancing its net interest margin.

 

5

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The following table sets forth the composition of theCompany’s available-for-sale securities portfolio at estimated fair value as ofthe dates indicated:

 
|                                 |   | **Estimated  Fair Value at December 31,** |      |
|--------------------------------------|--------|-------------------------------------------|-----------|
| **(In  thousands)**                  |   | **2002**                                  |      | **2001** |   | **2000** |   |
| U.S. Treasury                        |   | $                                         | 53,468    |   | $ | 69,297 |   | $ | 77,951 |   |
| U.S. Government  agencies            |   | 293,227                                   |      | 231,380 |   | 435,255 |   |
| Mortgage-backed  securities          |   | 1,038,044                                 |      | 887,148 |   | 993,939 |   |
| Collateralized  mortgage obligations |   | 3,512                                     |      | 4,377 |   | 9,635 |   |
| State and  political securities      |   | 71,095                                    |      | 97,603 |   | 115,400 |   |
| Other                                |   | 213,099                                   |      | 147,261 |   | 82,330 |   |
| Total                                |   | $                                         | 1,672,445 |   | $ | 1,437,066 |   | $ | 1,714,510 |   |

 

The following table sets forth the composition of theCompany’s held-to-maturity securities portfolio at amortized cost as of thedates indicated:

 
|                |   | **Book Value  at December 31,** |   |
|---------------------|--------|---------------------------------|--------|
| **(In  thousands)** |   | **2002**                        |   | **2001** |   | **2000** |   |
| Other               |   | $                               | 80,165 |   | $ | 76,765 |   | $ | 73,222 |   |
| Total               |   | $                               | 80,165 |   | $ | 76,765 |   | $ | 73,222 |   |

 

The following tables set forth the composition bycontractual maturity of the Company’s available-for-sale and held-to-maturitysecurities portfolios:

 

**AVAILABLE-FOR-SALESECURITIES**

 
|                                |   | **At December 31, 2002, Maturing in** |    |
|-------------------------------------|--------|---------------------------------------|---------|
|                                |   | **One Year  or Less**                 |    | **Over One  Year  Through 5 Years** |   | **Over 5  Years  Through 10 Years** |   | **Over 10  Years** |   | **Total** |   |
| **(Dollars in thousands)**          |   | **Amount**                            |    | **Weighted****Yield(1)** |   | **Amount** |   | **Weighted****Yield(1)** |   | **Amount** |   | **Weighted****Yield(1)** |   | **Amount** |   | **Weighted****Yield(1)** |   | **Amount** |   | **Weighted****Yield(1)** |   |
| U.S. Treasury                       |   | $                                     | 35,466  |   | 5.67 | % | $ | 18,002 |   | 3.37 | % | $ | — |   | — |   | $ | — |   | — |   | $ | 53,468 |   | 4.90 | % |
| U.S. Government agencies            |   | 59,424                                |    | 5.59 | % | 213,196 |   | 3.42 | % | 20,607 |   | 4.07 | % | — |   | — |   | 293,227 |   | 3.91 | % |
| Mortgage-backed securities          |   | 1,030                                 |    | 5.53 | % | 2,779 |   | 7.46 | % | 63,794 |   | 5.94 | % | 970,441 |   | 5.11 | % | 1,038,044 |   | 5.16 | % |
| Collateralized mortgage obligations |   | —                                |    | — |   | — |   | — |   | 2,987 |   | 2.81 | % | 525 |   | 2.70 | % | 3,512 |   | 2.79 | % |
| State and political securities      |   | 2,067                                 |    | 6.44 | % | 7,151 |   | 7.50 | % | 19,514 |   | 7.57 | % | 42,363 |   | 7.78 | % | 71,095 |   | 7.65 | % |
| Other                               |   | 135,052                               |    | 1.96 | % | 275 |   | 1.83 | % | 522 |   | 2.72 | % | 77,250 |   | 5.64 | % | 213,099 |   | 3.30 | % |
| Total                               |   | $                                     | 233,039 |   | 3.51 | % | $ | 241,403 |   | 3.58 | % | $ | 107,424 |   | 5.78 | % | $ | 1,090,579 |   | 5.25 | % | $ | 1,672,445 |   | 4.80 | % |
|                                     |        |                                       |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*(1)  Interestyields on investments are presented on a tax-equivalent basis to reflect thetax-exempt nature of certain assets. Yields are based on a 35% incremental taxrate and a 1.38% cost of funds.*

 

**HELD-TO-MATURITYSECURITIES**

 
|                       |   | **At December 31, 2002, Maturing in** |         |
|----------------------------|--------|---------------------------------------|--------------|
|                       |   | **One Year  or Less**                 |         | **Over One  Year  Through 5 Years** |   | **Over 5  Years  Through 10 Years** |   | **Over 10  Years** |   | **Total** |   |
| **(Dollars in thousands)** |   | **Amount**                            |         | **Weighted****Yield(1)** |   | **Amount** |   | **Weighted****Yield(1)** |   | **Amount** |   | **Weighted****Yield(1)** |   | **Amount** |   | **Weighted****Yield(1)** |   | **Amount** |   | **Weighted****Yield(1)** |   |
| Other                      |   | $                                     |  — |   | — |   | $ |  — |   | — |   | $ |  — |   | — |   | $ | 80,165 |   | 6.81 | % | $ | 80,165 |   | 6.81 | % |
| Total                      |   | $                                     |  — |   | — |   | $ |  — |   | — |   | $ |  — |   | — |   | $ | 80,165 |   | 6.81 | % | $ | 80,165 |   | 6.81 | % |

 

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*(1)  Interestyields on investments are presented on a tax-equivalent basis to reflect thetax-exempt nature of certain assets. Yields are based on a 35% incremental taxrate.*

 

The Company’s investments, includingavailable-for-sale and held-to-maturity securities, increased $239 million, or15.8%, to $1.8 billion at December 31, 2002, from $1.5 billion at December 31, 2001, due primarily to the Company’s strategy ofreinvesting cash flows derived from loan repayments and depositgeneration in additional investment securities, as an alternative to fundingloan growth, which as a result of the current sluggish economy, presents fewer opportunities that meet the Company’s stringentcredit quality criteria. At December 31, 2002, the Company’s investmentsrepresented 30.1% of total assets, compared to 26.2% at December 31, 2001.

 

The majority of the investmentportfolio is comprised of government and government sponsored enterprisesecurities (“GSE”). The credit risk associated with these issuers is withintolerances set by management. A significant portion of the GSE debt includes mortgaged-backed securities. Because of theirembedded prepayment options, these securities are subject to prepaymentand extension risk in volatile rate environments.

 

**CREDIT POLICY**

The Company’s lending activities are guided bythe general loan policy established by the Board of Directors. The Boardof Directors of the bank subsidiary has established loan approval limits foreach banking office of the Company. The limits established for each officerange from $5,000 to $500,000 per borrower, which is reduced to not more than$25,000 for any criticized or classified borrower. Amounts in excess of theindividual bank lending authority arepresented to corporate credit officers. The corporate credit officershave lending authority up to $1,000,000 per pass-rated borrower. Loans above$1,000,000 for pass-rated borrowers, $500,000 for watch-rated borrowers and$250,000 for classified borrowers are presented to the Senior Credit Committeewherein approval must be unanimous. The Senior Credit Committee is comprised ofthe Company’s chief operating officer, two executive vice president—divisionpresidents, the senior credit administrative officer, and the senior regionalcredit officer.

 

An integral part of the Company’s initiative toredesign its delivery structure is theimplementation of a centralized loan processing function. Begun in 2001, the Company continued its creditcentralization process during 2002, with the expectation that it will befully implemented by year-end 2003. This process centralizes the underwriting,documentation, administration and collection of all consumer loans and documentpreparation for commercial and agricultural credit. As of December 31, 2002,consumer loan collections and indirect consumerunderwriting, administration and documentation have been centralized.The centralization of direct consumer loans, as well as documentation ofcommercial and agricultural loans is progressing on schedule. The Company has augmented its servicing and collectionof commercial and agricultural distressed credits through 

 

6

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implementation of a special assets group, which was organized to provide greater support for the Company’s larger,more complex creditfacilities. Thecentralization process and special assets group will affordthe Company additional control and oversight ofthe entire credit process.

 

Although the Company has a diversified loan portfolio,the economic health of significant portions of the Company’s primary tradeareas and the ability of many of the Company’s borrowers to repay their loans(including real estate and commercial loans, as well as agricultural loans) isdependent to a large extent on the health of their sector of the local economy.The Company has identified and implemented strategies to deal with these factors,including an emphasis on quality local loan growth and the diversification andperformance of its earning asset portfolios.

 

**NONPERFORMING ASSETS**

The Company follows regulatory guidelines with respect to classifyingloans on a nonaccrual basis. Loans are placed on nonaccrual when they becomepast due over 90 days, unless well secured and in the process of collection, orwhen the collection of interest or principal is considered unlikely. TheCompany does not return a loan to accrual status until it is brought currentwith respect to both principal and interest and future principal and interestpayments are no longer in doubt. When a loan is placed on nonaccrual status,any previously accrued and uncollected interest is reversed. Interest income of$3,615,000, $2,722,000, and $4,693,000, on nonaccrual loans would have beenrecorded during 2002, 2001, and 2000, respectively, if the loans had beencurrent in accordance with their original terms. The Company recorded interestincome of $679,000, $1,113,000, and $955,000 related to loans that were onnonaccrual status as of December 31, 2002, 2001, and 2000, respectively.

 

The Company considers nonperforming assets to includeall nonaccrual loans, restructured loans defined as troubled debt restructurings under SFAS No. 15 and other realestate owned (“OREO”).

 

Nonperforming assets of the Company are summarized inthe following table:

 
| **December 31 (Dollars in thousands)**                        |   | **2002** |      | **2001** |   | **2000**  |   | **1999** |      | **1998** |   |
|---------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
| Loans:                                                        |   |     |      |     |   |      |   |     |      |     |   |
| Nonaccrual loans                                              |   | $        | 22,728    |     | $      | 20,818    |   | $        | 23,426    |     | $      | 25,764 |   | $ | 22,609 |   |
| Restructured  loans                                           |   | 220      |      | 252      |   | 224       |   | 284      |      | 162      |   |
| Nonperforming  loans                                          |   | 22,948   |      | 21,070   |   | 23,650    |   | 26,048   |      | 22,771   |   |
| OREO                                                          |   | 5,990    |      | 2,869    |   | 2,437     |   | 6,525    |      | 4,763    |   |
| Nonperforming  assets                                         |   | $        | 28,938    |     | $      | 23,939    |   | $        | 26,087    |     | $      | 32,573 |   | $ | 27,534 |   |
| Loans 90 days or  more past due but still accruing            |   | $        | 4,258     |     | $      | 6,270     |   | $        | 2,482     |     | $      | 1,949 |   | $ | 3,525 |   |
| Nonperforming  loans as a percentage of total loans           |   | 0.64     | %         | 0.56     | %      | 0.63      | %      | 0.71     | %         | 0.64     | %      |
| Nonperforming  assets as a percentage of total assets         |   | 0.50     | %         | 0.41     | %      | 0.43      | %      | 0.52     | %         | 0.44     | %      |
| Nonperforming  assets as a percentage of total loans and OREO |   | 0.81     | %         | 0.64     | %      | 0.70      | %      | 0.88     | %         | 0.78     | %      |
| Total loans                                                   |   | $        | 3,577,893 |     | $      | 3,736,692 |   | $        | 3,738,202 |     | $      | 3,690,353 |   | $ | 3,537,537 |   |
| Total assets                                                  |   | $        | 5,827,170 |     | $      | 5,772,326 |   | $        | 6,089,729 |     | $      | 6,302,235 |   | $ | 6,239,772 |   |

 

Nonperforming assets were $28.9 million at December31, 2002, an increase of $5.0 million, or 20.9%, from $23.9 million at December31, 2001. Nonperforming loans increased by $1.9 million during the same period.OREO increased $3.1 million, or 106.9%, from $2.9 million at December 31, 2001to $6.0 million at December 31, 2002. The increase in OREO was principally dueto the addition of two properties, one in Colorado and one in Arizona, whichpreviously had been classified as nonaccrual loans. The ratio of nonperformingassets to total assets at December 31, 2002, was .50%, compared to .41% atDecember 31, 2001.

 

Nonperforming assets were $23.9 million at December31, 2001, a decrease of $2.2 million, or 8.4%, from $26.1 million at December31, 2000. Nonperforming loans decreased by $2.6 million during the same period.OREO increased $432,000, or 17.7%, from $2.4 million at December 31, 2000 to$2.9 million at December 31, 2001. The ratio of nonperforming assets to totalassets at December 31, 2001, was .41%, compared to .43% at December 31, 2000.

 

**ALLOWANCE FOR LOAN LOSSES**

The current level of the allowance for loan losses is a result ofmanagement’s assessment of the risks within the portfolio based on theinformation obtained through the credit evaluation processes. The Companyutilizes a risk-rating system on non-homogenous loans, including purchasedloans, and a monthly credit review and reporting process that results in thecalculation of the reserves based on the risk within the portfolio. Thisassessment of risk takes into account the composition of the loan portfolio,previous loan experience, current economic conditions and other factors that,in management’s judgment, deserve recognition.

 

The allowance is allocated to individual loancategories based upon the relative risk characteristics of the loan portfoliosand actual loss experience. Additional reserves are provided to recognize theCompany’s exposure to inherent, but undetected losses within the overall loanportfolio. Risk is assessed and reserves are allocated to the individual loanportfolios through the periodic application of risk assessment processesincluding migration analysis, specific credit analysis and analysis ofportfolio sectors possessing common traits.

 

For commercial and agricultural loans, includingcommercial and agricultural real estate, real estate construction and purchasedassets, portfolio risk is determined using migration analysis wherein theactual loan loss experience is tracked, on a loan-by-loan basis, over theprevious 36 months to determine a weighted-average loss rate inherent in therespective portfolios. In addition, individual loans, which have beenidentified in the periodic portfolio review as problem loans, are allocatedreserves based on management’s assessment of loss probability. Also, on aquarterly basis, management identifies sectors of each loan portfolio, which,in their judgment, demonstrate more or lessrisk than that risk identified in the allocated reserve calculated inthe portfolio migration analysis. The basis of these allocation adjustmentsincludes historical and expected delinquencyand charge-off statistics, changes in underwriting criteria, assessmentof lender management expertise and changes in loan volume. Portfolio sectorsare identified based on a combination of common characteristics, which mayinclude collateral type, term, purpose, geographic concentration of borrowersor other common characteristics encounteredin management’s assessment of the portfolio.

 

7

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Consumer and residential realestate loan portfolio risk is determined through the application ofseparate migration analysis designed to identify estimated inherent losses, whereinthe actual portfolio losses are aggregated to determine the loss ratioapplicable to that period. The resulting loss ratio calculated in the analysisis applied to the entire consumer and real estate portfolios respectively,based on the average term of all portfolio loans. Also, on a quarterly basis,management identifies sectors of the loan portfolio, which in their judgmentdemonstrate more or less risk than that risk identified in the portfoliomigration analysis. The basis of these allocation adjustments includeshistorical delinquency and charge-off statistics, changes in underwritingcriteria, assessment of lender management expertise and changes in loan volume.Portfolio sectors are identified based on a combination of commoncharacteristics, which may include collateral type, term, purpose, geographicconcentration of borrowers or other common characteristics encountered inmanagement’s assessment of the portfolio.

 

The Company also maintains an additional allowanceamount to recognize its exposure to inherent, but undetected losses. Thisexposure is caused by inherent delays in obtaining information regarding anindividual borrower’s financial condition or change in their specific businesscondition; the judgmental nature of individual loan evaluations, collateralassessments and the interpretation of economictrends; the volatility of general economic or specific customerconditions affecting the identification and quantification of losses for largeindividual credits; and the sensitivity of assumptions used in establishingallocated allowances for general categories of loans.

 

The 2002 and 2001 allocation reflects the Company’smethodology utilized to allocate the allowance within individual loanportfolios. The methodology was modified in 2001 due to the Company’s desire tomore specifically identify credit risk within each individual loan portfolio.As a result, a greater portion of the allowance for loan losses has beenallocated to specific loan portfolios, which results in a smaller percentage ofadditional allowance. While designed to more specifically identify riskinherent in a specific loan portfolio, the methodology did not result in a needfor additional allowance, but rather permitted the Company to better assign itsallowance balance to the risk associated with specific loan portfolios. Theresulting increase in allocated allowance and decrease in additional allowancein 2002 and 2001 is primarily a result of the modified methodology.

 

The allocated portion of the allowance increased to$42.8 million at December 31, 2002, an increase of $1.5 million, or 3.6% from$41.3 million at December 31, 2001. The increase was principally due to changesin the Company’s assessment of the underlying loan portfolios. The allocatedallowance as a percentage of loans outstanding was 1.20% at December 31, 2002and 1.11% at December 31, 2001. The additional allowance decreased to $13.3million at December 31, 2002, a decrease of $324,000, or 2.4% from $13.7million at December 31, 2001. The additional allowance as a percentage of loansoutstanding was .37% at December 31, 2002 and .36% at December 31, 2001. Thelevel of the additional allowance was relatively unchanged from year to yearbased on the Company’s assessment of inherent, but undetected losses. Theaccompanying table shows the allocated and additional allowance for the variousloan classifications.

 

The allocated portion of the allowance at December 31,2002 increased to $15.1 million in the consumer and other portfolio, from $11.3million at December 31, 2001, a $3.8 million, or 33.6%, increase. The increaseis principally due to the increase in the level of delinquencies andcharge-offs in the portfolio and reflects management’s expectation of portfolioperformance in the current economic environment. As a percentage of theportfolio, the allowance allocated to consumer and other loans increased from1.80% of the 2001 portfolio to 2.41% of the 2002 portfolio. The December 31,2002 allowance allocated to the agricultural portfolio increased slightly to$3.0 million, a 1.1% increase from December 31, 2001. As a percentage of theportfolio, the allowance allocated to agricultural loans increased from 1.19%of the 2001 portfolio to 1.37% of the 2002 portfolio. The commercial portfolioallowance decreased $1.1 million, or 10.7% to $9.2 million at December 31,2002, from $10.3 million at December 31, 2001. As a percentage of theportfolio, the allowance allocated to commercial loans increased slightly from 1.25% of the 2001 portfolio to1.27% of the 2002 portfolio. The allowance allocated for the real estateconstruction portfolio decreased slightly to $4.1 million at December 31, 2002,from $4.3 million at December 31, 2001. As a percentage of the portfolio, theallowance allocated to real estate construction loans increased from 0.82% ofthe 2001 portfolio to 0.94% of the 2002 portfolio. The real estate portfolioallowance allocation of $11.4 million at December 31, 2002, decreased $1.1million or 8.8% from $12.5 million at December 31, 2001. As a percentage of theportfolio, the allowance allocated to real estate loans decreased from 0.83% ofthe portfolio in 2001 to 0.73% of the portfolio in 2002. For all portfolios,the change in the allocated allowance was principally due to the Company’sdelinquency and charge-off experience within the respective portfolios andreflects management’s estimate of probable losses in the portfolio atperiod-end.

 

As a result of the analytical processes implementedduring 2001, the allocated portion of the 2001 allowance increased in allportfolios, except the agricultural portfolio, which decreased modestly. Theallowance allocated to real estate loans, including real estate construction,increased to $16.8 million at December 31, 2001, an increase of $4.1 million or32.3% from $12.7 million at December 31, 2000. The increase was principally dueto the methodology utilized in identifying specific portfolio risk, asevidenced by the $3.7 million increase in the allowance allocated to realestate construction loans. The allowance allocated to the commercial loanportfolio increased to $10.3 million at December 31, 2001, an increase of $3.2million, or 45.1% from $7.1 million at December 31, 2000. The increase wasprincipally due to the methodology utilized in identifying specific portfoliorisk. The allowance allocated to the consumer loan portfolio increased to $11.3million, or 175.6% from $4.1 million at December31, 2000. The increase is principally due to the methodology utilized inidentifying specific portfolio risk, in addition to an increase in the level ofpast due and charge off statistics in the consumer portfolio during 2001 andmanagement’s expectations of future portfolio performance in the currenteconomic environment. The allowance allocated to the agricultural loanportfolio was $3.0 million at December 31, 2001 and December 31, 2000.

 

The actual amount of losses incurred can varysignificantly from the estimated amount. Tothe extent that actual losses might exceed the estimated provision,additional provision expense may be required in future periods. Conversely, ifactual losses are substantially less than estimated, future periods may reflecta lower provision expense. The Company’s methodology includes general factorsintended to minimize the differences in estimated and actual losses. Thesefactors allow the Company to adjust its estimates of losses based on the mostrecent information available. Although the Company determines the amount ofeach element of the allowance for loan losses separately, and this process isan important credit management tool, the entire allowance for loan losses isavailable for the entire loan portfolio.

 

8

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The following table sets forth the allocation of theallowance for loan losses to various loan categories, as well as the allocationas a percentage of loans outstanding in each category, as of the datesindicated:

 
|                       |   | **Allowance  for Loan Losses at December 31,** |   | **Allowance  as a Percent of Loans Outstanding  by Category at December 31,** |   |
|----------------------------|--------|------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|
| **(Dollars in thousands)** |   | **2002**                                       |   | **2001**                                                                      |   | **2000** |   | **1999** |   | **1998** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| Real estate                |   | $                                              | 11,413 |                                                                          | $      | 12,519 |   | $ | 12,234 |   | $ | 10,329 |   | $ | 9,844 |   | 0.73 | % | 0.83 | % | 0.84 | % | 0.78 | % | 0.76 | % |
| Real estate construction   |   | 4,116                                          |   | 4,256                                                                         |   | 515 |   | 218 |   | 190 |   | 0.94 | % | 0.82 | % | 0.11 | % | 0.05 | % | 0.05 | % |
| Commercial                 |   | 9,198                                          |   | 10,293                                                                        |   | 7,117 |   | 8,673 |   | 7,705 |   | 1.27 | % | 1.25 | % | 0.82 | % | 0.87 | % | 0.80 | % |
| Consumer and other         |   | 15,069                                         |   | 11,272                                                                        |   | 4,147 |   | 4,657 |   | 8,405 |   | 2.41 | % | 1.80 | % | 0.60 | % | 0.68 | % | 1.36 | % |
| Agricultural               |   | 3,029                                          |   | 2,996                                                                         |   | 3,016 |   | 2,643 |   | 3,077 |   | 1.37 | % | 1.19 | % | 1.19 | % | 1.02 | % | 1.04 | % |
| Total allocated allowance  |   | 42,825                                         |   | 41,336                                                                        |   | 27,029 |   | 26,520 |   | 29,221 |   | 1.20 | % | 1.11 | % | 0.72 | % | 0.72 | % | 0.83 | % |
| Total additional allowance |   | 13,331                                         |   | 13,655                                                                        |   | 25,139 |   | 22,358 |   | 22,639 |   | 0.37 | % | 0.36 | % | 0.68 | % | 0.60 | % | 0.64 | % |
| Total allowance            |   | $                                              | 56,156 |                                                                          | $      | 54,991 |   | $ | 52,168 |   | $ | 48,878 |   | $ | 51,860 |   | 1.57 | % | 1.47 | % | 1.40 | % | 1.32 | % | 1.47 | % |

 

At December 31, 2002, the allowance for loan losseswas $56.2 million, an increase of $1.2 million from the December 31, 2001,level of $55.0 million. At December 31, 2002, the allowance for loan losses asa percentage of total loans was 1.57%, as compared to 1.47% at December 31,2001. This increase is due to the combined effect of the Company’s analysis ofthe loan portfolio credit quality at the Company’s bank subsidiary and adecrease in the volume of loans outstanding.

 

At December 31, 2001, the allowance for loan losseswas $55.0 million, an increase of $2.8 million from the December 31, 2000 levelof $52.2 million. At December 31, 2001, the allowance for loan losses as apercentage of total loans was 1.47%, as compared to 1.40% at December 31, 2000.This increase was attributed to the Company’s analysis of the loan portfoliocredit quality at the Company’s bank subsidiary.

 

During 2002, net charge-offs were $12.1 million, adecrease of $2.6 million from the $14.7 million during 2001. The decrease isprincipally due to the 2001 charge-off of an Arizona-based credit facility andthe $1.2 million recovery recorded on the loan in 2002. The Company’s provisionfor loan losses decreased from $17.5 million in 2001 to $13.3 million in 2002.The provision for loan losses is recorded to bring the allowance for loanlosses to the level deemed appropriate by management. The provision is theresult of estimates based on management’sanalysis, and as such, future earnings could beadversely affected if the provision is not sufficient to cover futurelosses.

 

During 2001, net charge-offs were $14.7 million, anincrease of $2.2 million from net charge-offs of the $12.5 million during 2000.The increase is principally attributed to a $2.4 million charge-off of theCompany’s largest non-performing asset, an Arizona-based credit facility thatwas in place when the Company acquired its initial Arizona operation in 1997.The Company’s provision for loan losses increased from $15.8 million in 2000 to$17.5 million in 2001.

 

The following table sets forth the Company’s allowance for loan lossesas of the dates indicated:

 
| **December 31 (Dollars in thousands)**        |   | **2002** |      | **2001** |   | **2000**  |   | **1999** |      | **1998** |   |
|-----------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
| Balance at  beginning of year                 |   | $        | 54,991    |     | $      | 52,168    |   | $        | 48,878    |     | $      | 51,860 |   | $ | 41,387 |   |
| Allowance of  acquired companies and other    |   | —   |      | —   |   | —    |   | 270      |      | 1,950    |   |
| Charge-offs:                                  |   |     |      |     |   |      |   |     |      |     |   |
| Real estate                                   |   | 2,468    |      | 1,588    |   | 1,176     |   | 2,181    |      | 2,340    |   |
| Real estate  construction                     |   | 50       |      | 2,538    |   | 408       |   | 2,965    |      | 36       |   |
| Commercial                                    |   | 6,191    |      | 5,374    |   | 6,644     |   | 8,349    |      | 2,771    |   |
| Consumer and  other                           |   | 11,040   |      | 10,033   |   | 7,893     |   | 13,802   |      | 11,806   |   |
| Agricultural                                  |   | 300      |      | 336      |   | 996       |   | 553      |      | 1,381    |   |
| Total  charge-offs                            |   | 20,049   |      | 19,869   |   | 17,117    |   | 27,850   |      | 18,334   |   |
| Recoveries:                                   |   |     |      |     |   |      |   |     |      |     |   |
| Real estate                                   |   | 243      |      | 498      |   | 155       |   | 928      |      | 237      |   |
| Real estate  construction                     |   | 1,309    |      | 70       |   | 4         |   | —   |      | —   |   |
| Commercial                                    |   | 893      |      | 839      |   | 1,565     |   | 468      |      | 972      |   |
| Consumer and  other                           |   | 5,332    |      | 3,438    |   | 2,648     |   | 2,537    |      | 2,113    |   |
| Agricultural                                  |   | 175      |      | 327      |   | 254       |   | 481      |      | 399      |   |
| Total recoveries                              |   | 7,952    |      | 5,172    |   | 4,626     |   | 4,414    |      | 3,721    |   |
| Net charge-offs                               |   | 12,097   |      | 14,697   |   | 12,491    |   | 23,436   |      | 14,613   |   |
| Provision  charged to operations              |   | 13,262   |      | 17,520   |   | 15,781    |   | 20,184   |      | 23,136   |   |
| Balance at end  of year                       |   | $        | 56,156    |     | $      | 54,991    |   | $        | 52,168    |     | $      | 48,878 |   | $ | 51,860 |   |
| Allowance as a  percentage of total loans     |   | 1.57     | %         | 1.47     | %      | 1.40      | %      | 1.32     | %         | 1.47     | %      |
| Net charge-offs  to average loans outstanding |   | 0.33     | %         | 0.39     | %      | 0.34      | %      | 0.66     | %         | 0.43     | %      |
| Total loans                                   |   | $        | 3,577,893 |     | $      | 3,736,692 |   | $        | 3,738,202 |     | $      | 3,690,353 |   | $ | 3,537,537 |   |
| Average loans                                 |   | $        | 3,689,015 |     | $      | 3,785,553 |   | $        | 3,706,144 |     | $      | 3,573,060 |   | $ | 3,383,724 |   |

 

**SOURCE OF FUNDS**

 

**Deposits**

The Company’s major source of funds is provided by core deposits fromindividuals, businesses and local government units. Core deposits consist ofall in-market noninterest-bearing deposits, interest-bearing savings andchecking accounts and time deposits of less than $100,000.

 

9

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The following table sets forth a summary of thedeposits of the Company at the dates indicated, (in thousands):

 
| **December 31**                     |   | **2002**  |      | **2001**  |   | **2000**  |   |
|-------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| Noninterest-bearing                 |   | $         | 470,900   |      | $      | 487,864   |   | $ | 500,834 |   |
| Interest-bearing:                   |   |      |      |      |   |      |   |
| Savings and  checking accounts      |   | 2,424,943 |      | 2,367,255 |   | 2,349,606 |   |
| Time accounts  less than $100,000   |   | 1,103,716 |      | 1,203,379 |   | 1,496,483 |   |
| Time accounts greater than $100,000 |   | 670,187   |      | 692,315   |   | 672,968   |   |
| Total deposits                      |   | $         | 4,669,746 |      | $      | 4,750,813 |   | $ | 5,019,891 |   |

 

Total deposits at December 31,2002, were $4.7 billion, a decrease of $81 million, or 1.7%, from $4.8billion at December 31, 2001. The decrease is principally the result of theCompany’s strategy to manage the rate of interest paid on deposit accounts. TheCompany’s core deposits as a percentage of total deposits were 85.6% and 85.4%as of December 31, 2002 and December 31, 2001, respectively.

 

At December 31, 2002, $670 million, or 14.4% of totaldeposits were in time accounts greater than$100,000, a decrease of $22 million, or 3.2%, from $692 million atDecember 31, 2001. Management believesvirtually all the deposits in excess of $100,000 are with persons orentities that hold other deposit relationships with the bank. Maturities ofdeposits in excess of $100,000 at December 31, 2002 were (in thousands):

 
| Maturing in less  than three months   |   | $       | 165,415 |   |
|---------------------------------------|--------|---------|---------|--------|
| Maturing in  three to six months      |   | 154,725 |    |
| Maturing in six  to twelve months     |   | 187,646 |    |
| Maturing in over  twelve months       |   | 162,401 |    |
| Total deposits  in excess of $100,000 |   | $       | 670,187 |   |

 

At December 31, 2002, the Company had $21 million indeposits obtained through a brokered deposit relationship. In addition to theavailability of core deposits, management has determined it may continue toemploy a brokered deposit program in an effort to attract lower cost sources offunds.

 

**SHORT-TERM BORROWINGS**

Short-term borrowings include securities sold under agreements torepurchase, commercial paper, Federal Home Loan Bank advances and federal fundspurchased. These funds are used to fund the growth in loans and securities andmanage the Company’s rate sensitivity risk. They are subject to short-terminterest rate changes as the Company’s needs change or the overall market ratesfor short-term investment funds change.

 

The Company’s subsidiary bank has an arrangement withthe Federal Home Loan Bank that provides for borrowing up to $458 million. Asof December 31, 2002, $44 million in advances were outstanding. The Companyalso had $32 million outstanding on its $50 million short-term commercial paperarrangement at December 31, 2002. The $110 million increase in short-termborrowings from December 31, 2001 is due to the Company’s ability to obtainshort-term borrowings at favorable short-term rates and position itself favorablyrelative to matching its short-term funding needs. The Company has a $25million short-term line of credit with a nonaffiliated commercial bank forpurposes of funding operating expenses. As of December 31, 2002, there was nobalance outstanding on this line.

 

The following table sets forth a summary of theshort-term borrowings of the Company during 2002, 2001 and 2000, and as of theend of each such period:

 
| **(Dollars in thousands)**                                                  |   | **Outstanding  at Year-End** |    | **Average  Daily  Amount  Outstanding** |   | **Maximum  Outstanding  at any  Month-End** |   | **Weighted  Average  Interest  Rate** |    | **Average  Interest  Rate at  Year-End** |   |
|-----------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------------------|--------|---------------------------------------------|--------|---------------------------------------|---------|------------------------------------------|--------|
| 2002                                                                        |   |                         |    |                                    |   |                                        |   |                                  |    |                                     |   |
| Federal funds  purchased and securities sold under agreements to repurchase |   | $                            | 377,230 |                                    | $      | 296,791                                     |   | $                                     | 387,810 |                                     | 1.76   | % | 1.34 | % |
| Commercial paper                                                            |   | 32,260                       |    | 31,567                                  |   | 45,558                                      |   | 2.30                                  | %       | 1.93                                     | %      |
| FHLB advances                                                               |   | 44,000                       |    | 10,835                                  |   | 58,000                                      |   | 3.69                                  | %       | 1.70                                     | %      |
| Other                                                                       |   | —                       |    | —                                  |   | —                                      |   | —                                |    | —                                   |   |
| Total                                                                       |   | $                            | 453,490 |                                    | $      | 339,193                                     |   | $                                     | 462,881 |                                     | 1.87   | % | 1.42 | % |
| 2001                                                                        |   |                         |    |                                    |   |                                        |   |                                  |    |                                     |   |
| Federal funds  purchased and securities sold under agreements to repurchase |   | $                            | 318,859 |                                    | $      | 263,252                                     |   | $                                     | 363,638 |                                     | 3.47   | % | 2.46 | % |
| Commercial paper                                                            |   | 19,780                       |    | 22,285                                  |   | 34,051                                      |   | 4.98                                  | %       | 2.78                                     | %      |
| FHLB advances                                                               |   | 4,000                        |    | 72,513                                  |   | 210,000                                     |   | 6.27                                  | %       | 4.39                                     | %      |
| Other                                                                       |   | —                       |    | 3,513                                   |   | 5,000                                       |   | 6.40                                  | %       | —                                   |   |
| Total                                                                       |   | $                            | 342,639 |                                    | $      | 361,563                                     |   | $                                     | 496,856 |                                     | 4.15   | % | 2.51 | % |
| 2000                                                                        |   |                         |    |                                    |   |                                        |   |                                  |    |                                     |   |
| Federal funds  purchased and securities sold under agreements to repurchase |   | $                            | 205,758 |                                    | $      | 226,791                                     |   | $                                     | 274,577 |                                     | 5.31   | % | 5.33 | % |
| Commercial paper                                                            |   | 28,952                       |    | 25,488                                  |   | 32,078                                      |   | 6.74                                  | %       | 7.31                                     | %      |
| FHLB advances                                                               |   | 155,000                      |    | 258,935                                 |   | 364,000                                     |   | 6.41                                  | %       | 6.55                                     | %      |
| Other                                                                       |   | 20,000                       |    | 57,326                                  |   | 88,000                                      |   | 6.80                                  | %       | 7.37                                     | %      |
| Total                                                                       |   | $                            | 409,710 |                                    | $      | 568,540                                     |   | $                                     | 739,564 |                                     | 6.03   | % | 6.03 | % |

 

**LONG-TERM DEBT**

Long-term debt of the Company was $127 million as of December 31, 2002,and $137 million as of December 31, 2001.

 

**COMPANY-OBLIGATED MANDATORILYREDEEMABLE PREFERRED SECURITIES**

Company-obligated mandatorily redeemable preferred securities of theCompany were $120 million as of December 31, 2002 and 2001. At December 31,2002, the total consisted of $60 million of 8.125% Cumulative CapitalSecurities issued March 27, 2002 through CFB Capital III and $60 million of8.20% Cumulative Capital Securities issued December 10, 1997 through CFBCapital II. The proceeds of both offerings were invested by CFB Capital III andCFB Capital II, respectively, in Junior Subordinated Debentures of the Company.The debentures bear interest at the same rate as the Cumulative CapitalSecurities and mature not later than April 15, 

 

10

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2032. The Company has unconditionally guaranteed the obligation of CFBCapital III under the 8.125% Cumulative Capital Securities and the obligationof CFB Capital II under the 8.20% Cumulative Capital Securities. At December 31,2001, the Company had outstanding the 8.20% Cumulative Capital Securitiesissued December 10, 1997 and $60 million of 8.875% Cumulative CapitalSecurities issued February 5, 1997. The 8.875% Cumulative Capital Securitieswere redeemed on May 1, 2002.

 

**SHAREHOLDERS’ EQUITY**

Total shareholders’ equity increased $21.7 million, or 6.1%, to $378.4million at December 31, 2002, from $356.7 million at December 31, 2001, dueprincipally to the retention of a majority of earnings and a $20.0 millionincrease in unrealized gains on available-for-sale securities, net of tax. Thiswas offset in part through an increase of $44.5 million in treasury stock as aresult of the Company’s common stock repurchase program.

 

On February 22, 2002, the Company filed a shelf registrationstatement with the Securities and Exchange Commission for the purpose ofissuing $180 million of various debt and equity securities. On March 27, 2002,the Company issued $60 million of 8.125% Cumulative Capital Securities throughCFB Capital III, a Delaware business trust subsidiary. At December 31, 2002,$120 million remain available for issuance of debt and equity securities. InFebruary 2003, the Company determined to issue $60 million of cumulativecapital securities through CFB Capital IV, a Delaware business trustsubsidiary. The timing and terms of the offering are subject to marketconditions, but the securities are expected to be similar to those of CFBCapital III except for the interest rate. If consummated, the transaction isexpected to close in late February or March 2003. If consummated, terms of thecapital securities, including the interest rate and other material documents,will be described in a prospectus supplement and included in a Form 8-K thatthe Company will file with the Securities and Exchange Commission shortly afterthe offering is closed.

 

On April 10, 2000, the Company announced its intentionto repurchase up to 5 million shares of the Company’s common stock. On August 9, 2000, the Company announced itsintention to repurchase up to an additional 5 million shares of theCompany’s common stock. On August 7, 2001, the Company announced its intentionto repurchase up to 3 million shares of the Company’s common stock. As ofDecember 31, 2002, the Company had repurchased 12,700,000 shares of commonstock at prices ranging from $15.25 to $27.90. The Company repurchased 1.9million shares during 2002, 2.0 million shares during 2001, and 8.8 millionshares during 2000.

 

In April 1998, in conjunction with the Company’sshareholder approval of a charter amendment that facilitated a two-for-onesplit of the Company’s common stock in theform of a 100 percent dividend paid to holders of record as of May 1,1998, the Company increased the number ofauthorized common shares from 30,000,000 to 80,000,000. The number ofauthorized preferred shares remained at 2,000,000.

 

**ASSET AND LIABILITY MANAGEMENT**

 

**LIQUIDITY MANAGEMENT**

Liquidity management is an effort of the Company to provide acontinuing flow of funds to meet its financial commitments, customer borrowingneeds and deposit withdrawal requirements. The liquidity position of theCompany and its subsidiary bank is monitored by the Asset and LiabilityManagement Committee (“ALCO”) of the Company. The largest category of assetsrepresenting a ready source of liquidity for the Company is its short-termfinancial instruments, which include federal funds sold, interest-bearingdeposits at other financial institutions, U.S. Treasury securities and othersecurities maturing within one year. Liquidity is also provided through theregularly scheduled maturities of assets. The investment portfolio contains anumber of high quality issues with varying maturities and regular principalpayments. Maturities in the loan portfolio also provide a steady flow of funds,and strict adherence to the credit policies of the Company helps ensure thecollectibility of these loans. 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 partyto financial instruments with off-balance-sheet risk. Because many of thecommitments are expected to expire without being drawn upon, total commitmentamounts do not necessarily represent the Company’s future liquidity requirements.These instruments are further described in Note 9, Financial Instruments WithOff Balance-Sheet Risk and Concentrations of Credit Risk.

 

The liquidity ratio is one measure of a bank’s abilityto meet its current obligations and is defined as the percentage of liquidassets to deposits. Liquid assets include cash and due from banks, unpledged investment securities with maturities of lessthan one year and federal funds sold. At year-end 2002, 2001 and 2000,the liquidity ratio was 8.32%, 6.72%, and 5.21%, respectively. The level ofloans maturing within one year greatly add to the Company’s liquidity position.Including loans maturing within one year, the liquidity ratio was 27.94%,29.86%, and 24.98%, respectively, for the same periods.

 

The Company has revolving lines of credit with itsprimary lenders, which provide for borrowing up to $75 million. These lineswould be utilized to finance stock repurchase activity, underwrite commercialpaper, and fund other operating expenses. At December 31, 2002, the Company had$32 million in commercial paper outstanding, underwritten by the Company’srevolving line of credit.

 

The Company maintains availablelines of federal funds borrowings, as well as seasonal borrowingprivileges, at the Federal Reserve Bank of Minneapolis. The Company’ssubsidiary bank has the ability to borrow an aggregate of $185 million infederal funds from eight nonaffiliated financial institutions. At December 31,2002, the Company had $87 million outstanding on these lines. At December 31, 2001,the Company had no outstanding balance on an aggregate of $55 million inFederal Funds on a funds available basis with two non-affiliated institutions.

 

Additionally, the Company’s subsidiary bank is amember of the Federal Home Loan Bank (“FHLB”) System. As part of membership,the Company’s subsidiary bank purchased a modest amount of stock of FHLB andobtained advance lines of credit which represent an aggregate of $458 millionin additional funding capacity. At December 31, 2002, the Company had $44million outstanding on this line. At December 31, 2001, the Company had nobalance outstanding on an aggregate of $631 million of additional fundingcapacity with the FHLB.

 

**INTEREST RATE SENSITIVITY**

Interest rate sensitivity indicates the exposureof a financial institution’s earnings to future fluctuations in interestrates. Management of interest rate sensitivity is accomplished through thecomposition of loans and investments and by adjusting the maturities on earningassets and interest-bearing liabilities. Rate sensitivity and liquidity arerelated since both are affected by maturing assets and liabilities. However,interest rate sensitivity also takes into consideration those assets andliabilities with interest rates that are subject to change prior to maturity.

 

11

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ALCOattempts to structure the Company’s balance sheet to providefor an 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.

 

**REPRICING MISMATCH ANALYSIS**

Management performs a Repricing MismatchAnalysis (“Gap Analysis”) which represents a point in time net position ofassets, liabilities and off-balance sheet instruments subject to repricing inspecified time periods. Gap Analysis is performed quarterly. However, management believes Gap Analysis alonedoes not accurately measure the magnitude of changes in net interestincome since changes in interest rate donot impact all categories of assets, liabilitiesand off-balance sheet instruments equally or simultaneously. Asummary of the Gap Analysis is presented at the end of this section.

 

**BALANCE SHEET SIMULATION MODELING**

Balance SheetSimulation Modeling allows management to analyze theshort-term (12 months or less) impact of interest rate fluctuations onprojected earnings. Using financial simulation computer software, managementhas built a model that projects a number of interest rate scenarios. Eachscenario captures the impact of contractual obligations embedded in theCompany’s assets and liabilities. These contractualobligations include maturities, loan and security payments, repricingdates, interest rate caps, and interest rate floors. The projection resultsalso measure the impact of various management assumptions including loan anddeposit volume targets, security and loan prepayments, pricing spreads andimplied repricing caps and floors on variable rate non-maturity deposits.Management completes an earnings simulation quarterly. The simulation processis the Company’s primary interest rate risk management tool.

 

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

 

Based on the results ofthe simulation model as of December 31, 2002, management would expect netinterest income to decline 0.85%, assuming a 100 basis point rate increase inmarket rates. This expected result is within the ALCO established guidelines of1.40%. Assuming rates dropped 100 basis points, management would expect netinterest income to decline 2.41%. This decline exceeds the ALCO guidelines of1.40%.  At December 31, 2001 and 2000,the impact of a 100 basis point drop would be approximately .44% and 3.02%,respectively, of net income.

 

Several factors mitigatethe Company’s projected exposure to declining rates. First,management-established risk guidelines are measured against instantaneous rateshocks. Gradual rate shifts over several months reduce the level of projectedrisk. Also, the current model assumes that there is no room to downpricenon-maturity transaction deposits. Management has effectively floored theseliability accounts at current levels in its model. Out of an abundance ofcaution, management believes this is an appropriate assumption for riskmanagement purposes, but management believes there would be the potential forsome downpricing on this sizeable volume of accounts.

 

In addition to earningsat risk, the simulation process is also used as a tool in liquidity and capitalmanagement. Management models the impact of interest rate fluctuation on theanticipated cash flows from various financial instruments. Management alsoreviews the implications of strategies that impact asset mix and capital levelsfrom an interest rate risk and capital management perspective in one integratedmodel.

 

**EQUITY FAIR VALUE MODELING**

Because BalanceSheet Simulation Modeling is dependent on accuratevolume forecasts, its usefulness as a risk management tool is limited torelatively short time frames. As a complement to the simulation process,management uses Equity Fair Value Modeling to measure long-term interest raterisk exposure. This method estimates the impact of interest rate changes on thediscounted future cash flows of the Company’s current assets, liabilities andoff-balance sheet instruments. This risk model does not incorporate projectedvolume assumptions.

 

Similar to thesimulation process, fair value results are heavily driven by managementassumptions. While management strives to use the best assumptions possible, dueto numerous market factors, actual results may deviate from model projections.

 

Based on the modelresults from December 31, 2002, management would expect equity fair value todecline 0.70% assuming a 100 basis point increase in rates. This exposure iswithin the ALCO established guidelines of 10.00%. Assuming rates declined 100basis points, the model projects a decline in equity fair value of 1.42%. Thisexposure is also within the ALCO established policy guidelines of 10.00%.  At December 31, 2001 and 2000, the impact ofa 100 basis point drop would have been approximately .10% and 6.37%,respectively, of equity fair value.

 

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

 

Based on traditional GAPmethods of measuring interest rate risk, management believes the Company wasliability sensitive as of December 31, 2002. The following table sets forth theCompany’s interest rate sensitivity analysis by contractual repricing ormaturity at December 31, 2002:

 
|                                            |   | **Repricing or Maturing in** |       |
|-------------------------------------------------|--------|------------------------------|------------|
| **(In  thousands)**                             |   | **1 Year  or Less**          |       | **Over 1  to 5 Years** |   | **Over 5  Years** |   | **Total** |   |
| Rate  sensitive assets:                         |   |                         |       |   |   |   |   |   |   |
| Loans                                           |   | $                            | 1,923,800  |   | $ | 1,469,421 |   | $ | 184,672 |   | $ | 3,577,893 |   |
| Held-to-maturity  securities                    |   | —                       |       | — |   | 80,165 |   | 80,165 |   |
| Available-for-sale  securities                  |   | 233,039                      |       | 241,403 |   | 1,198,003 |   | 1,672,445 |   |
| Other  interest-bearing assets                  |   | 4,613                        |       | — |   | — |   | 4,613 |   |
| Total  rate sensitive assets                    |   | $                            | 2,161,452  |   | $ | 1,710,824 |   | $ | 1,462,840 |   | $ | 5,335,116 |   |
| Rate  sensitive liabilities:                    |   |                         |       |   |   |   |   |   |   |
| Savings  deposits and interest-bearing checking |   | $                            | 2,424,943  |   | $ | — |   | $ | — |   | $ | 2,424,943 |   |
| Time  deposits                                  |   | 1,316,265                    |       | 456,491 |   | 1,147 |   | 1,773,903 |   |
| Short-term  borrowings                          |   | 453,490                      |       | — |   | — |   | 453,490 |   |
| Long-term  borrowings                           |   | —                       |       | 125,000 |   | 2,500 |   | 127,500 |   |
| Total  rate sensitive liabilities               |   | $                            | 4,194,698  |   | $ | 581,491 |   | $ | 3,647 |   | $ | 4,779,836 |   |
| Rate  sensitive gap                             |   | $                            | (2,033,246 | ) | $ | 1,129,333 |   | $ | 1,459,193 |   | $ | 555,280 |   |
| Cumulative  rate sensitive gap                  |   | (2,033,246                   | )          | (903,913 | ) | 555,280 |   | 555,280 |   |

 

12

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Thefollowing sets forth the Company’s interest rate sensitivity analysis atDecember 31, 2002, with respect to the individual categories of loans andprovides separate analyses with respect to fixed interest rate loans andfloating interest rate loans:

 
|                          |   | **Repricing or Maturing in** |      |
|-------------------------------|--------|------------------------------|-----------|
| **(In  thousands)**           |   | **1 Year  or Less**          |      | **Over 1  to 5 Years** |   | **Over 5  Years** |   | **Total** |   |
| Loan category:                |   |                         |      |   |   |   |   |   |   |
| Real estate                   |   | $                            | 580,820   |   | $ | 861,709 |   | $ | 126,181 |   | $ | 1,568,710 |   |
| Real estate  construction     |   | 439,536                      |      | — |   | — |   | 439,536 |   |
| Agriculture                   |   | 175,127                      |      | 44,234 |   | 1,327 |   | 220,688 |   |
| Commercial                    |   | 414,811                      |      | 262,802 |   | 45,917 |   | 723,530 |   |
| Consumer and other            |   | 313,506                      |      | 300,676 |   | 11,247 |   | 625,429 |   |
| Total loans                   |   | $                            | 1,923,800 |   | $ | 1,469,421 |   | $ | 184,672 |   | $ | 3,577,893 |   |
| Floating  interest rate loans |   | $                            | 508,040   |   | $ | 234,829 |   | $ | 5,210 |   | $ | 748,079 |   |
| Fixed interest rate  loans    |   | 1,415,760                    |      | 1,234,592 |   | 179,462 |   | 2,829,814 |   |
| Total loans                   |   | $                            | 1,923,800 |   | $ | 1,469,421 |   | $ | 184,672 |   | $ | 3,577,893 |   |

 

**CAPITAL MANAGEMENT**

Risk-based capital guidelines establishedby regulatory agencies require the Company to maintain minimum amounts andratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1capital to average assets.

 

As of December 31, 2002, theCompany is considered well capitalized under the regulatory framework forprompt corrective action. To be categorized as well capitalized, the Companymust maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverageratios as set forth in the table.

 
|                              |   | **Regulatory  Capital Requirements** |   |
|-----------------------------------|--------|--------------------------------------|--------|
| **(Dollars  in thousands)**       |   | **Tier 1  Capital**                  |   | **Total Risk-  Based********Capital** |   | **Leverage** |   | **Total Risk-  Based Assets** |   |
| Minimum                           |   | 4.00                                 | %      | 8.00 | % | 3.00 | % | N/A |   |
| Well Capitalized                  |   | 6.00                                 | %      | 10.00 | % | 5.00 | % | N/A |   |
| Community First  Bankshares, Inc. |   |                                 |   |   |   |   |   |   |   |
| December 31, 2002                 |   | 8.98                                 | %      | 11.04 | % | 6.52 | % | $ | 4,202,131 |   |
| December 31, 2001                 |   | 8.67                                 | %      | 11.11 | % | 6.51 | % | $ | 4,304,531 |   |

 

Dueto the Company’s level of Tier 1 capital and substantial level of earningassets invested in low risk government agency and mortgage-backed securities,the Company’s risk-based capital ratios significantlyexceed the regulatory minimums. The Company conducts an ongoingassessment of its capital needs in order to maintain an adequate level ofcapital to support business growth, to ensure depositor protection and tofacilitate corporate expansion. Portions of the subordinated debt financingreferred to in Note 12, Long-Term Debt, are treated as Tier 2 capital.

 

**OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS ANDOTHER COMMERCIAL COMMITMENTS**

 

**Off-Balance Sheet Arrangements:**

In the normal course of business, theCompany enters into various business arrangements wherein it may be required bythe terms of the arrangement to guarantee or invest additional capital as aresult of investment opportunities and financial performance.

 

***Mortgage Loan Joint Venture:***The Company, through its subsidiary bank, and Wells Fargo & Company formeda joint venture mortgage company for thepurpose of providing mortgage origination, documentation, servicingprocess and support for substantially all the residential mortgage business ofthe Company. The Company has 50% ownership and 50% voting rights over theaffairs of the joint venture andaccordingly records its investment and its continuing share of theincome or loss of the joint venture under the equity method of accounting. As a50% holder of the joint venture, the Company may be required to increase itsinvestment in the joint venture in the event additional investment capital wererequired. As of December 31, 2002, the Company’s investment in the jointventure totaled $310,000.

 

***Federal Reserve Stock:***The Company’s affiliate bank is required by Federal banking regulations to be amember of the Federal Reserve System. As a member of the Federal ReserveSystem, the Company must maintain stock ownership in the Federal Reserve System in an amount equal to six percent of theaffiliate bank’s paid-in capital and surplus. The affiliate bank isrequired and currently has purchased an amount of common stock equal to threepercent, or one-half the bank’s subscription amount. At the discretion of theFederal Reserve System, the bank may be required to increase its investment toan amount equal to the full six percent of its total paid-in capital andsurplus. At December 31, 2002, the Company’s investment in the Federal ReserveSystem totaled $9.6 million.

 

**Contractual Obligations and Other Commercial Commitments:**

In the normal course of business, theCompany arranges financing through entering into debt arrangements with variouscreditors for the purpose of financing specific assets or providing a fundingsource.  The contract or notionalamounts of these financing arrangements at December 31, 2002, as well as thematurity of these commitments are (in thousands):

 
|                           |   | **Payment Due by Period** |    |
|--------------------------------|--------|---------------------------|---------|
| **CONTRACTUAL  OBLIGATIONS**   |   | **Total**                 |    | **Less  than1 Year** |   | **1-3Years** |   | **3-5Years** |   | **More  than5 Years** |   |
|                           |
| Long Term Debt                 |   | $                         | 127,500 |   | $ | — |   | $ | 94,000 |   | $ | 31,000 |   | $ | 2,500 |   |
| Capital Lease  Obligations     |   | 7,259                     |    | 1,145 |   | 2,958 |   | 2,958 |   | 198 |   |
| Operating Leases               |   | 7,967                     |    | 2,603 |   | 1,887 |   | 1,067 |   | 2,410 |   |
| Total Contractual  Obligations |   | $                         | 142,726 |   | $ | 3,748 |   | $ | 98,845 |   | $ | 35,025 |   | $ | 5,108 |   |

 

***Long Term Debt:***AtDecember 31, 2002, the Company had long term debt outstanding of $127.5million.  Long-term debt includes $60 million of unsecured subordinated notespayable, bearing interest at a rate of 7.30%, payable semi-annually,that mature June 30, 2004. The subordinated notes, whose terms include certaincovenants pertaining to regulatory compliance, financial performance timelyreporting, failure to pay principal at maturity, failure to make scheduledpayments, and bankruptcy, insolvency or reorganization of the Company, may notbe paid early. Management is currently evaluating the available fundingalternatives with regard to the June 20, 2004 maturity of the 7.3% subordinatednotes, including the impact of various alternatives on the Company’s risk-basedcapital ratios. The subsidiary bank had Federal Home Loan Bank advancestotaling $42.5 million outstanding at December 31, 2002, bearing interest ratesranging from 3.64% to 6.55%, interest is payable monthly, with maturitiesranging from May 20, 2004 to October 2, 2008. Also at December 31, 2002, thesubsidiary bank had a $25 million unsecured subordinated term note payable to anon-affiliated 

 

13

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bank, at an interest rate of LIBOR plus140 basis points, payable quarterly, with a maturity date of December 22, 2007.The subsidiary bank note payable is subject to covenants including, remainingin compliance with all regulatory agency requirements, providing timelyfinancial information and providing access to certain Company records. The debtfacilities are described in Note 12, Long-term Debt.

 

***Capital Lease Obligations:***The Company frequently acquires the rightsto equipment used in the operation of the Company by entering intolong-term capital leases. At December 31, 2002, the Company was liable for thepayment of lease schedules associated with the acquisition of equipment andpremises totaling $5,461,000, exclusive of finance charges. In addition, atDecember 31, 2002, the Company had entered into a commitment to leaseadditional computer equipment that was to be delivered and installed during thefirst quarter of 2003. The effect of capital leases recorded at December 31,2002 and the additional capital lease entered into in the first quarter of 2003are summarized in the table above. Capital lease obligations are also discussedin Note 18, Commitments and Contingent Liabilities.

 

***OperatingLeases:***In the normal course ofbusiness the Company enters into operating lease arrangements for the use ofpremises and equipment. Operating leases include rental agreements with tenantsproviding facilities through which the Company delivers its products andservices. Operating leases are also discussed in Note 18, Commitments andContingent Liabilities.

 

***Company-ObligatedMandatorily Redeemable Preferred Securities:***TheCompany has unconditionally guaranteed the obligationof CFB Capital III, under the $60 million, 8.125% Cumulative Capital Securitiesissued March 27, 2002 and the obligation of CFB Capital II, under the $60million 8.20% Cumulative Capital Securities issued December 10, 1997. The $60million Capital III securities, which mature April 15, 2032 may be redeemed anytime on or after April 15, 2007. The $60 million Capital II securities, whichmature December 15, 2027, may be redeemed at any time.  See Note 13, Company-Obligated MandatorilyRedeemable Preferred Securities for additional information.

 

In the normal course ofbusiness, the Company is party to financial instruments with off-balance-sheetrisk. These transactions enable customers to meet their financing needs andenable the Company to manage its interest rate risk. These financialinstruments include commitments to extendcredit and letters of credit. Other commercial commitments are furtherdiscussed in Note 9, Financial Instruments with Off-Balance-Sheet Risk andConcentrations of Credit. The contract or notional amounts of these financialinstruments at December 31, 2002, as well as the maturity of these commitmentare (in thousands):

 
|                              |   | **Amount of commitment expiring per period** |    |
|-----------------------------------|--------|----------------------------------------------|---------|
| **OTHER COMMERCIAL  COMMITMENTS** |   | **Total**                                    |    | **Less  than  1 Year** |   | **1-3  Years** |   | **3-5  Years** |   | **More  than  5 Years** |   |
|                              |
| Commitments to Extend  Credit     |   | $                                            | 659,609 |   | $ | 458,769 |   | $ | 49,424 |   | $ | 16,750 |   | $ | 134,666 |   |
| Standby Letters of  Credit        |   | 19,716                                       |    | 15,116 |   | 3,644 |   | 114 |   | 842 |   |
| Commercial Letters of  Credit     |   | 10,662                                       |    | 9,783 |   | 789 |   | — |   | 90 |   |
| Total Commercial  Commitments     |   | $                                            | 689,987 |   | $ | 483,668 |   | $ | 53,857 |   | $ | 16,864 |   | $ | 135,598 |   |

 

***Commitmentsto extend credit*** are legally binding andhave fixed expiration dates or other termination clauses. The Company’sexposure to credit loss on commitments to extend credit, in the event ofnonperformance by the counterparty, is represented by the contractual amountsof the commitments. The Company monitors its credit risk for commitments toextend credit by applying the same credit policies in making commitments as itdoes for loans and by obtaining collateral to secure commitments based onmanagement’s credit assessment of the counterparty. Collateral held by theCompany may include marketable securities, receivables, inventory, agriculturalcommodities, equipment and real estate. Because many of the commitments areexpected to expire without being drawn upon, total commitment amounts do notnecessarily represent the Company’s future liquidity requirements. In addition,the Company also offers various consumer credit line products to its customersthat are cancelable upon notification by the Company, which are included abovein commitments to extend credit.

 

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

 

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

 

**FORWARD-LOOKING STATEMENTS**

This Annual Report containsforward-looking statements under the Private Securities Litigation Reform Actof 1995 that are subject to certain risks and uncertainties that could causeactual results to differ materially from historical earnings and thosepresently anticipated or projected. The Company wishes to caution readers notto place undue reliance on any such forward-looking statements, which speakonly as of the date made. Factors that could cause actual results to differfrom the results discussed in the forward-looking statements include, but are not limited to: risks of loans andinvestments, including dependence on local economic conditions;competition for the Company’s customersfrom other providers of financial services; possible adverse effects ofchanges in interest rates; balance sheet and critical ratio risks related tothe share repurchase program; risks related to the Company’s acquisitionstrategy, including risks of adversely changing results of operations andpossible factors affecting the Company’s ability to consummate furtheracquisitions; and other risks detailed in the Company’s filings with theSecurities and Exchange Commission, all of which are difficult to predict andmany of which are beyond the control of the Company.

 

14

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| **CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION** |   | **COMMUNITY  FIRST BANKSHARES, INC.** |
|----------------------------------------------------|--------|---------------------------------------|

 
| **December 31 (Dollars in  thousands, except share data)**                                                 |   | **2002**  |       | **2001**  |       |
|------------------------------------------------------------------------------------------------------------|--------|-----------|------------|-----------|------------|
| **ASSETS**                                                                                                 |   |      | ** ** |      | ** ** |
| Cash and due  from banks                                                                                   |   | $         | 242,887    |      | $          | 248,260 |   |
| Interest-bearing  deposits                                                                                 |   | 4,613     |       | 341       |       |
| Available-for-sale  securities                                                                             |   | 1,672,445 |       | 1,437,066 |       |
| Held-to-maturity  securities (Fair Value: 2002 – $80,165; 2001 – $76,765)                        |   | 80,165    |       | 76,765    |       |
| Loans                                                                                                      |   | 3,577,893 |       | 3,736,692 |       |
| Less: Allowance  for loan losses                                                                           |   | (56,156   | )          | (54,991   | )          |
| Net loans                                                                                                  |   | 3,521,737 |       | 3,681,701 |       |
| Bank premises  and equipment, net                                                                          |   | 132,122   |       | 125,947   |       |
| Accrued interest  receivable                                                                               |   | 34,863    |       | 39,491    |       |
| Goodwill                                                                                                   |   | 62,903    |       | 62,903    |       |
| Other  intangibles                                                                                         |   | 32,577    |       | 34,554    |       |
| Other assets                                                                                               |   | 42,858    |       | 65,298    |       |
| Total assets                                                                                               |   | $         | 5,827,170  |      | $          | 5,772,326 |   |
|                                                                                                       |   |      |       |      |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                             |   |      | ** ** |      | ** ** |
| Deposits:                                                                                                  |   |      |       |      |       |
| Noninterest-bearing                                                                                        |   | $         | 470,900    |      | $          | 487,864 |   |
| Interest-bearing:                                                                                          |   |      |       |      |       |
| Savings and NOW  accounts                                                                                  |   | 2,424,943 |       | 2,367,255 |       |
| Time accounts  over $100,000                                                                               |   | 670,187   |       | 692,315   |       |
| Other time  accounts                                                                                       |   | 1,103,716 |       | 1,203,379 |       |
| Total deposits                                                                                             |   | 4,669,746 |       | 4,750,813 |       |
| Federal funds  purchased and securities sold under agreements to repurchase                                |   | 377,230   |       | 318,859   |       |
| Other short-term  borrowings                                                                               |   | 76,260    |       | 23,780    |       |
| Long-term debt                                                                                             |   | 127,500   |       | 136,841   |       |
| Accrued interest  payable                                                                                  |   | 18,987    |       | 29,966    |       |
| Other  liabilities                                                                                         |   | 58,998    |       | 35,362    |       |
| Total  liabilities                                                                                         |   | 5,328,721 |       | 5,295,621 |       |
| Company-obligated  mandatorily redeemable preferred securities of subsidiary trusts                        |   | 120,000   |       | 120,000   |       |
| Shareholders’  equity:                                                                                |   |      |       |      |       |
| Common stock,  par value $.01 per share:                                                                   |   |      |       |      |       |
| Authorized  Shares – 80,000,000                                                                       |   |      |       |      |       |
| Issued Shares –  51,021,896                                                                           |   | 510       |       | 510       |       |
| Capital surplus                                                                                            |   | 193,887   |       | 193,103   |       |
| Retained earnings                                                                                          |   | 393,550   |       | 348,101   |       |
| Unrealized gain  on available-for-sale securities, net of tax                                              |   | 23,826    |       | 3,847     |       |
| Less cost of  common stock in treasury – 2002 – 12,343,096 shares; 2001 – 10,775,857 shares |   | (233,324  | )          | (188,856  | )          |
| Total  shareholders’ equity                                                                           |   | 378,449   |       | 356,705   |       |
| Total  liabilities and shareholders’ equity                                                           |   | $         | 5,827,170  |      | $          | 5,772,326 |   |

 

See accompanying notes.

 

15

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| **CONSOLIDATED  STATEMENTS OF INCOME** |   | **COMMUNITY FIRST BANKSHARES, INC.** |
|----------------------------------------|--------|--------------------------------------|

 
| **Years  ended December 31 (Dollars in thousands, except share and per share data)** |   | **2002**   |    | **2001**   |   | **2000**   |   |
|--------------------------------------------------------------------------------------|--------|------------|---------|------------|--------|------------|--------|
| **INTEREST INCOME:**                                                                 |   |       |    |       |   |       |   |
| Loans                                                                                |   | $          | 276,846 |       | $      | 336,937    |   | $ | 353,405 |   |
| Investment  securities                                                               |   | 81,136     |    | 96,688     |   | 123,525    |   |
| Interest-bearing  deposits                                                           |   | 41         |    | 192        |   | 184        |   |
| Federal funds  sold and resale agreements                                            |   | 160        |    | 199        |   | 444        |   |
| Total interest  income                                                               |   | 358,183    |    | 434,016    |   | 477,558    |   |
|                                                                                 |   |       |    |       |   |       |   |
| **INTEREST EXPENSE:**                                                                |   |       |    |       |   |       |   |
| Deposits                                                                             |   | 75,572     |    | 138,542    |   | 169,281    |   |
| Short-term and  other borrowings                                                     |   | 6,340      |    | 15,001     |   | 34,303     |   |
| Long-term debt                                                                       |   | 8,016      |    | 8,677      |   | 6,697      |   |
| Total interest  expense                                                              |   | 89,928     |    | 162,220    |   | 210,281    |   |
| Net interest  income                                                                 |   | 268,255    |    | 271,796    |   | 267,277    |   |
| Provision for  loan losses                                                           |   | 13,262     |    | 17,520     |   | 15,781     |   |
| Net interest  income after provision for loan losses                                 |   | 254,993    |    | 254,276    |   | 251,496    |   |
|                                                                                 |   |       |    |       |   |       |   |
| **NONINTEREST INCOME:**                                                              |   |       |    |       |   |       |   |
| Service charges  on deposit accounts                                                 |   | 40,121     |    | 41,850     |   | 42,192     |   |
| Insurance  commissions                                                               |   | 13,822     |    | 12,535     |   | 10,550     |   |
| Security sales  commissions                                                          |   | 9,526      |    | 6,644      |   | 6,805      |   |
| Fees from  fiduciary activities                                                      |   | 5,405      |    | 5,661      |   | 5,811      |   |
| Net gains on  sales of securities                                                    |   | 373        |    | 804        |   | 65         |   |
| Other                                                                                |   | 12,072     |    | 12,081     |   | 12,437     |   |
| Total  noninterest income                                                            |   | 81,319     |    | 79,575     |   | 77,860     |   |
|                                                                                 |   |       |    |       |   |       |   |
| **NONINTEREST EXPENSE:**                                                             |   |       |    |       |   |       |   |
| Salaries and  employee benefits                                                      |   | 113,994    |    | 115,743    |   | 110,024    |   |
| Net occupancy                                                                        |   | 32,832     |    | 31,593     |   | 31,941     |   |
| FDIC insurance                                                                       |   | 800        |    | 915        |   | 1,039      |   |
| Legal and  accounting                                                                |   | 3,138      |    | 3,764      |   | 3,874      |   |
| Other  professional services                                                         |   | 4,340      |    | 4,634      |   | 4,415      |   |
| Advertising                                                                          |   | 3,983      |    | 5,037      |   | 4,545      |   |
| Telephone                                                                            |   | 5,575      |    | 5,633      |   | 5,203      |   |
| Restructuring  charge                                                                |   | —     |    | 7,656      |   | —     |   |
| Data processing                                                                      |   | 7,210      |    | 6,940      |   | 7,200      |   |
| Company-obligated  mandatorily redeemable preferred securities of subsidiary trusts  |   | 10,405     |    | 10,273     |   | 10,245     |   |
| Amortization of  intangibles                                                         |   | 3,318      |    | 9,928      |   | 10,481     |   |
| Other                                                                                |   | 31,960     |    | 33,200     |   | 33,007     |   |
| Total  noninterest expense                                                           |   | 217,555    |    | 235,316    |   | 221,974    |   |
| Income before  income taxes                                                          |   | 118,757    |    | 98,535     |   | 107,382    |   |
| Provision for  income taxes                                                          |   | 39,549     |    | 33,476     |   | 35,748     |   |
| Net income                                                                           |   | $          | 79,208  |       | $      | 65,059     |   | $ | 71,634 |   |
| Earnings per  common and common equivalent share:                                    |   |       |    |       |   |       |   |
| Basic net income                                                                     |   | $          | 2.00    |       | $      | 1.59       |   | $ | 1.55 |   |
| Diluted net  income                                                                  |   | $          | 1.97    |       | $      | 1.57       |   | $ | 1.54 |   |
| Average common  and common equivalent shares outstanding:                            |   |       |    |       |   |       |   |
| Basic                                                                                |   | 39,564,912 |    | 40,905,545 |   | 46,219,120 |   |
| Diluted                                                                              |   | 40,243,135 |    | 41,471,404 |   | 46,578,750 |   |

 

*See accompanying notes.*

 

16

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| **CONSOLIDATED  STATEMENTS OF COMPREHENSIVE INCOME** |   | **COMMUNITY FIRST BANKSHARES, INC.** |
|------------------------------------------------------|--------|--------------------------------------|

 
| **Years ended December 31 (Dollars in thousands)**                  |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net income                                                          |   | $        | 79,208 |     | $      | 65,059   |   | $ | 71,634 |   |
| Other  comprehensive income, net of tax:                            |   |     |   |     |   |     |   |
| Unrealized gains  on securities:                                    |   |     |   |     |   |     |   |
| Unrealized  holding gains arising during period                     |   | 20,203   |   | 13,815   |   | 35,449   |   |
| Less:  Reclassification adjustment for gains included in net income |   | (224     | )      | (482     | )      | (39      | )      |
| Other  comprehensive income                                         |   | 19,979   |   | 13,333   |   | 35,410   |   |
| Comprehensive  income                                               |   | $        | 99,187 |     | $      | 78,392   |   | $ | 107,044 |   |

 

*See accompanying notes.*

 

| **CONSOLIDATED  STATEMENTS OF SHAREHOLDERS’ EQUITY** | **COMMUNITY FIRST BANKSHARES, INC.** |
|-----------------------------------------------------------|--------------------------------------|

 
| **Years ended December 31, 2002, 2001, 2000 (Dollars in  thousands, except share data)**    |   | **Common  Stock** |   | **Capital  Surplus** |   | **Retained  Earnings** |   | **Unrealized  Gain(Loss)** |   | **Treasury  Stock** |    | **Total** |   |
|---------------------------------------------------------------------------------------------|--------|-------------------|--------|----------------------|--------|------------------------|--------|----------------------------|--------|---------------------|---------|-----------|--------|
| **Shares**                                                                                  |   | **Amount**        |   | **Shares**           |   | **Amount**             |   |                       |
| **Balance at December 31, 1999**                                                            |   | 51,021,896        |   | $                    | 510    |                   | $      | 192,071                    |   | $                   | 276,502 |      | $      | (44,896 | ) | 885,964 |   | $ | (16,918 | ) | $ | 407,269 |   |
| Net income                                                                                  |   | —            |   | —               |   | —                 |   | 71,634                     |   | —              |    | —    |   | — |   | 71,634 |   |
| Common stock dividends ($0.60 per share)                                                    |   | —            |   | —               |   | —                 |   | (27,601                    | )      | —              |    | —    |   | — |   | (27,601 | ) |
| Purchases of common stock for treasury, at cost                                             |   | —            |   | —               |   | —                 |   | —                     |   | —              |    | 8,760,278 |   | (145,725 | ) | (145,725 | ) |
| Sales of treasury stock to employee benefit plans                                           |   | —            |   | —               |   | —                 |   | (793                       | )      | —              |    | (127,136  | )      | 2,573 |   | 1,780 |   |
| Exercise of options, net of stock tendered in payment                                       |   | —            |   | —               |   | 297                    |   | (4,651                     | )      | —              |    | (363,962  | )      | 7,018 |   | 2,664 |   |
| Change in unrealized loss on available-for-sale securities,  net of income taxes of $21,576 |   | —            |   | —               |   | —                 |   | —                     |   | 35,410              |    | —    |   | — |   | 35,410 |   |
| **Balance at December 31, 2000**                                                            |   | 51,021,896        |   | $                    | 510    |                   | $      | 192,368                    |   | $                   | 315,091 |      | $      | (9,486 | ) | 9,155,144 |   | $ | (153,052 | ) | $ | 345,431 |   |
| Net income                                                                                  |   | —            |   | —               |   | —                 |   | 65,059                     |   | —              |    | —    |   | — |   | 65,059 |   |
| Common stock dividends ($0.68 per share)                                                    |   | —            |   | —               |   | —                 |   | (27,793                    | )      | —              |    | —    |   | — |   | (27,793 | ) |
| Purchases of common stock for treasury, at cost                                             |   | —            |   | —               |   | —                 |   | —                     |   | —              |    | 2,010,172 |   | (43,020 | ) | (43,020 | ) |
| Exercise of options, net of stock tendered in payment                                       |   | —            |   | —               |   | 735                    |   | (4,256                     | )      | —              |    | (389,459  | )      | 7,216 |   | 3,695 |   |
| Change in unrealized gain on available-for-sale securities,  net of income taxes of $8,748  |   | —            |   | —               |   | —                 |   | —                     |   | 13,333              |    | —    |   | — |   | 13,333 |   |
| **Balance at December 31, 2001**                                                            |   | 51,021,896        |   | $                    | 510    |                   | $      | 193,103                    |   | $                   | 348,101 |      | $      | 3,847 |   | 10,775,857 |   | $ | (188,856 | ) | $ | 356,705 |   |
| Net income                                                                                  |   | —            |   |                 |   | —                 |   | 79,208                     |   | —              |    | —    |   | — |   | 79,208 |   |
| Common stock dividends ($0.80 per share)                                                    |   | —            |   | —               |   | —                 |   | (31,664                    | )      | —              |    | —    |   | — |   | (31,664 | ) |
| Common stock dividends                                                                      |   |              |   |                 |   |                   |   |                       |   |                |    |      |   |   |   |   |   |
| Purchases of common stock for treasury, at cost                                             |   | —            |   | —               |   | —                 |   | —                     |   | —              |    | 1,958,641 |   | (50,187 | ) | (50,187 | ) |
| Exercise of options, net of stock tendered in payment                                       |   | —            |   | —               |   | 1,902                  |   | (2,073                     | )      | —              |    | (425,929  | )      | 6,489 |   | 6,318 |   |
| Purchase of treasury stock for employee benefit plans                                       |   |              |   | —               |   | —                 |   | (22                        | )      | —              |    | 34,527    |   | (770 | ) | (792 | ) |
| Net cost of redemption of company-obligated mandatorily redeemable  preferred securities    |   | —            |   | —               |   | (1,118                 | )      | —                     |   | —              |    | —    |   | — |   | (1,118 | ) |
| Change in unrealized gain on available-for-sale securities, net of  income taxes of $13,098 |   | —            |   | —               |   | —                 |   | —                     |   | 19,979              |    | —    |   | — |   | 19,979 |   |
| **Balance at December 31, 2002**                                                            |   | 51,021,896        |   | $                    | 510    |                   | $      | 193,887                    |   | $                   | 393,550 |      | $      | 23,826 |   | 12,343,096 |   | $ | (233,324 | ) | $ | 378,449 |   |
|                                                                                             |        |                   |        |                      |        |                        |        |                            |        |                     |         |           |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

*See accompanying notes.*

 

17

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| **CONSOLIDATED  STATEMENTS OF CASH FLOWS** |   | **COMMUNITY FIRST BANKSHARES, INC.** |
|--------------------------------------------|--------|--------------------------------------|

 
| **Years  ended December 31 (In thousands)**                                                   |   | **2002**   |    | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------------------|--------|------------|---------|----------|--------|----------|--------|
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                                      |   |       |    |     |   |     |   |
| Net income                                                                                    |   | $          | 79,208  |     | $      | 65,059   |   | $ | 71,634 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:            |   |       |    |     |   |     |   |
| Provision for  loan losses                                                                    |   | 13,262     |    | 17,520   |   | 15,781   |   |
| Depreciation                                                                                  |   | 14,841     |    | 13,553   |   | 14,307   |   |
| Amortization of  intangibles                                                                  |   | 3,318      |    | 9,928    |   | 10,481   |   |
| Net amortization  (accretion) of premiums and discounts on securities                         |   | 1,740      |    | (582     | )      | 188      |   |
| Deferred income  tax benefit                                                                  |   | 5,237      |    | (2,223   | )      | (2,077   | )      |
| Decrease  (increase) in interest receivable                                                   |   | 4,628      |    | 13,003   |   | (1,464   | )      |
| (Decrease)  increase in interest payable                                                      |   | (10,979    | )       | (15,523  | )      | 13,540   |   |
| Other, net                                                                                    |   | 26,400     |    | 15,451   |   | (6,350   | )      |
| Net cash  provided by operating activities                                                    |   | 137,655    |    | 116,186  |   | 116,040  |   |
|                                                                                          |   |       |    |     |   |     |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                                      |   |       |    |     |   |     |   |
| Net (increase)  decrease in interest-bearing deposits                                         |   | (4,272     | )       | 769      |   | 3,538    |   |
| Purchases of  available-for-sale securities                                                   |   | (1,487,117 | )       | (724,534 | )      | (129,097 | )      |
| Maturities of  available-for-sale securities                                                  |   | 1,210,824  |    | 985,009  |   | 258,584  |   |
| Sales of  available-for-sale securities, net of gains                                         |   | 72,251     |    | 39,632   |   | 150,318  |   |
| Purchases of  held-to-maturity securities                                                     |   | (3,400     | )       | (3,543   | )      | (3,431   | )      |
| Maturities of  held-to-maturity securities                                                    |   | —     |    | —   |   | 4,457    |   |
| Net decrease  (increase) in loans                                                             |   | 146,702    |    | (13,187  | )      | (60,340  | )      |
| Net increase in  bank premises and equipment                                                  |   | (21,016    | )       | (17,825  | )      | (10,525  | )      |
| Net cash (used  in) provided by investing activities                                          |   | (86,028    | )       | 266,321  |   | 213,504  |   |
|                                                                                          |   |       |    |     |   |     |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                                      |   |       |    |     |   |     |   |
| Net increase  (decrease) in demand deposits, NOW accounts and savings accounts                |   | 40,724     |    | 4,679    |   | (43,126  | )      |
| Net (decrease)  increase in time accounts                                                     |   | (121,791   | )       | (273,757 | )      | 153,154  |   |
| Net increase  (decrease) in short-term and other borrowings                                   |   | 110,851    |    | (67,071  | )      | (314,715 | )      |
| Net (decrease)  increase in long-term debt                                                    |   | (9,341     | )       | 12,884   |   | 48,335   |   |
| Net proceeds  from issuance of Company-obligated mandatorily redeemable preferred  securities |   | 61,856     |    | —   |   | —   |   |
| Repayment of Company-obligated  mandatorily redeemable preferred securities                   |   | (62,974    | )       | —   |   | —   |   |
| Net purchase of  common stock held in treasury                                                |   | (50,979    | )       | (43,020  | )      | (145,725 | )      |
| Net sale of  common stock held in treasury                                                    |   | 6,318      |    | 3,695    |   | 4,444    |   |
| Cash dividends                                                                                |   | (31,664    | )       | (27,793  | )      | (27,601  | )      |
| Net cash used in  financing activities                                                        |   | (57,000    | )       | (390,383 | )      | (325,234 | )      |
| Net (decrease)  increase in cash and cash equivalents                                         |   | (5,373     | )       | (7,876   | )      | 4,310    |   |
| Cash and cash  equivalents at beginning of year                                               |   | 248,260    |    | 256,136  |   | 251,826  |   |
| Cash and cash  equivalents at end of year                                                     |   | $          | 242,887 |     | $      | 248,260  |   | $ | 256,136 |   |

 

*See accompanying notes.*

 

18

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| **NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS** |   | **COMMUNITY FIRST BANKSHARES, INC.** |
|-------------------------------------------------|--------|--------------------------------------|

 

 

**1.SIGNIFICANT ACCOUNTING POLICIES**

 

Community First Bankshares, Inc. (the “Company”) is a bank holdingcompany which, at the end of 2002, served 136 communities in Arizona,California, Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota,South Dakota, Utah, Wisconsin and Wyoming. The Company’s community banksprovide a full range of banking services through its 51 Regional FinancialCenters and 28 Community Financial Centers, primarily in small and medium-sizedcommunities and the surrounding areas. In addition to its primary emphasis oncommercial and consumer banking services, the Companyoffers trust, mortgage, insurance and nondeposit investment products andservices.

 

**BASIS OF PRESENTATION**

The consolidated financial statements include the accounts of CommunityFirst Bankshares, Inc., its wholly-owned data processing, credit originationand insurance agency subsidiaries and its wholly-owned subsidiary bank. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation. Certain amounts in prior periods have been reclassified toconform to the current presentation.

 

**USE OF ESTIMATES**

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

**HELD-TO-MATURITY ANDAVAILABLE-FOR-SALE SECURITIES**

Management determines the classification of debt securities at the timeof purchase and re-evaluates such designation as of each balance sheet date.Debt securities are classified as held-to-maturity when the Company has thepositive intent and ability to hold the securities to maturity.Held-to-maturity securities are stated at amortized cost.

 

Debt securities not classified as held-to-maturity andequity securities are classified asavailable-for-sale. Available-for-sale securities are stated at fairvalue, with the unrealized gains and losses, net of tax, reported withincomprehensive income in shareholders’ equity.

 

The amortized cost of debt securities classified asheld-to-maturity or available-for-sale is adjusted for amortization of premiumsand accretion of discounts to maturity or, in the case of mortgage-backedsecurities, over the estimated life of the security. Such amortization andaccretion is included as an adjustment to interest income from investments.Realized gains and losses and declines in value judged to be other than temporary are included in netsecurities gains (losses). The cost of securities sold is based on thespecific identification method.

 

**LOANS**

Loans are stated at their principal balance outstanding, less the allowance for loan losses. Interest on loans isrecognized on an accrual basis. Loans are placed on nonaccrual when theybecome past due over 90 days, unless well secured and in the process ofcollection, or earlier, if the collection of interest or principal isconsidered unlikely. Thereafter, no interest income is recognized unlessreceived in cash and until such time as the borrower demonstrates the abilityto pay interest and principal. Consumer loans are generally charged off whenthey become 90 days contractually past due. All other loans are charged offwhen considered uncollectible based on both quantitative and qualitativefactors determined on an individual loan basis.

 

Loans held for sale are carried at the lower of costor fair value.

 

**LOAN FEE INCOME**

The Company recognizes loan fees and certain direct origination costs,utilizing a method that approximates a constant rate of return over theestimated life of the loan.

 

**ALLOWANCE FOR LOAN LOSSES**

The allowance for loan losses is maintained through charges to expenseat an amount that will provide for estimated loan losses. The current level ofthe allowance for loan losses is a result of management’s assessment of the riskswithin 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.

 

During 2001, the Company modified the methodologyutilized to allocate reserves within individual loan portfolios. Themodification was due to the Company’s desire to more specifically identifycredit risk within each individual loan portfolio.

 

Ultimate losses may vary fromcurrent estimates, and as adjustments become necessary, the allowancefor loan losses is adjusted in the periods in which such losses become known orfail to occur. Actual loan charge-offs and subsequent recoveries are deductedfrom and added to the allowance, respectively.

 

**BANK PREMISES AND EQUIPMENT**

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation for financialreporting purposes is provided on the straight-line method over theestimated lives of the assets and includes amortization of assets recordedunder capital leases. Estimated lives range from three to twenty and fifteen tothirty-nine years for equipment and premises, respectively. Accelerated depreciationmethods are used for income tax reporting purposes.

 

**INTANGIBLE ASSETS**

Goodwill, the excess cost over net assets acquired, of subsidiaries wasamortized over a period of fifteen years, until December 31, 2001. As describedin Note 3, Accounting Changes, goodwill is no longer amortized. At December 31,2002, goodwill totaled $62,903,000, net of accumulated amortization of$36,292,000. Other intangible assets, principally deposit based intangibles,unexpired premium lists and noncompetition agreements, totaled $32,577,000, netof accumulated amortization of $17,087,000, and are amortized over theirestimated useful lives ranging from three to twenty-five years. The Companyassesses the recoverability of goodwill and other intangibles on an annualbasis to determine whether any impairment exists. This ongoing assessmentincludes understanding and evaluating qualitative factors that would indicatethe potential for impairment. If the Company believes a potential 

 

19

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impairment exists, the Company estimates the relative market value ofthe corresponding business activity to determine whether a permanent impairmentexists.

 

**INCOME TAXES**

The Company provides for income taxes based on income reported forfinancial statement purposes, rather than amounts currently payable understatutory tax laws. Deferred taxes are recorded to reflect the tax consequenceson future years’ differences between the tax bases of assets and liabilitiesand the financial reporting of amounts at each year-end.

 

**EARNINGS PER SHARE**

Basic earnings per common share is calculated by dividing net income applicable to common equity by theweighted-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 during each period. Such adjustments tothe weighted-average number of shares of common stock outstanding aremade only when such adjustments dilute earnings per share.

 

**CASH AND CASH EQUIVALENTS**

Cash and cash equivalents is defined as cash and due from banks, federal funds sold and securities purchased underagreements to resell.

 

**STOCK-BASED COMPENSATION**

At December 31, 2002, the company had two stock-based employeecompensation plans, which are described more fully in Note 15, Employee BenefitPlans. The Company accounts for those plans under the recognition andmeasurement principles of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and Related Interpretations. No stock-based employee compensationcost is reflected in net income, as all options granted under those plans hadan exercise price equal to the market value of the underlying common stock onthe date of grant. The following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,to stock-based employee compensation:

 
|                                                                                                                                            |   | **Year Ended  December 31** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
| **(Dollars in thousands, except per share data)**                                                                                               |   | **2002**                    |   | **2001** |   | **2000** |   |
| Net income, as  reported                                                                                                                        |   | $                           | 79,208 |   | $ | 65,059 |   | $ | 71,634 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax  effects. |   | (2,782                      | )      | (2,289 | ) | (1,923 | ) |
| Pro forma net  income                                                                                                                           |   | $                           | 76,426 |   | $ | 62,770 |   | $ | 69,711 |   |
| Earnings per  share:                                                                                                                            |   |                        |   |   |   |   |   |
| Basic—as  reported                                                                                                                         |   | $                           | 2.00   |   | $ | 1.59 |   | $ | 1.55 |   |
| Basic—pro forma                                                                                                                            |   | $                           | 1.93   |   | $ | 1.53 |   | $ | 1.51 |   |
| Diluted—as  reported                                                                                                                       |   | $                           | 1.97   |   | $ | 1.57 |   | $ | 1.54 |   |
| Diluted—pro  forma                                                                                                                         |   | $                           | 1.90   |   | $ | 1.51 |   | $ | 1.50 |   |

 

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 singlemeasure of the fair value of its employee stock options.

 

The following weighted-average assumptions were usedin the valuation model: risk-free interest rates of 3.61 percent and 4.88percent in 2002 and 2001, respectively; dividend yield of 3.17 percent and 2.65percent in 2002 and 2001, respectively; stock price volatility factors of .265and .329 in 2002 and 2001, respectively; and expected life of options of 7.5 years.

 

**2.BUSINESS COMBINATIONS ANDDIVESTITURES**

 

On June 15, 2001, the Company, through its subsidiary bank, and WellsFargo & Company formed a joint venture mortgage company called CommunityFirst Mortgage, LLC. This joint venture mortgage company provides mortgageorigination, documentation, servicing process and support for all of theresidential mortgage business of Community First Bankshares. The Company has50% ownership and voting rights over the affairs of the joint venture andrecords its interest in the joint venture using the equity method ofaccounting. Accordingly, the assets and liabilities of the joint venture arenot consolidated in the Company’s financial statements, but rather, arereflected as a single line item in the statements of financial condition. Thenew mortgage company began operations in late 2001 and was fully operational in2002.

 

During 2001, the Company sold nine offices in Arizona,three offices in Nebraska, and one office in North Dakota. The transactionsincluded the disposition of $118 million in deposits.

 

During 2001, the Company completed the closure ofeight offices, including three offices in Colorado, two offices in each ofNorth Dakota and Wyoming and one in Minnesota. Four of the offices closed arein communities where the Company maintains other offices. Thus, the Companywill continue to serve those communities. The closures are part of theCompany’s strategic initiatives announced during the first quarter of 2001.

 

**3. ACCOUNTINGCHANGES**

 

SFAS Nos. 141 and 142 – Business Combinations and Goodwill and OtherIntangible Assets – In June 2001, the FASB issued SFAS Nos. 141 and 142.Statement 141 requires that the purchase method of accounting be used for allbusiness combinations initiated after June 30, 2001. Statement 142 prohibitsthe amortization of goodwill and intangible assets with indefinite usefullives. Statement 142 requires that these assets be reviewed for impairment atleast annually. Intangible assets with finite lives will continue to beamortized over their estimated useful lives.

 

Effective January 1, 2002, the Company adoptedStatement 142. During the first quarter of 2002, the Company performed thefirst of the required impairment tests of goodwill as of January 1, 2002. TheCompany tested for impairment using the two-step process described in Statement142. The first step was a review for potential impairment, while the secondstep measures the amount of the impairment, if any. The Company found noimpairment of goodwill;

 

20

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therefore, the Company did not record any transitional impairment as acumulative effect of a change in accounting principle.

 

The following table sets forth the computation of netincome and basic and diluted earnings per share as though goodwill amortizationhad not been recorded as an expense during 2002 and 2001:

 
|                                                    |   | **For the  Years Ended** |   |
|---------------------------------------------------------|--------|--------------------------|--------|
| **(Dollars in thousands, except per share data)**       |   | **2002**                 |   | **2001** |   |
| Reported net  income                                    |   | $                        | 79,208 |   | $ | 65,059 |   |
| Effect of SFAS  142                                     |   |                     |   |   |   |
| After-tax goodwill  amortization included in net income |   | —                   |   | 4,984 |   |
| Adjusted net  income                                    |   | $                        | 79,208 |   | $ | 70,043 |   |
| Adjusted basic  earnings per share                      |   | $                        | 2.00   |   | $ | 1.71 |   |
| Adjusted diluted  earnings per share                    |   | $                        | 1.97   |   | $ | 1.69 |   |

 

The aggregate amortization expense of intangible assetsother than goodwill for the years ended December 31, 2002 and 2001 were$3,318,000 and $3,375,000, respectively. The following table sets forthestimated amortization expense for intangible assets other than goodwill foreach of the five years subsequent to December 31, 2002 (in thousands):

 
| 2003 |   | $     | 3,322  |   |
|------|--------|-------|--------|--------|
| 2004 |   | 3,306 |   |
| 2005 |   | 3,261 |   |
| 2006 |   | 3,189 |   |
| 2007 |   | 3,160 |   |

 

All of the Company’s intangible assets other thangoodwill are subject to amortization. The following table sets forth thegross carrying amount and accumulated amortization, in total and by major classof intangible assets as of December 31, 2002 (in thousands):

 
|                          |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
|-------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
| Amortized  intangible assets: |   |                        |   |                          |   |
| Deposit-based  intangibles    |   | $                           | 39,620 |                          | $      | 14,225 |   |
| Insurance list  premiums      |   | 9,260                       |   | 2,393                         |   |
| Non-compete  agreements       |   | 784                         |   | 469                           |   |
| Total                         |   | $                           | 49,664 |                          | $      | 17,087 |   |

 

In November 2002, the Financial Accounting StandardsBoard issued Interpretation No. 45, Guarantor’s Accounting and Disclosure for Guarantees,Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45requires certain guarantees to be recorded at fair value and applies tocontracts or indemnification agreements that contingently require the guarantorto make payments to the guaranteed party based on changes in an underlyingcondition that is related to an asset, liability or equity security of theguaranteed party. Examples of contracts meeting these characteristics includestandby and performance letters of credit. The recognition requirements of FIN45 are to be applied prospectively to guarantees issued or modified subsequentto December 31, 2002. FIN 45 also expands the disclosures to be made byguarantors, effective as of December 31, 2002, to include the nature of theguarantee, the maximum potential amount of future payments that the guarantorcould be required to make under the guarantee, and the current amount of theliability, if any, for the guarantor’s obligation under the guarantee.Significant guarantees that have been entered into by the Company are disclosedin Note 9, Financial Instruments with Off-Balance-Sheet Risk and Concentrationof Credit Risk. The Company does not expect the requirements of FIN 45 to havea material impact on its results of operations, financial position orliquidity.

 

**4. RESTRUCTURINGCHARGE**

 

During the first quarter of 2001, the Companyrecorded a $5.1 million after-tax, non-recurring charge as a result of aseries of strategic initiatives designed to improve customer service and strengthenthe Company’s position as a provider of diversified financial services. As partof this strategy, the Company designated each of its offices as either aRegional Financial Center or a Community Financial Center. Regional FinancialCenters are those locations exhibiting strong commercial banking potential,while Community Financial Centers offer greater retail opportunities. As aconsequence of the new delivery structure, the Company sold 13 offices andclosed eight additional offices. A further consequence was to achieve areduction in work force through implementation of an early-out program, whichwas accepted by 21 eligible management personnel. The restructuring chargeincluded approximately $3.1 million related to asset write-down, data processing,and legal and accounting fees. Additionally, the Company recorded an after-taxexpense of approximately $2.0 million to provide for severance-related costsassociated with the early-out and reduction-in-force programs.

 

**5. SECURITIES**

 

The following is a summary of available-for-sale securities andheld-to-maturity securities at December 31, 2002 (in thousands):

 
|                                 |   | **AVAILABLE-FOR-SALE SECURITIES** |      |
|--------------------------------------|--------|-----------------------------------|-----------|
|                                 |   | **Amortized****Cost**             |      | **GrossUnrealizedGains** |   | **GrossUnrealizedLosses** |   | **Estimated  Fair  Value** |   |
| United States  Treasury              |   | $                                 | 52,474    |   | $ | 994 |   | $ | — |   | $ | 53,468 |   |
| United States  Government agencies   |   | 286,706                           |      | 6,521 |   | — |   | 293,227 |   |
| Mortgage-backed  securities          |   | 1,007,049                         |      | 31,071 |   | 76 |   | 1,038,044 |   |
| Collateralized  mortgage obligations |   | 3,476                             |      | 36 |   | — |   | 3,512 |   |
| State and political  securities      |   | 68,665                            |      | 2,463 |   | 33 |   | 71,095 |   |
| Other securities                     |   | 214,629                           |      | 684 |   | 2,214 |   | 213,099 |   |
| Total                                |   | $                                 | 1,632,999 |   | $ | 41,769 |   | $ | 2,323 |   | $ | 1,672,445 |   |

 
|             |   | **HELD-TO-MATURITY SECURITIES** |   |
|------------------|--------|---------------------------------|--------|
|             |   | **Amortized****Cost**           |   | **GrossUnrealizedGains** |   | **GrossUnrealizedLosses** |   | **Estimated  Fair  Value** |   |
| Other securities |   | $                               | 80,165 |   | $ | — |   | $ | — |   | $ | 80,165 |   |
| Total            |   | $                               | 80,165 |   | $ | — |   | $ | — |   | $ | 80,165 |   |

 

21

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The following is a summary of available-for-salesecurities and held-to-maturity securities at December 31, 2001 (in thousands):

 
|                                 |   | **AVAILABLE-FOR-SALE SECURITIES** |      |
|--------------------------------------|--------|-----------------------------------|-----------|
|                                 |   | **Amortized****Cost**             |      | **GrossUnrealizedGains** |   | **GrossUnrealizedLosses** |   | **Estimated  Fair  Value** |   |
| United States  Treasury              |   | $                                 | 66,953    |   | $ | 2,349 |   | $ | 5 |   | $ | 69,297 |   |
| United States  Government agencies   |   | 227,848                           |      | 4,624 |   | 1,092 |   | 231,380 |   |
| Mortgage-backed  securities          |   | 877,670                           |      | 11,343 |   | 1,865 |   | 887,148 |   |
| Collateralized  mortgage obligations |   | 4,337                             |      | 50 |   | 10 |   | 4,377 |   |
| State and  political securities      |   | 97,829                            |      | 1,029 |   | 1,255 |   | 97,603 |   |
| Other securities                     |   | 156,059                           |      | 691 |   | 9,489 |   | 147,261 |   |
| Total                                |   | $                                 | 1,430,696 |   | $ | 20,086 |   | $ | 13,716 |   | $ | 1,437,066 |   |

 
|             |   | **HELD-TO-MATURITY SECURITIES** |   |
|------------------|--------|---------------------------------|--------|
|             |   | **Amortized****Cost**           |   | **GrossUnrealizedGains** |   | **GrossUnrealizedLosses** |   | **Estimated  Fair  Value** |   |
| Other securities |   | $                               | 76,765 |   | $ | — |   | $ | — |   | $ | 76,765 |   |
| Total            |   | $                               | 76,765 |   | $ | — |   | $ | — |   | $ | 76,765 |   |

 

Proceeds from the sale of available-for-salesecurities during the years ended December 31, 2002, 2001 and 2000, were$72,624,000, $40,436,000, and $150,383,000, respectively. Gross gains of$2,606,000, $1,088,000, and $880,000 and gross losses of $2,233,000, $284,000,and $815,000 were realized on those sales during 2002, 2001 and 2000,respectively. The tax effect on the net gains during 2002, 2001 and 2000 wasapproximately $131,000, $281,000, and $23,000, respectively. There were nosales of held-to-maturity securities during 2002, 2001 or 2000.

 

The amortized cost and estimated fair value of debtsecurities at December 31, 2002, by contractual maturity, are shown below.Expected maturities may differ from contractual maturities because borrowersmay have the right to call or prepay obligations with or without call orprepayment penalties.

 
| **Available-for-Sale  (In thousands)**  |   | **Amortized  Cost** |      | **Estimated  Fair Value** |   |
|-----------------------------------------|--------|---------------------|-----------|---------------------------|--------|
| Due in one year  or less                |   | $                   | 230,460   |                      | $      | 232,009 |   |
| Due after one  year through five years  |   | 232,762             |      | 238,624                   |   |
| Due after five  years through ten years |   | 39,338              |      | 40,643                    |   |
| Due after ten  years                    |   | 119,914             |      | 119,613                   |   |
|                                    |   | 622,474             |      | 630,889                   |   |
| Mortgage-backed  securities             |   | 1,007,049           |      | 1,038,044                 |   |
| Collateralized  mortgage obligations    |   | 3,176               |      | 3,512                     |   |
| Total                                   |   | $                   | 1,632,999 |                      | $      | 1,672,445 |   |

 
| **Held-to-Maturity (In thousands)** |   | **Amortized  Cost** |   | **Estimated  Fair Value** |   |
|-------------------------------------|--------|---------------------|--------|---------------------------|--------|
| Due after ten  years                |   | $                   | 80,165 |                      | $      | 80,165 |   |
| Total                               |   | $                   | 80,165 |                      | $      | 80,16537 |   |

 

Available-for-sale and held-to-maturity securitiescarried at $1,262,239,000 and $1,213,234,000 at December 31, 2002 and 2001,respectively, were pledged to secure borrowings, public and trust deposits andfor other purposes required by law. Securities sold under agreement torepurchase were collateralized by available-for-sale and held-to-maturitysecurities with an aggregate carrying value of $260,730,000 and $246,759,000 atDecember 31, 2002 and 2001, respectively.

 

**6. LOANS**

 

The composition of the loan portfolio at December 31 was as follows (inthousands):

 
|                             |   | **2002**  |      | **2001**  |   |
|----------------------------------|--------|-----------|-----------|-----------|--------|
| Real estate                      |   | $         | 1,568,710 |      | $      | 1,515,118 |   |
| Real estate  construction        |   | 439,536   |      | 519,031   |   |
| Commercial                       |   | 723,530   |      | 824,318   |   |
| Consumer and  other              |   | 625,429   |      | 627,034   |   |
| Agriculture                      |   | 220,688   |      | 251,191   |   |
|                             |   | 3,577,893 |      | 3,736,692 |   |
| Less: Allowance  for loan losses |   | (56,156   | )         | (54,991   | )      |
| Net loans                        |   | $         | 3,521,737 |      | $      | 3,681,701 |   |

 

Real estate loans totaling $261,627,000 and$1,136,828,000 at December 31, 2002 and 2001, respectively, were pledged tosecure borrowings. Loans held for sale totaled $2,669,000 and $0 at December31, 2002 and 2001, respectively, and consisted of real estate loans at theCompany’s affiliate bank.

 

**7.ALLOWANCE FOR LOAN LOSSES**

 

Activity in the allowance was as follows (in thousands):

 
|                                    |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Balance at  beginning of year           |   | $        | 54,991 |     | $      | 52,168   |   | $ | 48,878 |   |
| Allowance of  acquired companies/other  |   | —   |   | —   |   | —   |   |
| Provision  charged to operating expense |   | 13,262   |   | 17,520   |   | 15,781   |   |
| Loans charged  off                      |   | (20,049  | )      | (19,869  | )      | (17,117  | )      |
| Recoveries of  loans charged off        |   | 7,952    |   | 5,172    |   | 4,626    |   |
| Balance at end  of year                 |   | $        | 56,156 |     | $      | 54,991   |   | $ | 52,168 |   |

 

Other real estate owned totaled $5,990,000,$2,869,000, and $2,437,000 at December 31, 2002, 2001, and 2000, respectively.

 

Nonaccrual loans totaled $22,728,000, $20,818,000, and$23,426,000 at December 31, 2002, 2001 and 2000, respectively. The Companyincludes all loans considered impaired under SFAS No. 114 in nonaccrual loans.Interest income of $3,615,000, $2,722,000, and $4,693,000 on nonaccrual loanswould have been recorded during 2002, 2001 and 2000, respectively, if the loanshad been current in accordance with their original terms. The Company recordedinterest income of $679,000, $1,113,000 and $955,000 related to loans that wereon nonaccrual status as of December 31, 2002, 2001 and 2000, respectively.

 

22

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**8. FAIR VALUE OF FINANCIALINSTRUMENTS**

** **

Due to the nature of its business and the financing needs of itscustomers, the Company has a financial interest in a large number of financialinstruments, the majority for which an active market does not exist.Accordingly, the Company has used various valuation techniques to estimate thefair value of its financial instruments. These techniques are significantlyaffected by the assumptions used, including the discount rate, the estimatedtiming and amount of cash flows and the aggregation methods used to valuesimilar instruments. In this regard, theresulting fair value estimates cannot be substantiated by comparison toindependent markets and, in a majority of cases, could not be realized by theimmediate sale or settlement of the instrument. Also, the estimates reflect apoint-in-time valuation that could change significantly based on changes inoutside economic factors, such as the general level of interest rates. Therequired disclosures exclude the estimated values of nonfinancial instrumentcash flows and are not intended to provide or estimate a market value of the Company. The following assumptions wereused by the Company in estimating the fair value of the specificfinancial instruments.

 

**CASH AND DUE FROM BANKS**

The carrying amounts reported in the statementsof financial condition approximate fair values for these items that haveno interest rate or credit risk.

 

**INTEREST-BEARING DEPOSITS**

The fair value of interest-bearing deposits is estimated using adiscounted cash flow analysis using current market rates of interest bearing deposits with similar maturities todiscount the future cash flows.

 

**AVAILABLE-FOR-SALE ANDHELD-TO-MATURITY SECURITIES**

Fair values for these items are based on available market quotes. Ifmarket quotes are not available, fair values are based on market quotes ofcomparable securities.

 

**LOANS**

The loan portfolio consists of both variable and fixed rate loans. Thefair value of variable rate loans, a majority of which reprice within the nextthree months and for which there has been no significant change in credit risk,are assumed to approximate their carrying amounts. The fair values for fixedrate loans are estimated using discounted cash flow analyses. The discountrates applied are based on the current interest rates for loans with similarterms to borrowers of similar credit quality.

 

**DEPOSIT LIABILITIES**

The fair value of demand deposits, savings accounts and certain moneymarket deposits is defined by SFAS No. 107 to be equal to the amount payable ondemand at the date of the financial statements. Fair values for fixed ratecertificates of deposit are estimated using a discounted cash flow analysisthat uses the interest rates currently being offered on certificates of depositto discount the aggregated expected monthly maturities.

 

**SHORT-TERM BORROWINGS**

Federal funds purchased, borrowings under repurchase agreements andother short-term borrowings are at variable rates or have short-termmaturities, and their fair value is assumed to approximate their carryingvalue.

** **

**LONG-TERM DEBT**

The fair value of long-term debt is estimated using a discounted cashflow analysis using current market rates of debt with similar maturities todiscount the future cash flows.

 

**LOAN COMMITMENTS AND LETTERS OFCREDIT**

The majority of the Company’s commitments have variable rates and donot expose the Company to interest rate risk. The Company’s commitments forfixed rate loans are evaluated, and it is estimated the probability ofadditional loans being issued under these commitments is not significant andthere is not a fair value liability.

 

The estimated fair values of the Company’s financialinstruments at December 31 are shown in the table below (in thousands): 

 
|                                               |   | **2002**             |    | **2001**        |   |
|----------------------------------------------------|--------|----------------------|---------|-----------------|--------|
|                                               |   | **Carrying  Amount** |    | **Fair  Value** |   | **Carrying  Amount** |   | **Fair  Value** |   |
| Financial  assets:                                 |   |                 |    |            |   |   |   |   |   |
| Cash and due  from banks                           |   | $                    | 242,887 |            | $      | 242,887 |   | $ | 248,260 |   | $ | 248,260 |   |
| Interest-bearing  deposits                         |   | 4,613                |    | 4,613           |   | 341 |   | 341 |   |
| Available-for-sale  securities                     |   | 1,672,445            |    | 1,672,445       |   | 1,437,066 |   | 1,437,066 |   |
| Held-to-maturity  securities                       |   | 80,165               |    | 80,165          |   | 76,765 |   | 76,765 |   |
| Loans                                              |   | 3,577,893            |    | 3,629,191       |   | 3,736,692 |   | 3,798,123 |   |
| Allowance for  loan losses                         |   | (56,156              | )       | (56,156         | )      | (54,991 | ) | (54,991 | ) |
| Net loans                                          |   | 3,521,737            |    | 3,573,035       |   | 3,681,701 |   | 3,743,132 |   |
| Financial  liabilities:                            |   |                 |    |            |   |   |   |   |   |
| Deposits:                                          |   |                 |    |            |   |   |   |   |   |
| Noninterest-bearing                                |   | $                    | 470,900 |            | $      | 470,900 |   | $ | 487,864 |   | $ | 487,864 |   |
| Interest-bearing:                                  |   |                 |    |            |   |   |   |   |   |
| Savings and NOW                                    |   | 2,424,943            |    | 2,424,943       |   | 2,367,255 |   | 2,367,255 |   |
| Time accounts  over $ 100,000                      |   | 670,187              |    | 680,086         |   | 692,315 |   | 696,810 |   |
| Other time  accounts                               |   | 1,103,716            |    | 1,121,184       |   | 1,203,379 |   | 1,211,193 |   |
| Total deposits                                     |   | 4,669,746            |    | 4,697,113       |   | 4,750,813 |   | 4,763,122 |   |
| Federal funds  purchased and repurchase agreements |   | 377,230              |    | 377,230         |   | 318,859 |   | 318,859 |   |
| Other short-term  borrowings                       |   | 76,260               |    | 76,260          |   | 23,780 |   | 23,780 |   |
| Long-term debt                                     |   | 127,500              |    | 131,303         |   | 136,841 |   | 140,570 |   |

 

**9. FINANCIALINSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK**

 

In the normal course of business, the Company is party to financialinstruments with off-balance-sheet risk. These transactions enable customers tomeet their financing needs and enable the Company to manage its interest raterisk. These financial instruments include commitments to extend credit andletters of credit. The contract or notional amounts of these financialinstruments at December 31, 2002 and 2001, were as follows (in thousands):

 
|                          |   | **2002** |    | **2001** |   |
|-------------------------------|--------|----------|---------|----------|--------|
| Commitments to  extend credit |   | $        | 659,609 |     | $      | 671,500 |   |
| Standby letters  of credit    |   | 19,716   |    | 21,042   |   |
| Commercial  letters of credit |   | 10,662   |    | 9,165    |   |
|                               |        |          |         |          |        |  |  |

 

23

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Commitmentsto extend credit are legally binding and have fixed expiration dates or other termination clauses. The Company’s exposureto credit loss on commitments to extend credit, in the event of  nonperformance by the counterparty, isrepresented by the contractual amounts of the commitments. The Company monitorsits credit risk for commitments to extend credit by applying the same credit policies in making commitments as itdoes for loans and by obtaining collateral to secure commitments basedon management’s credit assessment of the counterparty. Collateral held by theCompany may include marketable securities, receivables, inventory, agriculturalcommodities, equipment and real estate. Because many of the commitments areexpected to expire without being drawn upon, total commitment amounts do notnecessarily represent the Company’s future liquidity requirements. In addition,the Company also offers various consumer credit line products to its customersthat are cancelable upon notification by the Company, which are included abovein commitments to extend credit.

 

Standby letters ofcredit are conditional commitments issued by the Company to guarantee thefinancial performance of a customer to a third party. Those guarantees areprimarily issued to support public and private borrowing arrangements.

 

Commercial letters ofcredit are issued by the Company on behalf of customers to ensure payments ofamounts owed or collection of amounts receivable in connection with tradetransactions. The Company’s exposure to credit loss in the event ofnonperformance by the counterparty is the contractual amount of the letter ofcredit and represents the same exposure as that involved in extending loans.

 

The amount of collateralobtained to support letters of credit is based on a credit assessment of thecounterparty. Collateral held may include marketable securities, receivables,inventory, agricultural commodities, equipment and real estate. Because theconditions under which the Company is required to fund letters of credit maynot materialize, the liquidity requirements of letters of credit are expectedto be less than the total outstanding commitments.

 

The Company’s banksubsidiary grants real estate, agricultural, commercial, consumer and otherloans and commitments and letters of credit to customers throughout Arizona,California, Colorado, Iowa, Minnesota, Nebraska, New Mexico, North Dakota,South Dakota, Utah, Wisconsin and Wyoming. Although the Company has adiversified loan portfolio, the ability of a significant portion of its debtorsto honor their contracts is dependent upon their local  economic sector. The maximum exposure toaccounting loss that could occur, if the borrowers fail to perform according tothe loan agreements, and the underlying collateral proved to be of no value, isthe total loan portfolio balances and contractual amounts of commitments andletters of credit.

 

**10. BANKPREMISES AND EQUIPMENT**

 

Bank premises and equipment at December 31consisted of the  following (inthousands):

 
|                                             |   | **2002** |    | **2001** |   |
|--------------------------------------------------|--------|----------|---------|----------|--------|
| Land                                             |   | $        | 22,100  |     | $      | 22,265 |   |
| Buildings                                        |   | 134,675  |    | 133,701  |   |
| Furniture, fixtures  and equipment               |   | 95,018   |    | 89,911   |   |
| Leased property under  capital lease obligations |   | 12,561   |    | 7,747    |   |
|                                             |   | 264,354  |    | 253,624  |   |
| Less  accumulated depreciation                   |   | 132,232  |    | 127,677  |   |
|                                             |   | $        | 132,122 |     | $      | 125,947 |   |

 

**1****1.********SHORT-TERM BORROWINGS**

 

As of December 31, 2002, the Company’ssubsidiary bank had $44 million in Federal Home Loan Bank (“FHLB”) borrowings,which are collateralized by various investment securities and real estateloans. The interest rates on FHLB borrowings are variable rates based onshort-term market conditions and the term of the advance, ranging from 1.46% to4.68% at December 31, 2002. The Company’s subsidiaries had no additionalshort-term borrowings outstanding at December 31, 2002.

 

The Company has ashort-term line of credit bearing interest at a variable rate of LIBOR plus..75% that provides for borrowing up to $25 million through October 26, 2003,with a commitment fee of .25% of the revolving commitment amount. As ofDecember 31, 2002, the Company had no balance outstanding under this line ofcredit. The Company has a short term line of credit bearing interest at avariable rate of 1.25% above the Federal Funds rate that provides for borrowingup to $50 million, with a commitment fee of .25% of the revolving commitmentamount. This line may be accessed to fund the repurchase of the Company’scommon stock, fund operating expenses and underwrite the Company’s outstandingcommercial paper obligations. As of December 31, 2001, the Company had nobalance outstanding under this line of credit. The Company has entered into anagreement that allows for its designated agent to underwrite up to $35 millionof commercial paper and has obtained lines of credit to support theseborrowings. As of December 31, 2002, there was a $32 million commercial paperbalance outstanding with a blended rate of 1.93%. The terms of the lines ofcredit include certain covenants with which the Company must comply. AtDecember 31, 2002, the Company was in compliance with all covenants pertainingto the lines of credit.

 

**1****2.********LONG-TERM DEBT**

 

Long-term debt consisted of the followingat December 31 (in  thousands):

 
|                                                                                                                                                                                                                         |   | **2002** |    | **2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Parent Company:                                                                                                                                                                                                              |   |     |    |     |   |
| Subordinated notes  payable, interest at 7.30%,  payable semi-annually, maturing June 30, 2004, unsecured                                                                                                                    |   | $        | 60,000  |     | $      | 60,000 |   |
| Term note payable to  bank, interest at 6.19% until February 1, 2008, then at .50% over One Year,  Three Year, or Five Year U.S. Treasury rate,  payable semi-annually, maturing February 1, 2013, secured by real  property |   | —   |    | 2,560    |   |
| Subsidiaries:                                                                                                                                                                                                                |   |     |    |     |   |
| Federal Home Loan Bank  advances, interest rates ranging from 3.64% to 6.55%, payable monthly, with  maturities ranging from May 20, 2004 to October 2, 2008                                                                 |   | 42,500   |    | 48,500   |   |
| Subordinated term note  payable to bank, interest of LIBOR plus 140 basis points, payable quarterly,  maturing December 22, 2007, unsecured                                                                                  |   | 25,000   |    | 25,000   |   |
| Term  note payable to bank, interest at 3.50% payable monthly, principal payments  ranging from $49,600 to $54,700, per schedule due monthly through March 31,  2003                                                         |   | —   |    | 781      |   |
|                                                                                                                                                                                                                         |   | $        | 127,500 |     | $      | 136,841 |   |

 

24

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The7.30% subordinated notes payable are not redeemable, in whole or in part, bythe Company. These notes, of which 20% of the balance qualifies as Tier IIcapital as of December 31, 2002, under the Federal Reserve Board guidelines,are direct obligations of the Company and are subordinated to all otherindebtedness of the Company. The terms of the subordinated notes payableinclude  certain covenants with whichthe Company must comply. At December 31, 2002, the Company was in compliancewith all covenants pertaining to the subordinated notes payable.

 

Maturities of long-termdebt outstanding, at December 31, 2002, were (in thousands):

 
| 2003       |   | $      | 0       |   |
|------------|--------|--------|---------|--------|
| 2004       |   | 66,000 |    |
| 2005       |   | 28,000 |    |
| 2006       |   | 4,000  |    |
| 2007       |   | 27,000 |    |
| Thereafter |   | 2,500  |    |
|       |   | $      | 127,500 |   |

 

**13.COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES**

 

On March 27, 2002, theCompany issued $60 million of 8.125% Cumulative Capital Securities, through CFBCapital III, a Delaware business trust subsidiary organized in February 2002.The proceeds of the offering were invested by CFB Capital III in JuniorSubordinated Debentures of the Company. The debentures can be redeemed noearlier than April 15, 2007, and mature April 15, 2032. The capital securitiesqualified as Tier 1 capital under capital guidelines of the Federal Reserve. OnMay 1, 2002, the Company used the net proceeds to redeem all of the 8.875%Junior Subordinated Debentures that it issued in 1997, thereby triggering theredemption of all 2,400,000 of the 8.875% Cumulative Capital Securities issuedby CFB Capital I, a Delaware business trust. 

 

On December 10, 1997,the Company issued $60 million of 8.20% Cumulative Capital Securities, throughCFB Capital II, a business trust subsidiary organized in December 1997. Theproceeds of the offering were invested by CFB Capital II in Junior SubordinatedDebentures of the Company. The debentures will mature not earlier than December15, 2002 and not later than December 15, 2027.

 

At December 31, 2002,$118 million in Capital Securities qualified asTier 1 capital under capital guidelines of the Federal Reserve Board.

 

**1****4.********SHAREHOLDERS’ EQUITY**

 

On February 22,2002, the Company filed a shelf registration statementwith the Securities and Exchange Commission for the purpose of issuing $180million of various debt and equity securities. At December 31, 2002, $120million remain available for issuance of debt and equity securities.

 

**COMMONSTOCK******

On April 3, 1998, theCompany filed a shelf registration statement with the Securities and ExchangeCommission for the purpose of issuing up to 3,500,000 shares of its commonstock. The shares may be offered in acquisition transactions in exchange forshares of capital stock, partnership interests or other assets representing aninterest, direct or indirect, in other companies or entities, or in exchangefor assets used in or related to the business of such entities. Amendment No.1, effective June 11, 1998, increased the shares under this registrationstatement to 7,000,000 shares, to reflect the effect of the shares remaining asof May 15, 1998, when the  shareholdersapproved a charter amendment to facilitate a two-for-one split of the Company’s common stock, in the form of a 100 percentstock dividend. Subsequently, two additional acquisitions, totaling 1,843,447shares, were completed under this registration statement. At December 31, 2002,there remain 5,156,553 shares to be issued under the registration statement.

 

On December 31, 1997,the Company filed a shelf registration statement with the Securities andExchange Commission for the purpose of issuing up to 3,000,000 shares of itscommon stock. The shares may be offered in acquisition transactions in exchangefor shares of capital stock, partnership interests or other assets  representing an interest, direct orindirect, in other companies or entities, or in exchange for assets used in orrelated to the business of such entities. Amendment No. 2, effective June 22,1998 increased the shares under this registration statement to 4,438,207shares, to reflect the effect of the shares remaining as of May 15, 1998, whenthe shareholders approved a charter amendment to facilitate a two-for-one splitof the Company’s common stock, in the form of a 100 percent stock dividend. Asof June 22, 1998, two acquisitions werecompleted under the registration statement, totaling 1,561,793 shares,resulting in a pre-split remaining authorized sharesof 1,438,207. Subsequently, two additional acquisitions, totaling2,016,218 shares, were completed under the December 31, 1997 registrationstatement. At December 31, 2002, there remain 860,196 shares to be issued underthe registration statement.

 

**PREFERRED STOCK SHAREHOLDERS’ RIGHTS PLAN**

The Company adopted a shareholders’rights plan in January 1995 that attached one right to each share of commonstock outstanding on January 19, 1995. Each right entitles the holder topurchase one one-hundredth of a share of a new series of juniorparticipating  preferred stock of theCompany, which has an initial exercise price of $31.50. The rights becomeexercisable only upon the acquisition of 15 percent or more of the Company’svoting stock, or an announcement of a tender offer or exchange offer to acquirean interest of 15 percent or more by a person or group, without the priorconsent of the Company. If exercised, or if the Company is acquired, the rightsentitle the holders (not including the person or persons acquiring or proposingto acquire an amount of common stock equal to 15 percent or more of theCompany) to purchase, at the exercise price, common stock with a market valueequal to two

 

25

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times the exercise price. The rights,which may be redeemed by the Company in certain circumstances, expire January5, 2005.

 

**CAPITALREQUIREMENTS******

The Company is subjectto various regulatory capital requirements administered by the federal bankingagencies. Failure to meet  minimumcapital requirements can initiate certain mandatory, and possibly additionaldiscretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’sconsolidated financial statements. Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company must meetspecific capital guidelines that involve quantitative measures of the Company’s assets, liabilities and certainoff-balance sheet items as calculated under regulatory accounting practices.The Company’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company tomaintain minimum amounts and ratios of total and Tier 1 capital torisk-weighted assets, and of Tier 1 capital to average assets.

 

As of December 31, 2002,the Company is considered well capitalized under the regulatory framework for prompt corrective action.To be categorized as well capitalized, the Company must maintain minimum totalrisk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in thefollowing table.

 

| **Regulatory Capital  Requirements:** |   | **At  December 31, 2002** |
|---------------------------------------|--------|---------------------------|

 
| **(Dollars in thousands)**            |   | **Tier 1  Capital** |   | **Total Risk-  Based  Capital** |   | **Leverage** |   | **Total Risk-  Weighted  Assets** |      |
|---------------------------------------|--------|---------------------|--------|---------------------------------|--------|--------------|--------|-----------------------------------|-----------|
| Minimum                               |   | 4.00                | %      | 8.00                            | %      | 3.00         | %      | N/A                               |      |
| Well Capitalized                      |   | 6.00                | %      | 10.00                           | %      | 5.00         | %      | N/A                               |      |
| **Bank Subsidiary:**                  |   |                |   |                            |   |         |   |                              |      |
| Community First  National Bank, Fargo |   | 10.35               | %      | 12.08                           | %      | 7.72         | %      | $                                 | 4,159,134 |   |
| Community First  Bankshares, Inc.     |   | 8.98                | %      | 11.04                           | %      | 6.52         | %      | $                                 | 4,202,131 |   |

 

| **Regulatory Capital  Requirements:** |   | **At  December 31, 2001** |
|---------------------------------------|--------|---------------------------|

 
| **(Dollars in thousands)**            |   | **Tier 1  Capital** |   | **Total Risk-  Based  Capital** |   | **Leverage** |   | **Total Risk-  Weighted  Assets** |      |
|---------------------------------------|--------|---------------------|--------|---------------------------------|--------|--------------|--------|-----------------------------------|-----------|
| Minimum                               |   | 4.00                | %      | 8.00                            | %      | 3.00         | %      | N/A                               |      |
| Well Capitalized                      |   | 6.00                | %      | 10.00                           | %      | 5.00         | %      | N/A                               |      |
| **Bank Subsidiary:**                  |   |                |   |                            |   |         |   |                              |      |
| Community First  National Bank, Fargo |   | 9.43                | %      | 11.13                           | %      | 7.16         | %      | $                                 | 4,254,919 |   |
| Community First  Bankshares, Inc.     |   | 8.67                | %      | 11.11                           | %      | 6.51         | %      | $                                 | 4,304,531 |   |

 

**1****5.********EMPLOYEE BENEFIT PLANS**

 

**STOCKOPTION PLAN**

During 1996, the Company approved the1996 Stock Option Plan under which anadditional 4,000,000 shares of the Company’s common stock were reservedfor granting of future stock options. Similar to the 1987 Stock Option Plan,the Company may grant key employees incentive or nonqualified options topurchase common stock of the Company. Incentive stock options must have anexercise price of at least fair market value on the date of the grant, asdetermined by the Company. The options generally vest ratably over a three-yearperiod and are exercisable over five- or ten-year terms.

 

Stock optionsoutstanding under the plans are as follows:

 
|                        |   | **2002**               |   | **2001**                                |   |
|-----------------------------|--------|------------------------|--------|-----------------------------------------|--------|
|                        |   | **OptionsOutstanding** |   | **Weighted  Average  Price Per  Share** |   | **OptionsOutstanding** |   | **Weighted  Average  Price Per  Share** |   |
| Beginning of year           |   | 2,437,234              |   | $                                       | 17.98  |   | 2,441,862 |   | $ | 16.32 |   |
| Options granted             |   | 835,453                |   | 24.60                                   |   | 682,800 |   | 19.45 |   |
| Options exercised           |   | (666,319               | )      | 17.44                                   |   | (507,061 | ) | 11.16 |   |
| Options forfeited           |   | (142,071               | )      | 19.93                                   |   | (180,367 | ) | 20.25 |   |
| End of year                 |   | 2,464,297              |   | $                                       | 20.26  |   | 2,437,234 |   | $ | 17.98 |   |
| Exercisable  at end of year |   | 1,300,277              |   | $                                       | 19.34  |   | 1,212,469 |   | $ | 18.55 |   |

 
|                                            |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|
| Weighted-average fair  value of options granted |   | $        | 5.64   |     | $      | 6.34 |   |
|                                                 |        |          |        |          |        |  |  |

 

Therange of exercise prices and the weighted-average remaining contractual life ofthe options outstanding at December 31, 2002 were as follows:

 
| **Range of  Exercise  Prices Per Share** |   | **Options  Outstanding at  December 31,  2002** |   | **Weighted  Average  Exercise Price  Per Share** |   | **Weighted  Average  Remaining  Contractual Life** |       |
|------------------------------------------|--------|-------------------------------------------------|--------|--------------------------------------------------|--------|----------------------------------------------------|------------|
| $ 24.25 – $26.55                    |   | 1,021,839                                       |   | $                                                | 24.67  |                                               | 6.95 Years |   |
| $ 19.3125 – $21.49                  |   | 868,836                                         |   | $                                                | 19.52  |                                               | 7.55 Years |   |
| $ 12.82 – $15.875                   |   | 536,137                                         |   | $                                                | 14.02  |                                               | 7.14 Years |   |
| $ 5.87 – $6.16                      |   | 37,485                                          |   | $                                                | 6.04   |                                               | 3.77 Years |   |

 

AtDecember 31, 2002, a total of 2,769,572 shares of authorized common stock wasreserved for exercise of options granted under the 1996 and 1987 Stock OptionPlans.

 

**EMPLOYEESTOCK OWNERSHIP PLAN******

Prior to 2001, theCompany had an employee stock ownership plan (“ESOP”) that was a definedcontribution plan covering all employees who are 21 years of age with more thanone year of service. Contributions were calculated using a formula based on theCompany’s return on average assets on a yearly basis. In 2001, the Company approved a plan which merged the ESOPinto the Company’s Profit Sharing Plan, thus, the Company made nocontributions in 2002, 2001 and 2000, andanticipates no future contribution expenses.

 

26

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**PROFIT-SHARINGPLAN**

The Company offers a contributory profit-sharingand thrift plan that qualifies under section 401(k) of the Internal RevenueCode. The plan covers all employees who are 21 years of age with more than oneyear of service. The plan provides for an employer-matching contribution of100% of the first 3% and 50% of the next 3% of each participant’s eligiblecontribution, subject to a limitation of the lesser of the participant’scontribution or the maximum amount prescribed by the Internal Revenue Code. TheCompany’s contribution was $2,172,000, $2,743,000, and $1,456,000 in 2002, 2001and 2000, respectively. In 2001, the Company adopted a plan which merged theCompany’s ESOP into the Profit Sharing Plan and increased the employer-matchingcontribution. Prior to 2001, the employer-matching contribution was 50% basedon each participant’s eligible contribution for each plan year, subject to alimitation of the lesser of 6% of the participant’s annual compensation or themaximum amount prescribed by the Internal Revenue Code.

** **

**16.RESTRICTIONS ON CASH AND DUE FROM BANKS**

 

Banksubsidiaries are required to maintain average reserve balances with the FederalReserve Bank. Balances of $46,845,000 and $22,597,000 at December 31, 2002 and2001, respectively, exceeded required amounts.

 

**1****7.********INCOME TAXES**

 

Thecomponents of the provision for income taxes were (in  thousands):

 
|                        |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Federal:                    |   |     |   |     |   |     |   |
| Current                     |   | $        | 31,592 |     | $      | 32,587   |   | $ | 34,443 |   |
| Deferred                    |   | 5,141    |   | (1,961   | )      | (1,741   | )      |
|                        |   | 36,733   |   | 30,626   |   | 32,702   |   |
| State:                      |   |     |   |     |   |     |   |
| Current                     |   | 2,720    |   | 3,112    |   | 3,382    |   |
| Deferred                    |   | 96       |   | (262     | )      | (336     | )      |
|                        |   | 2,816    |   | 2,850    |   | 3,046    |   |
| Provision for income  taxes |   | $        | 39,549 |     | $      | 33,476   |   | $ | 35,748 |   |

 

Thereconciliation between the provision for income taxes and the amount computedby applying the statutory federal income tax rate was as follows (inthousands):

 
|                                          |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Tax at statutory rate  (35%)                  |   | $        | 41,565 |     | $      | 34,487   |   | $ | 37,584 |   |
| State income tax, net  of federal tax benefit |   | 1,830    |   | 1,853    |   | 1,980    |   |
| Tax-exempt interest                           |   | (3,944   | )      | (4,094   | )      | (3,726   | )      |
| Amortization of  goodwill                     |   | —   |   | 919      |   | 918      |   |
| Other                                         |   | 98       |   | 311      |   | (1,008   | )      |
| Provision for income  taxes                   |   | $        | 39,549 |     | $      | 33,476   |   | $ | 35,748 |   |

 

Deferred income taxassets and liabilities reflect the net tax effect of temporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax reporting purposes. Significantcomponents of the Company’s deferred tax assets and liabilities as of December31, 2002 and 2001, are as follows (in thousands):

 
|                       |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|
| Deferred tax assets:       |   |     |   |     |   |
| Loan loss reserves         |   | $        | 21,480 |     | $      | 20,695 |   |
| Other reserves             |   | 478      |   | 376      |   |
| Deferred compensation      |   | 1,857    |   | 916      |   |
| Deferred loan fees         |   | —   |   | 8        |   |
| Other                      |   | 2,175    |   | 3,250    |   |
|                       |   | 25,990   |   | 25,245   |   |
|                       |   |     |   |     |   |
| Deferred tax  liabilities: |   |     |   |     |   |
| Unrealized net gains       |   | 15,693   |   | 2,522    |   |
| Depreciation               |   | 3,739    |   | 644      |   |
| Deductible goodwill        |   | 1,502    |   | —   |   |
| Purchase accounting        |   | 135      |   | 126      |   |
| Other                      |   | 121      |   | 228      |   |
|                       |   | 21,190   |   | 3,520    |   |
| Net deferred tax asset     |   | $        | 4,800  |     | $      | 21,725 |   |

 

Therealization of the Company’s deferred tax assets is dependent upon theCompany’s ability to generate taxable income in future periods and the reversalof deferred tax liabilities during the same period.The Company has evaluated the available evidence supporting therealization of its deferred tax assets and determined it is more likely thannot that the assets will be realized.

 

**18. COMMITMENTS AND CONTINGENTLIABILITIES**

** **

Totalrent expense was $4,852,000, $5,273,000, and $5,704,000 in 2002, 2001 and 2000,respectively.

 

Future minimum payments,by year and in the aggregate, under noncancelableleases with initial or remaining terms of one year or more, consisted ofthe following at December 31, 2002 (in thousands):

 
|                                         |   | **Operating** |   | **Capital** |   |
|----------------------------------------------|--------|---------------|--------|-------------|--------|
| 2003                                         |   | $             | 2,603  |        | $      | 1,053 |   |
| 2004                                         |   | 1,229         |   | 1,356       |   |
| 2005                                         |   | 658           |   | 1,356       |   |
| 2006                                         |   | 546           |   | 1,356       |   |
| 2007                                         |   | 521           |   | 1,356       |   |
| Thereafter                                   |   | 2,410         |   | 198         |   |
|                                         |   | $             | 7,967  |        | $      | 6,675 |   |
| Executory  costs (taxes)                     |   |          |   | —      |   |
| Net minimum lease  payments                  |   |          |   | 6,675       |   |
| Less:                                        |   |          |   |        |   |
| Amount  representing interest                |   |          |   | (1,214      | )      |
| Present  value of net minimum lease payments |   |          |   | $           | 5,461  |   |

 

Inthe normal course of business, there are various outstanding legal proceedings,claims, commitments and contingent liabilities. In the opinion of management,the Company and its subsidiaries will not be materially affected by the outcomeof such matters.

 

24

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**19. COMMUNITY FIRST BANKSHARES, INC.**

 

*(Parent CompanyOnly)*

 

**CONDENSED STATEMENTS OF FINANCIAL CONDITION**

 
| **December  31 (In thousands)**                  |   | **2002** |    | **2001** |   |
|--------------------------------------------------|--------|----------|---------|----------|--------|
| **assets**                                       |   |     |    |     |   |
| Cash and due  from subsidiary bank               |   | $        | 681     |     | $      | 4,698 |   |
| Interest-bearing  deposits                       |   | 4,150    |    | 31       |   |
| Available-for-sale  securities                   |   | 114      |    | 13,040   |   |
| Investment in  subsidiaries                      |   | 560,319  |    | 521,938  |   |
| Furniture and  equipment                         |   | 11,951   |    | 7,884    |   |
| Receivable from  subsidiaries                    |   | 7,188    |    | 13,009   |   |
| Other assets                                     |   | 13,333   |    | 13,595   |   |
| Total assets                                     |   | $        | 597,736 |     | $      | 574,195 |   |
|                                             |   |     |    |     |   |
| **liabilities and shareholders’  equity**   |   |     |    |     |   |
| Short-term  borrowings                           |   | $        | 24,720  |     | $      | 19,780 |   |
| Long-term debt                                   |   | 183,711  |    | 186,272  |   |
| Other  liabilities                               |   | 10,856   |    | 11,438   |   |
| Shareholders’  equity                       |   | 378,449  |    | 356,705  |   |
| Total  liabilities and shareholders’ equity |   | $        | 597,736 |     | $      | 574,195 |   |

 

**CONDENSED STATEMENTS OF INCOME**

 
| **Years ended December 31********(In  thousands)**                                |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Income:                                                                           |   |     |   |     |   |     |   |
| Dividends from  subsidiaries                                                      |   | $        | 87,125 |     | $      | 126,117  |   | $ | 58,067 |   |
| Service fees  from subsidiaries                                                   |   | —   |   | 329      |   | 411      |   |
| Interest income                                                                   |   | 739      |   | 614      |   | 971      |   |
| Other                                                                             |   | (801     | )      | 1,552    |   | 1,559    |   |
| Total income                                                                      |   | 87,063   |   | 128,612  |   | 61,008   |   |
| Expense:                                                                          |   |     |   |     |   |     |   |
| Interest expense                                                                  |   | 15,806   |   | 16,471   |   | 18,462   |   |
| Other expense                                                                     |   | 28,023   |   | 29,839   |   | 22,186   |   |
| Total expense                                                                     |   | 43,829   |   | 46,310   |   | 40,648   |   |
| Income before  income tax benefit, equity in undistributed income of subsidiaries |   | 43,234   |   | 82,302   |   | 20,360   |   |
| Income tax  benefit                                                               |   | 14,587   |   | 14,849   |   | 13,120   |   |
| Income before  undistributed (overdistributed) income of subsidiaries             |   | 57,821   |   | 97,151   |   | 33,480   |   |
| Equity in  undistributed (overdistributed) income of subsidiaries                 |   | 21,387   |   | (32,092  | )      | 38,154   |   |
| Net income                                                                        |   | $        | 79,208 |     | $      | 65,059   |   | $ | 71,634 |   |

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

 
| **Years ended December 31****(In thousands)**                                                |   | **2002** |   | **2001** |   | **2000** | ** ** |
|----------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|------------|
| **Cash flows from operating activities:**                                                    |   |     |   |     |   |     |       |
| Net income                                                                                   |   | $        | 79,208 |     | $      | 65,059   |       | $ | 71,634 |   |
| Adjustments to  reconcile net income to net cash used in operating activities:               |   |     |   |     |   |     |       |
| Equity in  (undistributed) overdistributed income of subsidiaries                            |   | (21,387  | )      | 32,092   |   | (38,154  | )          |
| Depreciation                                                                                 |   | 1,029    |   | 730      |   | 867      |       |
| (Decrease)  increase in interest payable                                                     |   | (161     | )      | (2,450   | )      | 2,176    |       |
| Other, net                                                                                   |   | 591      |   | 9,485    |   | (417     | )          |
| Net cash provided by  operating activities                                                   |   | 59,280   |   | 104,916  |   | 36,106   |       |
|                                                                                         |   |     |   |     |   |     |       |
| **Cash  flows from investing activities:**                                                   |   |     |   |     |   |     |       |
| Equity  distribution from (to) subsidiaries                                                  |   | 2,819    |   | (1,763   | )      | 110,021  |       |
| Net loans to  subsidiaries                                                                   |   | 5,821    |   | (90      | )      | 8,945    |       |
| Purchases of  available-for-sale securities                                                  |   | (255,903 | )      | (355,456 | )      | (32,473  | )          |
| Sales of  available-for-sale securities, net of gains                                        |   | 21,132   |   | 3,767    |   | 1,630    |       |
| Maturities of  investment securities                                                         |   | 247,112  |   | 348,779  |   | 23,009   |       |
| Net  increase in furniture and equipment                                                     |   | (5,096   | )      | (1,917   | )      | (932     | )          |
| Net (increase)  decrease in interest-bearing deposits                                        |   | (4,119   | )      | (29      | )      | 14       |       |
| Net cash provided by  (used in) investing activities                                         |   | 11,766   |   | (6,709   | )      | 110,214  |       |
|                                                                                         |   |     |   |     |   |     |       |
| **Cash  flows from financing activities:**                                                   |   |     |   |     |   |     |       |
| Net increase  (decrease) in short-term borrowings                                            |   | 4,940    |   | (29,172  | )      | 23,345   |       |
| Common stock dividends  paid                                                                 |   | (31,664  | )      | (27,793  | )      | (27,601  | )          |
| Repayment of long-term  debt                                                                 |   | (2,560   | )      | (213     | )      | (214     | )          |
| Net proceeds from  issuance of Company-obligated mandatorily redeemable preferred securities |   | 61,856   |   | —   |   | —   |       |
| Repayment of  Company-obligated mandatorily redeemable preferred securities                  |   | (62,974  | )      | —   |   | —   |       |
| Net sales of common  stock held in treasury                                                  |   | 6,318    |   | 3,695    |   | 4,444    |       |
| Net purchases of  common stock held in treasury                                              |   | (50,979  | )      | (43,020  | )      | (145,725 | )          |
| Net cash used in  financing activities                                                       |   | (75,063  | )      | (96,503  | )      | (145,751 | )          |
| Net (decrease)  increase in cash and cash equivalents                                        |   | (4,017   | )      | 1,704    |   | 569      |       |
| Cash and cash  equivalents at beginning of year                                              |   | 4,698    |   | 2,994    |   | 2,425    |       |
| Cash and cash  equivalents at end of year                                                    |   | $        | 681    |     | $      | 4,698    |       | $ | 2,994 |   |

 

Certain restrictions exist regarding the extent to which the banksubsidiary may transfer funds to the Company in the form of dividends, loans oradvances. Federal law prevents the Company from borrowing from its banksubsidiary unless the loans are secured by specified U.S. obligations. Securedloans to the Company or any individual affiliate are generally limited inamount to 10% of the bank’s equity. Further, loans to the Company and allaffiliates in total are limited to 20% of the bank’s equity. As of December 31,2002 and 2001, $54,960,000 and $50,861,000, respectively, of individualsubsidiary bank’s capital was available for

 

28

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credit extension to the parent company. At December 31, 2002 and 2001,the bank subsidiary had no credit extended to the Company.

 

Payment of dividends to the Company by its subsidiarybank is subject to various limitations by bank regulatory agencies. Undistributed earnings of the bank subsidiaryavailable for distribution as dividends under these limitations were $0and $25,898,000 as of December 31, 2002 and 2001, respectively.

 

**20. RELATED PARTY TRANSACTIONS**

 

Certain directors and executive officers of the Company and itssubsidiaries, including their immediate families, companies in which they areprincipal owners and trusts in which they are involved, are loan customers ofthe bank subsidiary. The aggregate dollar amounts of these loans, which weremade in the normal course of business, did not exceed five percent of  shareholders’ equity at December 31, 2002,2001 and 2000.

 

**21. EARNINGS PER SHARE**

 

The following table sets forth the computation of basic and dilutedearnings per share (dollars in thousands, except share and per share data):

 
| **Years  ended December 31**                                                                          |   | **2002**   |   | **2001**   |   | **2000**   |   |
|-------------------------------------------------------------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|
| **Numerator:**                                                                                        |   |       |   |       |   |       |   |
| Income  from continuing operations                                                                    |   | $          | 79,208 |       | $      | 65,059     |   | $ | 71,634 |   |
| Numerator for  basic earnings per share income available to common stockholders                       |   | 79,208     |   | 65,059     |   | 71,634     |   |
| **Denominator:**                                                                                      |   |       |   |       |   |       |   |
| Denominator for basic  earnings per share weighted-average shares outstanding                         |   | 39,564,912 |   | 40,905,545 |   | 46,219,120 |   |
| Effect of dilutive  securities:                                                                       |   |       |   |       |   |       |   |
| Employee stock options                                                                                |   | 640,937    |   | 565,859    |   | 359,630    |   |
| Employee benefit  plan shares                                                                         |   | 37,286     |   | —     |   | —     |   |
| Dilutive potential  common shares                                                                     |   | 678,223    |   | 565,859    |   | 359,630    |   |
| Denominator for  diluted earnings per share adjusted  weighted-average shares and assumed conversions |   | 40,243,135 |   | 41,471,404 |   | 46,578,750 |   |
| Basic earnings per  share                                                                             |   | $          | 2.00   |       | $      | 1.59       |   | $ | 1.55 |   |
| Diluted earnings  per share                                                                           |   | $          | 1.97   |       | $      | 1.57       |   | $ | 1.54 |   |

 

**22. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **Years  ended December 31****(In  thousands)**         |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Unrealized gain (loss) on available-for-sale securities |   | $        | 33,076 |     | $      | 22,081   |   | $ | 56,986 |   |
| Income taxes paid                                       |   | 35,058   |   | 36,514   |   | 35,149   |   |
| Interest paid                                           |   | 100,907  |   | 177,743  |   | 196,741  |   |
|                                                         |        |          |        |          |        |          |        |  |  |  |

 

**23. SUBSEQUENT EVENT**

 

In February 2003, the Company determined to issue $60 million ofcumulative capital securities through CFB Capital IV, a Delaware business trustsubsidiary. The timing and terms of the offering are subject to marketconditions, but the securities are expected to be similar to those of CFBCapital III except for the interest rate. If consummated, the transaction isexpected to close in late February or March 2003.

 

**REPORT OF INDEPENDENT AUDITORS**

 

*The Board of Directors andShareholders,*

*Community First Bankshares, Inc.*

 

*We have audited the accompanyingconsolidated statements of financial condition of Community First Bankshares,Inc. and subsidiaries as of December 31, 2002 and 2001, and the relatedconsolidated statements of income, comprehensive income, shareholders’ equityand cash flows for each of the three years in the period ended December 31,2002. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.*

 

*We conducted our audits in accordancewith auditing standards generally accepted in the United States. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.*

 

*In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Community First Bankshares, Inc., andsubsidiaries at December 31, 2002 and 2001, and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2002, in conformity with accounting principles generallyaccepted in the United States.*

 

*As discussed in Note 3, in 2002 theCompany adopted Statement of Financial Accounting Standards No. 142, Goodwilland Other Intangible Assets, and changed its method of accounting for goodwill.*

 

 
| /s/ Ernst & Young LLP                                        |   |
|------------------------------------------------------------------|--------|
|                                                             |
| *Minneapolis, Minnesota*                                         |
| *January 14, 2003*                                               |
| *Except for Note 23, as to which  the date is February 7, 2003.* |

* *

 

29

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| **CONSOLIDATED  STATEMENT OF CONDITION—FIVE YEAR SUMMARY** | **COMMUNITY FIRST BANKSHARE INC.** |
|-----------------------------------------------------------------|------------------------------------|

 
| **December  31 (In thousands)**                                                     |   | **2002**  |      | **2001**  |   | **2000**  |   | **1999**  |      | **1998**  |   |
|-------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|-----------|-----------|-----------|--------|
| **ASSETS**                                                                          |   |      |      |      |   |      |   |      |      |      |   |
| Cash  and due from banks                                                            |   | $         | 242,887   |      | $      | 248,260   |   | $         | 256,136   |      | $      | 247,051 |   | $ | 262,667 |   |
| Federal  funds sold and securities purchased under agreement to resell              |   | —    |      | —    |   | —    |   | 4,775     |      | 11,990    |   |
| Interest-bearing  deposits                                                          |   | 4,613     |      | 341       |   | 1,110     |   | 4,648     |      | 11,463    |   |
| Available-for-sale  securities                                                      |   | 1,672,445 |      | 1,437,066 |   | 1,714,510 |   | 1,937,517 |      | 2,004,584 |   |
| Held-to-maturity  securities                                                        |   | 80,165    |      | 76,765    |   | 73,222    |   | 74,248    |      | 92,859    |   |
| Total  securities                                                                   |   | 1,752,610 |      | 1,513,831 |   | 1,787,732 |   | 2,011,765 |      | 2,097,443 |   |
| Loans                                                                               |   | 3,577,893 |      | 3,736,692 |   | 3,738,202 |   | 3,690,353 |      | 3,537,537 |   |
| Less:  Allowance for loan losses                                                    |   | 56,156    |      | 54,991    |   | 52,168    |   | 48,878    |      | 51,860    |   |
| Net  loans                                                                          |   | 3,521,737 |      | 3,681,701 |   | 3,686,034 |   | 3,641,475 |      | 3,485,677 |   |
| Other  assets                                                                       |   | 305,323   |      | 328,193   |   | 358,717   |   | 392,521   |      | 370,532   |   |
| Total  assets                                                                       |   | $         | 5,827,170 |      | $      | 5,772,326 |   | $         | 6,089,729 |      | $      | 6,302,235 |   | $ | 6,239,772 |   |
|                                                                                |   |      |      |      |   |      |   |      |      |      |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                       |   |      |      |      |   |      |   |      |      |      |   |
| Deposits:                                                                           |   |      |      |      |   |      |   |      |      |      |   |
| Noninterest-bearing                                                                 |   | $         | 470,900   |      | $      | 487,864   |   | $         | 500,834   |      | $      | 616,861 |   | $ | 591,718 |   |
| Interest-bearing                                                                    |   | 4,198,846 |      | 4,262,949 |   | 4,519,057 |   | 4,293,002 |      | 4,509,347 |   |
| Total  deposits                                                                     |   | 4,669,746 |      | 4,750,813 |   | 5,019,891 |   | 4,909,863 |      | 5,101,065 |   |
| Short-term  borrowings                                                              |   | 453,490   |      | 342,639   |   | 409,710   |   | 724,425   |      | 435,726   |   |
| Long-term  debt                                                                     |   | 127,500   |      | 136,841   |   | 123,957   |   | 75,622    |      | 93,524    |   |
| Other  liabilities                                                                  |   | 77,985    |      | 65,328    |   | 70,740    |   | 65,056    |      | 64,801    |   |
| Total  liabilities                                                                  |   | 5,328,721 |      | 5,295,621 |   | 5,624,298 |   | 5,774,966 |      | 5,695,116 |   |
| Company-obligated  mandatorily redeemable preferred securities of subsidiary trusts |   | 120,000   |      | 120,000   |   | 120,000   |   | 120,000   |      | 120,000   |   |
| Shareholders’  equity                                                          |   | 378,449   |      | 356,705   |   | 345,431   |   | 407,269   |      | 424,656   |   |
| Total  liabilities and shareholders’ equity                                    |   | $         | 5,827,170 |      | $      | 5,772,326 |   | $         | 6,089,729 |      | $      | 6,302,235 |   | $ | 6,239,772 |   |

 

30

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| **CONSOLIDATED  STATEMENT OF INCOME—FIVE YEAR SUMMARY** | **COMMUNITY FIRST BANKSHARE INC.** |
|--------------------------------------------------------------|------------------------------------|

 
| **Years Ended  December 31 (In thousands, except share and per share data)**        |   | **2002**   |    | **2001**   |   | **2000**   |   | **1999**   |    | **1998**   |   |
|-------------------------------------------------------------------------------------|--------|------------|---------|------------|--------|------------|--------|------------|---------|------------|--------|
| **INTEREST INCOME:**                                                                |   |       |    |       |   |       |   |       |    |       |   |
| Loans                                                                               |   | $          | 276,846 |       | $      | 336,937    |   | $          | 353,405 |       | $      | 332,974 |   | $ | 337,771 |   |
| Investment securities                                                               |   | 81,136     |    | 96,688     |   | 123,525    |   | 130,955    |    | 124,306    |   |
| Other                                                                               |   | 201        |    | 391        |   | 628        |   | 1,277      |    | 5,193      |   |
| Total interest income                                                               |   | 358,183    |    | 434,016    |   | 477,558    |   | 465,206    |    | 467,270    |   |
|                                                                                |   |       |    |       |   |       |   |       |    |       |   |
| **INTEREST EXPENSE:**                                                               |   |       |    |       |   |       |   |       |    |       |   |
| Deposits                                                                            |   | 75,572     |    | 138,542    |   | 169,281    |   | 151,138    |    | 166,873    |   |
| Short-term and other  borrowings                                                    |   | 6,340      |    | 15,001     |   | 34,303     |   | 28,052     |    | 19,576     |   |
| Long-term  debt                                                                     |   | 8,016      |    | 8,677      |   | 6,697      |   | 6,628      |    | 8,338      |   |
| Total  interest expense                                                             |   | 89,928     |    | 162,220    |   | 210,281    |   | 185,818    |    | 194,787    |   |
| Net interest income                                                                 |   | 268,255    |    | 271,796    |   | 267,277    |   | 279,388    |    | 272,483    |   |
| Provision  for loan losses                                                          |   | 13,262     |    | 17,520     |   | 15,781     |   | 20,184     |    | 23,136     |   |
| Net interest income  after provision for loan losses                                |   | 254,993    |    | 254,276    |   | 251,496    |   | 259,204    |    | 249,347    |   |
|                                                                                |   |       |    |       |   |       |   |       |    |       |   |
| **NONINTEREST INCOME:**                                                             |   |       |    |       |   |       |   |       |    |       |   |
| Service charges on  deposit accounts                                                |   | 40,121     |    | 41,850     |   | 42,192     |   | 39,246     |    | 33,480     |   |
| Insurance commissions                                                               |   | 13,822     |    | 12,535     |   | 10,550     |   | 8,791      |    | 7,197      |   |
| Securities sales  commissions                                                       |   | 9,526      |    | 6,644      |   | 6,805      |   | 5,258      |    | 4,249      |   |
| Fees from fiduciary  activities                                                     |   | 5,405      |    | 5,661      |   | 5,811      |   | 5,148      |    | 4,944      |   |
| Net gains on sales of  securities                                                   |   | 373        |    | 804        |   | 65         |   | 2,175      |    | 1,801      |   |
| Other                                                                               |   | 12,072     |    | 12,081     |   | 12,437     |   | 14,124     |    | 13,196     |   |
| Total noninterest  income                                                           |   | 81,319     |    | 79,575     |   | 77,860     |   | 74,742     |    | 64,867     |   |
|                                                                                |   |       |    |       |   |       |   |       |    |       |   |
| **NONINTEREST EXPENSE:**                                                            |   |       |    |       |   |       |   |       |    |       |   |
| Salaries and employee  benefits                                                     |   | 113,994    |    | 115,743    |   | 110,024    |   | 106,542    |    | 119,250    |   |
| Net occupancy                                                                       |   | 32,832     |    | 31,593     |   | 31,941     |   | 32,726     |    | 33,929     |   |
| FDIC insurance                                                                      |   | 800        |    | 915        |   | 1,039      |   | 625        |    | 771        |   |
| Professional service  fees                                                          |   | 7,478      |    | 8,398      |   | 8,289      |   | 8,819      |    | 10,251     |   |
| Advertising                                                                         |   | 3,983      |    | 5,037      |   | 4,545      |   | 4,065      |    | 4,281      |   |
| Telephone                                                                           |   | 5,575      |    | 5,633      |   | 5,203      |   | 4,807      |    | 5,727      |   |
| Amortization of  intangibles                                                        |   | 3,318      |    | 9,928      |   | 10,481     |   | 10,500     |    | 10,366     |   |
| Acquisition,  integration and conforming                                            |   | —     |    | —     |   | —     |   | 3,053      |    | 3,721      |   |
| Restructuring charge                                                                |   | —     |    | 7,656      |   | —     |   | —     |    | —     |   |
| Data processing                                                                     |   | 7,210      |    | 6,940      |   | 7,200      |   | 6,349      |    | 6,809      |   |
| Company-obligated  mandatorily redeemable preferred securities of subsidiary trusts |   | 10,405     |    | 10,273     |   | 10,245     |   | 10,245     |    | 10,218     |   |
| Other                                                                               |   | 31,960     |    | 33,200     |   | 33,007     |   | 32,729     |    | 36,925     |   |
| Total  noninterest expense                                                          |   | 217,555    |    | 235,316    |   | 221,974    |   | 220,460    |    | 242,248    |   |
| Income from continuing  operations                                                  |   | 118,757    |    | 98,535     |   | 107,382    |   | 113,486    |    | 71,966     |   |
| Provision  for income taxes                                                         |   | 39,549     |    | 33,476     |   | 35,748     |   | 38,573     |    | 22,595     |   |
| Income from continuing  operations                                                  |   | 79,208     |    | 65,059     |   | 71,634     |   | 74,913     |    | 49,371     |   |
| Discontinued  operations                                                            |   | —     |    | —     |   | —     |   | —     |    | (2,232     | )      |
| Disposal  of discontinued operations                                                |   | —     |    | —     |   | —     |   | —     |    | (1,676     | )      |
| Net  income                                                                         |   | $          | 79,208  |       | $      | 65,059     |   | $          | 71,634  |       | $      | 74,913 |   | $ | 45,463 |   |
| Earnings per common  and common equivalent share:                                   |   |       |    |       |   |       |   |       |    |       |   |
| Basic                                                                               |   | $          | 2.00    |       | $      | 1.59       |   | $          | 1.55    |       | $      | 1.50 |   | $ | 0.90 |   |
| Diluted                                                                             |   | $          | 1.97    |       | $      | 1.57       |   | $          | 1.54    |       | $      | 1.48 |   | $ | 0.89 |   |
| Average common and  common equivalent shares outstanding:                           |   |       |    |       |   |       |   |       |    |       |   |
| Basic                                                                               |   | 39,564,912 |    | 40,905,545 |   | 46,219,120 |   | 50,061,972 |    | 50,272,551 |   |
| Diluted                                                                             |   | 40,243,135 |    | 41,471,404 |   | 46,578,750 |   | 50,670,559 |    | 51,114,703 |   |

 

31

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| **Quarterly  results of opeartions (unaudited)** |   | **community first bankshares, inc.** |
|--------------------------------------------------|--------|--------------------------------------|

 

The following is a summary of the quarterly results of operations forthe years ended December 31, 2002 and 2001 (in thousands, except share and pershare data):

 
|                                                 |   | **First  Quarter** |    | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |    |
|------------------------------------------------------|--------|--------------------|---------|---------------------|--------|--------------------|--------|---------------------|---------|
| **Year ended December 31, 2002**                     |   |               |    |                |   |               |   |                |    |
| Interest income                                      |   | $                  | 91,740  |                | $      | 90,684             |   | $                   | 89,109  |   | $ | 86,650 |   |
| Interest expense                                     |   | 25,154             |    | 22,388              |   | 21,681             |   | 20,705              |    |
| Net interest income                                  |   | 66,586             |    | 68,296              |   | 67,428             |   | 65,945              |    |
| Provision  for loan losses                           |   | 3,315              |    | 3,297               |   | 3,352              |   | 3,298               |    |
| Net interest income  after provision for loan losses |   | 63,271             |    | 64,999              |   | 64,076             |   | 62,647              |    |
| Net gains (losses) on  sales of securities           |   | 17                 |    | (188                | )      | 56                 |   | 488                 |    |
| Noninterest income                                   |   | 18,983             |    | 20,819              |   | 20,829             |   | 20,315              |    |
| Noninterest  expense                                 |   | 53,109             |    | 55,701              |   | 54,371             |   | 54,374              |    |
| Income before income  taxes                          |   | 29,162             |    | 29,929              |   | 30,590             |   | 29,076              |    |
| Provision  for income taxes                          |   | 9,901              |    | 10,072              |   | 10,221             |   | 9,355               |    |
| Net  income                                          |   | 19,261             |    | 19,857              |   | 20,369             |   | 19,721              |    |
| Earnings per common  and common equivalent shares:   |   |               |    |                |   |               |   |                |    |
| Basic net income                                     |   | $                  | 0.48    |                | $      | 0.50               |   | $                   | 0.52    |   | $ | 0.50 |   |
| Diluted net income                                   |   | $                  | 0.47    |                | $      | 0.49               |   | $                   | 0.51    |   | $ | 0.50 |   |
| Average common and  common equivalent shares:        |   |               |    |                |   |               |   |                |    |
| Basic                                                |   | 39,984,092         |    | 39,772,344          |   | 39,424,624         |   | 39,080,638          |    |
| Diluted                                              |   | 40,644,637         |    | 40,515,906          |   | 40,073,077         |   | 39,740,426          |    |
|                                                 |   |               |    |                |   |               |   |                |    |
|                                                 |   | **First  Quarter** |    | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |    |
| **Year ended December 31, 2001**                     |   |               |    |                |   |               |   |                |    |
| Interest income                                      |   | $                  | 115,175 |                | $      | 111,875            |   | $                   | 107,371 |   | $ | 99,595 |   |
| Interest  expense                                    |   | 50,088             |    | 43,585              |   | 37,964             |   | 30,583              |    |
| Net interest income                                  |   | 65,087             |    | 68,290              |   | 69,407             |   | 69,012              |    |
| Provision  for loan losses                           |   | 5,617              |    | 3,303               |   | 5,301              |   | 3,299               |    |
| Net interest income  after provision for loan losses |   | 59,470             |    | 64,987              |   | 64,106             |   | 65,713              |    |
| Net gains (losses) on  sales of securities           |   | 484                |    | (252                | )      | 19                 |   | 553                 |    |
| Noninterest income                                   |   | 19,494             |    | 19,743              |   | 20,292             |   | 19,242              |    |
| Noninterest  expense                                 |   | 63,701             |    | 57,706              |   | 56,472             |   | 57,437              |    |
| Income before income  taxes                          |   | 15,747             |    | 26,772              |   | 27,945             |   | 28,071              |    |
| Provision  for income taxes                          |   | 5,519              |    | 9,039               |   | 9,505              |   | 9,413               |    |
| Net  income                                          |   | $                  | 10,228  |                | $      | 17,733             |   | $                   | 18,440  |   | $ | 18,658 |   |
| Earnings per common  and common equivalent shares:   |   |               |    |                |   |               |   |                |    |
| Basic  net income                                    |   | $                  | 0.25    |                | $      | 0.43               |   | $                   | 0.45    |   | $ | 0.46 |   |
| Diluted  net income                                  |   | $                  | 0.24    |                | $      | 0.43               |   | $                   | 0.45    |   | $ | 0.46 |   |
| Average common and  common equivalent shares:        |   |               |    |                |   |               |   |                |    |
| Basic                                                |   | 41,590,689         |    | 41,126,894          |   | 40,697,521         |   | 40,224,374          |    |
| Diluted                                              |   | 41,997,381         |    | 41,633,795          |   | 41,359,956         |   | 40,911,780          |    |

 

32

----

 

 

**SHAREHOLDERS**

 

As of Febuary 18, 2003, the Company had 2,105 shareholders of recordand an estimated 9,000 additional beneficial holders whose stock was held instreet name by brokerage houses.

 

 

**DIVIDEND POLICY**

 

The Board of Directors has adopted a policy of declaring regularquarterly dividends. A dividend of 15 cents per share was paid for each quarterof 2000. A dividend of 16 cents was paid for the first and second quarters of2001. A dividend of 18 cents per share was paid for the third and fourthquarters of 2001. A dividend of 19 cents per share was paid for the first andsecond quarters of 2002. A dividend of 21 cents per share was paid for thethird and fourth quarters of 2002.

 

 

**MARKET PRICE RANGE OF COMMON SHARES**

 

The Company's common stock trades on the Nasdaq Stock Marketäunder the symbol CFBX. The following table sets forth the high, low and closingsales prices for the Company's common stock during the periods indicated:

 

 
|           |   | **2002** |   | **2001** |   |
|----------------|--------|----------|--------|----------|--------|
|           |   | **HIGH** |   | **LOW**  |   | **CLOSE** |   | **HIGH** |   | **LOW** |   | **CLOSE** |   |
| First Quarter  |   | 26.37    |   | 24.14    |   | 25.86 |   | 20.44 |   | 18.06 |   | 20.19 |   |
| Second Quarter |   | 28.45    |   | 24.99    |   | 26.09 |   | 23.25 |   | 18.88 |   | 23.00 |   |
| Third Quarter  |   | 28.15    |   | 22.36    |   | 27.88 |   | 26.25 |   | 22.15 |   | 24.02 |   |
| Fourth Quarter |   | 28.13    |   | 24.41    |   | 26.46 |   | 26.97 |   | 22.84 |   | 25.69 |   |