SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________TO ______________.
COMMISSION FILE NUMBER 0-18342
BREMER FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0715583
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
445 MINNESOTA STREET 55101
SUITE 2000, ST. PAUL, MN (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 227-7621
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based upon the $21.18 per share book value of the shares of class A common stock
of the Company as of December 31, 1996, the aggregate value of the Company's
shares of class A common stock held by employees and directors as of such date
was approximately $20.3 million.
As of March 14, 1997, there were 1,200,000 shares of class A common stock and
10,800,000 shares of class B common stock outstanding.
BREMER FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
INDEX
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PAGE
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Documents Incorporated by Reference ii
Cross Reference Sheet iii
PART I
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders 3
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 3
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 44
PART III
Item 10 through Item 13. See "Documents Incorporated by Reference" (Page ii) 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 44
Signatures 47
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference to the parts indicated of
this Annual Report on Form 10-K:
DOCUMENTS INCORPORATED BY
PARTS OF ANNUAL REPORT ON FORM 10-K REFERENCE
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PART II
Item 5. Market for Registrant's Common Reference is made to the
Equity and Related Stockholder portions described herein of the
Matters. final Prospectus of the Company
dated April 20, 1989 filed with
the Securities and Exchange
Commission on April 20, 1989.
PART III
Item 10. Directors and Executive Officers Reference is made to the
of the Registrant. Registrant's definitive proxy
statement ("Proxy Statement"),
which will be filed with the
Securities and Exchange
Commission ("Commission") within
120 days after December 31,
1996.
Item 11. Executive Compensation. Reference is made to the
Registrant's Proxy Statement.
Item 12. Security Ownership of Certain Reference is made to the
Beneficial Owners and Management. Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Reference is made to the
Transactions. Registrant's Proxy Statement.
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CROSS REFERENCE SHEET
BETWEEN ITEMS IN PART III
OF FORM 10-K AND
PROXY STATEMENT
PURSUANT TO PARAGRAPH G-4 OF GENERAL INSTRUCTIONS TO FORM 10-K
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SUBJECT HEADINGS
ITEM NUMBER AND CAPTION IN PROXY STATEMENT
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Item 10. Directors and Executive Officers of the Registrant. Election of Directors
Item 11. Executive Compensation. Election of Directors
Item 12. Security Ownership of Certain Beneficial Owners
and Management. Principal Shareholders
Item 13. Certain Relationships and Related Transactions. Election of Directors
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PART I.
ITEM 1. BUSINESS.
GENERAL
Bremer Financial Corporation (the "Company") is a regional multi-state bank
holding company headquartered in St. Paul, Minnesota, and incorporated under
Minnesota law on December 7, 1943. As of March 14, 1997, the Company owned at
least 95.9% of the total outstanding capital stock of its 16 subsidiary banks
(collectively, "Subsidiary Banks"). As a bank holding company, the Company is
subject to the federal Bank Holding Company Act of 1956, as amended ("Holding
Company Act"), and to regulation and supervision by the Federal Reserve System
(including the Board of Governors of the Federal Reserve System). The Subsidiary
Banks are located in Minnesota, Wisconsin and North Dakota and have a total of
81 offices throughout these states. The Subsidiary Banks draw most of their
deposits from and make substantially all of their loans within the states of
Minnesota, Wisconsin and North Dakota and have no foreign loans. At December 31,
1996, the Company and its subsidiaries (including the Subsidiary Banks) had
consolidated assets of approximately $2.9 billion and consolidated deposits of
approximately $2.3 billion. The Subsidiary Banks ranged in size from $3.0
million to $350.4 million in total assets and from less than $1.0 million to
$280.0 million in total deposits as of December 31, 1996. See the portion of
this Form 10-K, Item 1. entitled "Business Developments in 1996."
The Company also owns several financial services subsidiaries. It owns all of
the outstanding capital stock of First American Trust Company of Minnesota
("First American Trust"), which provides trust and other fiduciary services to
most of the Minnesota Subsidiary Banks' communities; the two First American
Insurance Agencies, Inc. (the "Insurance Agencies"), which provide insurance
agency services to the Subsidiary Banks' communities; Bremer Financial Services,
Inc. ("Bremer Financial"), which provides management and support services to the
Company and its subsidiaries; Bremer Investment Services, Inc. ("Bremer
Investment"), which provides brokerage and investment advisory services to the
Subsidiary Banks; Premium Finance Corporation ("Premium Finance"), which
provides commercial insurance premium financing services in Wisconsin,
Minnesota, and North Dakota; Bremer Business Finance Corporation, ("BBFC"),
which provides asset-based lending and leasing services; and First American
Services, Inc. ("First American Services"), which provides operations and
support services to the Subsidiary Banks. The Company also owns a controlling
portion of the capital stock of Bremer First American Life Insurance Company,
which is engaged in the underwriting and reinsurance of credit life and health
insurance sold in conjunction with the extension of credit by the Subsidiary
Banks.
Consumer investment products and services are available at the Subsidiary Banks
through INVEST Financial Corporation of Tampa, Florida ("INVEST"). The Company
and its Subsidiary Banks have entered into a fully disclosed agreement with
INVEST, whereby the Company and its subsidiaries deliver investment services to
its customers through a network of Subsidiary Banks' offices and receive a
portion of the commissions earned by the investment representatives.
The operations of the financial services subsidiaries, while an integral part of
the Company's ability to deliver a full range of financial services, taken as a
whole, are not significant enough to meet the requirements of additional segment
reporting.
The Otto Bremer Foundation (the "Foundation") owns 20% of the outstanding shares
of the Company's class A common stock and 100% of the outstanding shares of its
class B common stock, for a total of 92% of the outstanding shares of the
Company's capital stock, consisting only of the class A and class B common
stock. Accordingly, the Foundation is, and is subject to regulation as, a bank
holding company within the meaning of the Holding Company Act.
COMPETITION
The banking business is highly competitive. As the financial service industry
expands, the scope of potential competition for the Subsidiary Banks also
expands. The Subsidiary Banks compete with other commercial banks, savings and
loan associations, and credit unions for loans and deposits, with money market
funds for deposits, and with brokerage firms for investment products and
services. Consumer and commercial finance companies, department stores, mortgage
banks and insurance companies are also important competitors for various types
of loans. Some of these entities and institutions are not subject to the same
regulatory restrictions as the Company and the Subsidiary Banks. In addition,
competition has intensified as local institutions become part of larger national
associations as a result of amendments to interstate banking laws.
Management believes that each Subsidiary Bank will be able to continue to
compete successfully in its community. Management further believes that the
Company's emphasis on local management and the ability of the Subsidiary Banks
to make decisions close to the marketplace, the Subsidiary Banks' community
commitment and involvement, and the commitment to a strong sales culture and to
providing quality banking services, are factors that should allow the Subsidiary
Banks to continue to maintain and improve their competitive position.
TRADEMARKS
The Company has registered its stylized "Bremer Eagle" symbol with the United
States Patent and Trademark Office. This trademark is used by all of the
Company's affiliates, including the Subsidiary Banks. The Company has also
registered a stylized version of the word "Transaction" with the United States
Patent and Trademark Office for use in connection with the Subsidiary Banks'
automatic teller machine cards. The Company has registered no other trademarks,
patents or copyrights. While management believes that a trademark or service
mark is useful in identifying and advertising a common identity among the
Subsidiary Banks and the Company or a service offered by the Subsidiary Banks,
it also believes that the "Bremer Eagle" symbol, the "Transaction" service mark,
or any other trademark, patent or copyright or the registration thereof is not
material to the business of the Company or its subsidiaries.
BUSINESS DEVELOPMENTS IN 1996
On January 1, 1996, First American Insurance Agencies, Inc. of Casselton,
North Dakota (a wholly-owned subsidiary of the Company) acquired the United
Insurance Agency in Minot, North Dakota ("United Agency"), with annual
premiums of $7 million.
During 1996 and January 1997, the Company expanded its operations into new
markets via de novo charters and branches. The de novo charters opened were
First American Bank, National Association, located in Wahpeton, North Dakota
(formerly First American Bank Wahpeton) in June 1996, and First American Bank,
National Association located in Moorhead, Minnesota in January 1997. The branch
additions consisted of supermarket locations in Hutchinson, Minnesota and Fargo,
North Dakota, both opened in December 1996.
The Company merged corporate and bank resources within First American Bank,
National Association of South Saint Paul, Minnesota (formerly First American
Bank Metro) to enhance its business development, branching and acquisition
activities in the greater Minneapolis and St. Paul, Minnesota market. In
addition, the Company expanded trust services to the communities of Brainerd and
South Saint Paul, Minnesota; Menomonie, Wisconsin; and Devil's Lake, North
Dakota.
In October 1996, the Company established a wholly-owned subsidiary, Bremer
Business Finance Corporation, an asset-based lending subsidiary and developed
leasing capabilities to expand the Company's business banking relationship
offerings.
In late 1996, the Company commenced the process of converting all of its
state-chartered Subsidiary Banks to national charters. This will have the effect
of standardizing the law and regulations applicable to the Subsidiary Banks,
including reporting requirements. In addition, this conversion will result in
the advantage of interacting with only one regulatory agency. The conversion was
completed on March 1, 1997.
On January 9, 1997, First American Bank, National Association of Detroit Lakes,
Minnesota (formerly First American Bank of Detroit Lakes), completed the
acquisition of approximately $12.4 million of deposits from the Perham Minnesota
branch of Brainerd National Bank.
On January 24, 1997, First American Trust Company of Minnesota introduced the
Bremer Mutual Fund Family. Initially two no-load mutual funds, the Bremer Growth
Stock Fund and the Bremer Bond Fund, will be offered through Bremer Investment
Funds, Incorporated. The funds are managed by First American Trust Company of
Minnesota.
On March 1, 1997, First American Insurance Agencies, Inc. of St. Paul,
Minnesota (a wholly-owned subsidiary of the Company) acquired the Paul E.
Hedlund Insurance Agency in Boyceville, Wisconsin. The Paul E. Hedlund
Insurance Agency has annual premiums of $900,000.
EMPLOYEES
As of March 14, 1997, the Company and its subsidiaries (including the Subsidiary
Banks) had a total of 1,300 full-time equivalent positions. The Company and each
of its subsidiaries considers its relations with employees to be good. None of
the Company's employees is a member of a collective bargaining unit.
ITEM 2. PROPERTIES.
The Company leases its principal offices at 445 Minnesota Street, Suite 2000,
St. Paul, Minnesota 55101, which consist of approximately 20,000 square feet of
space. Management believes that these facilities will be sufficient for the
Company's needs in the foreseeable future, but, if this is not the case, that
other space would be readily available in downtown St. Paul.
Each of the Subsidiary Banks owns its main office and its branches, if any,
except for those located in leased space of supermarkets; the facilities are all
well maintained and range in size from 391 square feet to 52,280 square feet.
Certain properties of the Subsidiary Banks are subject to pledges or mortgages.
However, the amount of long-term debt secured by mortgages on the Subsidiary
Banks' properties is not material. See Notes F and H to the Notes to
Consolidated Financial Statements of the Company set forth in Item 8 of Part II
of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its Subsidiary Banks are involved in legal actions in
various stages of litigation and investigation. After reviewing all actions,
pending or threatened, involving the Company and such Subsidiary Banks,
management believes that such legal actions, whether pending or threatened,
constitute ordinary routine litigation incidental to the business of the Company
and the Subsidiary Banks and that the ultimate resolution of these matters
should not materially affect the Company's consolidated financial position or
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the year ended December
31, 1996 to a vote of the Company's security holders, through the solicitation
of proxies or otherwise.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
There is no established trading market for the shares of the Company's class A
common stock. To the best of the Company's knowledge, during the period from May
18, 1989 (the closing date of the registered initial public offering of the
Company's class A common stock) through and including March 7, 1997, a majority
of the purchases and sales of shares of the class A common stock have consisted
of transfers effected upon the exercise of the options described in the portions
of the Company's Prospectus dated April 20, 1989 ("Prospectus") entitled
"Description of Capital Stock -- Description of Class A Common Stock --
Restrictions on Transfer" on page 62 of the Prospectus and "Description of
Capital Stock -- Description of Class A Common Stock First Call Option to
Company" on page 64 of the Prospectus (which portions are hereby incorporated by
reference pursuant to Rule 12b-23 under the Securities Exchange Act of 1934).
The Company is not obligated to purchase any shares of class A common stock from
a holder upon the exercise of a put option if the purchase price paid for the
shares subject to the put option, when added to the purchase price paid for all
previous purchases of class A common stock during the preceding twelve-month
period, would exceed 10% of the Company's net worth as of the date of such
purchase. As of December 31, 1996, the Company's net worth, including redeemable
class A common stock, was $254.2 million and 10% of the Company's net worth and
redeemable class A common stock, was $25.4 million.
During the period from January 1, 1996 and through and including March 7, 1997,
the Company did not directly purchase any shares of class A common stock but
assigned to its Employee Stock Ownership Plan ("ESOP") and the Bremer Banks
Profit Sharing Plus Plan ("Profit Sharing Plan") its options to purchase a total
of 84,296.6201 shares. The ESOP and the Profit Sharing Plan purchased these
shares and then transferred them to employees of the Company and its
subsidiaries through the ESOP and the Profit Sharing Plan. In addition, 3,602.0
shares of class A common stock were transferred directly between individuals at
various times throughout the year. To the best of the Company's knowledge, these
were the only transfers of shares of class A common stock effected during the
period from January 1, 1996 through and including March 7, 1997. The sales price
of the shares of class A common stock in such transactions ranged from $19.83 to
$26.35 per share. These prices were equal to either the per share book value of
the class A common stock as shown in the Company's consolidated balance sheet
dated as of the last day of the immediately preceding fiscal quarter or, and
only with respect to shares transferred that had been held for employees in the
ESOP, the per share fair market values of $23.75, $25.50, and $26.35 as of June
30, 1995, December 31, 1995, and June 30, 1996, respectively, as determined by
an independent appraiser. At December 31, 1996, the most recent date for which a
per share book value for the class A common stock is available, such value was
$21.18.
To the best of the Company's knowledge, no brokers are used to sell the shares
of class A common stock, and there are no market makers for the class A common
stock.
HOLDERS
As of March 7, 1997, there were approximately 1,100 holders of record of the
shares of class A common stock.
DIVIDENDS
The Subsidiary Banks' ability to pay dividends to the Company and the Company's
ability to pay dividends to holders of the class A common stock are restricted
and limited. (The restrictions on payments of dividends also are described in
Note O of the Company's Notes to Consolidated Financial Statements set forth in
Item 8 of this Form 10-K.) Each of the Subsidiary Banks is subject to extensive
regulation regarding the payment of dividends and other matters. The state
Subsidiary Banks incorporated under Minnesota law are subject to regulation by
the Minnesota Department of Commerce, the state Subsidiary Bank incorporated
under Wisconsin law is subject to regulation by the Wisconsin Commissioner of
Banking, and the North Dakota Subsidiary Banks are subject to regulation by the
North Dakota Department of Banking and Financial Institutions. In addition,
because the deposits of the Company's state Subsidiary Banks are insured up to
the applicable limit (currently $100,000) by the Federal Deposit Insurance
Corporation ("FDIC"), all of the state Subsidiary Banks are subject to
regulation by the FDIC. The national Subsidiary Banks are regulated by the
Office of the Comptroller of the Currency ("Comptroller"). The Company and the
Foundation, as bank holding companies, as well as the one state Subsidiary Bank
that is a member of the Federal Reserve System, are regulated by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board").
DIVIDENDS FROM SUBSIDIARY BANKS. A substantial portion of the Company's cash
flow and income is derived from dividends paid to it by the Subsidiary Banks,
and restrictions on the payment of such dividends could affect the payment of
dividends by the Company. A Minnesota bank may declare and pay dividends only
out of accumulated net earnings, if it complies with certain capital
requirements, and if it obtains the prior approval of the Minnesota Commissioner
of Commerce. A Wisconsin bank may declare and pay dividends out of net earnings
for the year in which the dividend is to be declared and paid. However, if such
dividend exceeds such earnings and if the bank has paid dividends in excess of
net earnings in either of the two previous years, then prior approval of the
Wisconsin Commissioner of Banking is required to pay dividends in excess of net
earnings for the current year. A North Dakota bank may declare and pay dividends
out of cumulative adjusted net profits for the last three years, and the prior
approval of the North Dakota Department of Banking and Financial Institutions is
required for dividends paid that exceed that statutory limit.
With regard to national Subsidiary Banks, and in addition to the statutory
prohibition against the withdrawal of any portion of a national bank's capital
and certain statutory limitations on the payment of dividends, the approval of
the Comptroller is required for the payment of any dividend by any national bank
if the total of all dividends declared by the bank in any calendar year exceeds
the total of its net profits (as defined) for that year combined with its
retained net profits for the preceding two calendar years, less any required
transfer to surplus. The Comptroller also has issued a banking circular
emphasizing that the level of cash dividends should bear a direct correlation to
the level of a national bank's current and expected earnings stream, the bank's
need to maintain an adequate capital base, and other factors.
In addition to the foregoing limitations, the appropriate federal or state
banking agency could take the position that it has the power to prohibit a
national or state bank from paying dividends if, in its view, such payments
would constitute unsafe or unsound banking practices.
The payment of dividends by any state or national bank also is affected by the
requirements to maintain adequate capital pursuant to the capital adequacy
guidelines issued by the FDIC and the Comptroller. The FDIC and the Comptroller
each has issued capital adequacy regulations for state banks subject to the
FDIC's primary supervision and for national banks subject to the Comptroller's
primary supervision. These regulations provide for a minimum tier 1 capital to
total assets (leverage) ratio of 3.00% for the most highly-rated banks and a
minimum total capital to risk-weighted assets (total capital) ratio of 8.00%.
These guidelines and regulations further provide that capital adequacy is to be
considered on a case-by-case basis in view of various qualitative factors that
affect a bank's overall financial condition. Most banking organizations are
expected to maintain a leverage ratio of 100 to 200 basis points above this
minimum depending on their financial condition. The Subsidiary Banks are in
compliance with the FDIC's and the Comptroller's minimum capital guidelines. See
the discussion of the capital adequacy guidelines set forth in the portion of
Item 7. Management's Discussion and Analysis "Capital Management," in Part II of
this Form 10-K.
The above regulations and restrictions on dividends paid by the Subsidiary Banks
may limit the Company's ability to obtain funds from such dividends for its cash
needs, including funds for payment of operating expenses and for the payment of
dividends on the class A and class B common stock, as well as funds necessary to
facilitate acquisitions. However, because of the capital positions of the
Subsidiary Banks, the Company has been able to obtain dividends sufficient to
meet its cash flow needs.
As of December 31, 1996, the Subsidiary Banks had retained earnings of $37.8
million which were available for distribution to the Company as dividends in
1997 subject to regulatory and administrative restrictions. Of this amount,
approximately $19.6 million was available for distribution without obtaining the
prior approval of the appropriate bank regulator. In 1995 and 1996, the
Subsidiary Banks paid total dividends to the Company of $26.5 million and $22.8
million, respectively. Thirteen of the fourteen banks that were Subsidiary Banks
in 1995 and 1996 paid dividends in both years. Of the Subsidiary Banks that paid
dividends in 1995 and/or 1996, the range of dividend payouts (dividends paid
divided by net income) was 47.0% to 336.1% in 1995 and 42.9% to 102.1% in 1996.
Under the ESOP, and at the option of the ESOP's Administrator, cash dividends
declared on the shares of class A common stock held by the ESOP will be
allocated to the ESOP participants. To the extent that cash dividends declared
on the class A common stock held by the ESOP are distributed to the participants
(whether directly or indirectly), the dividends will be deductible to the
Company. Any dividends paid in the form of class A common stock with respect to
shares allocated to the individual participants' accounts will be allocated to
such accounts, and dividends paid in the form of class A common stock with
respect to shares held in the suspense account are added to the suspense
account.
Under the Profit Sharing Plan, all cash dividends paid on the class A common
stock are allocated to the accounts of the participants holding shares of the
class A common stock in their profit sharing accounts. All such proceeds are
available to the participants for investment under the Profit Sharing Plan in
accordance with the terms and conditions of the Profit Sharing Plan. All
dividends paid in the form of class A common stock will be allocated to the
account of the participant in which the shares are held. In no event will
dividends paid on the class A common stock held by the participants' accounts
within the Profit Sharing Plan be forfeited or otherwise allocated and held by
the trustees of the Profit Sharing Plan.
DIVIDENDS FROM COMPANY. The payment of dividends by the Company, as a bank
holding company, is limited by, among other things, the requirement to maintain
adequate capital pursuant to the capital adequacy guidelines issued by the
Federal Reserve Board. These guidelines are substantially similar to those
promulgated by the FDIC and the Comptroller with respect to state and national
banks, which are discussed above. The payment of dividends by a bank holding
company also is subject to the general limitation that the Federal Reserve Board
could take the position that it has the power to prohibit the bank holding
company from paying dividends if, in its view, such payments would constitute an
unsafe or unsound practice.
The Company declared and paid dividends to the Foundation and all other holders
of its class A common stock of $9.6 million in 1995 and $12.6 million in 1996.
In 1995, $2.4 million of dividends were paid in each of the four quarters. In
1996, $3.0 million of dividends were paid in each of the first, second, and
third quarters and $3.6 million of dividends were paid in the fourth quarter.
The dividend yield, which consists of dividends paid during the year divided by
shareholder's equity as of the last day of the preceding year, was 4.7% and 5.3%
for the years ended December 31, 1995 and 1996, respectively.
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ITEM 6. SELECTED FINANCIAL DATA.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
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1996 CHANGE 1995 1994 1993 1992
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OPERATING RESULTS (in thousands)
Total interest income $ 210,703 5.5% $ 199,781 162,267 149,192 163,309
Net interest income 108,193 7.5 100,645 94,083 87,094 87,427
Net interest income (1) 115,862 7.4 107,898 100,698 93,665 92,564
Provision for loan losses 2,756 54.8 1,780 (1,300) (1,000) 6,844
Noninterest income 33,842 21.3 27,892 26,768 30,816 26,637
Noninterest expense 92,325 5.8 87,296 85,636 79,762 74,421
Net income 31,817 17.3 27,136 25,797 26,885 22,647
Dividends 12,600 31.3 9,600 9,360 7,200 6,000
AVERAGE BALANCES (in thousands)
Total assets 2,817,062 6.4 2,647,758 2,356,426 2,137,952 2,040,707
Loans 1,687,450 9.2 1,545,231 1,330,269 1,173,332 1,166,926
Securities 959,278 1.8 942,521 893,266 843,394 753,132
Deposits 2,211,280 4.6 2,113,070 1,903,284 1,776,395 1,718,844
Redeemable class A common stock 19,686 11.4 17,672 16,347 15,191 13,738
Shareholder's equity 226,388 11.4 203,222 187,986 174,702 157,989
PERIOD-END BALANCES (in thousands)
Total assets 2,925,651 4.0 2,812,232 2,537,712 2,279,853 2,120,965
Loans 1,755,757 7.9 1,626,616 1,443,128 1,238,717 1,143,695
Securities 935,774 (5.0) 984,768 907,211 875,454 826,318
Deposits 2,283,446 1.8 2,242,307 2,024,464 1,894,453 1,776,954
Redeemable class A common stock 20,337 6.8 19,035 16,308 16,386 14,404
Shareholder's equity 233,870 6.8 218,906 187,538 188,434 165,646
FINANCIAL RATIOS
Return on average total assets (2) 1.18% 10.3 1.07% 1.15 1.32 1.17
Return on average
realized equity (3)(4) 13.08 8.5 12.06 12.41 14.16 13.19
Average equity to average
total assets (3) 8.74 4.8 8.34 8.67 8.88 8.42
Tangible equity to total assets 8.62 2.6 8.40 8.03 9.14 8.98
Dividend payout 39.60 11.9 35.38 36.28 26.78 26.49
Net interest margin (1) 4.37 0.9 4.33 4.52 4.64 4.79
Net charge-offs to average
total loans 0.03 (62.5) 0.08 0.02 0.03 0.46
Reserve for loan losses to
total loans 1.74 -- 1.74 1.87 2.23 2.39
PER SHARE OF COMMON STOCK (3)
Income before accounting changes $ 2.65 17.3 $ 2.26 2.15 2.24 1.93
Income after accounting changes 2.65 17.3 2.26 2.15 2.24 1.89
Dividends paid 1.05 31.3 0.80 0.78 0.60 0.50
Book value 21.18 6.8 19.83 16.99 17.07 15.00
Realized book value (4) 21.08 8.3 19.47 18.01 16.65 15.00
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(1) Tax-equivalent basis (TEB).
(2) Calculation is based on income before minority interests.
(3) Calculation is based on 12,000,000 shares, including redeemable class A
common stock.
(4) Excluding net unrealized gain (loss) on securities available for sale.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS
EARNINGS. The Company reported net income of $31.8 million for the year ended
December 31, 1996, a $4.7 million or 17.3% increase from the $27.1 million
earned in 1995. Earnings per share were $2.65 in 1996 compared to $2.26 in 1995.
Return on realized equity was 13.08% in 1996, as compared to the 12.06% return
in 1995. Return on average assets was 1.18% in 1996, versus 1.07% in 1995. To
facilitate comparisons, net interest income and net interest margin in the
accompanying discussion and tables have been adjusted to show tax-exempt income,
such as interest on municipal securities and loans, on a tax-equivalent basis.
Table I presents a comparative summary of operating data for 1992 through 1996.
Table II presents the major components affecting the changes in return on assets
for 1996.
TABLE I
SUMMARY INCOME STATEMENT (TAX-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1996 CHANGE 1995 1994 1993 1992
-------- ------ -------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Interest income $218,372 5.5% $207,034 168,882 155,763 168,446
Interest expense 102,510 3.4 99,136 68,184 62,098 75,882
-------- -------- ------ ------ ------
Net interest income 115,862 7.4 107,898 100,698 93,665 92,564
Provision for loan losses 2,756 (54.8) 1,780 (1,300) (1,000) 6,844
-------- -------- ------ ------ ------
Net funds function 113,106 6.6 106,118 101,998 94,665 85,720
Noninterest income 33,842 21.3 27,892 26,768 30,816 26,637
-------- -------- ------ ------ ------
Adjusted gross income 146,948 9.7 134,010 128,766 125,481 112,357
Noninterest expense 92,325 5.8 87,296 85,636 79,762 74,421
-------- ---- -------- ------ ------ ------
Income before taxes and
accounting changes 54,623 16.9 46,714 43,130 45,719 37,936
Income taxes 22,806 16.5 19,578 17,333 18,834 14,821
-------- ---- -------- ------ ------ ------
Income before accounting
changes 31,817 17.3 27,136 25,797 26,885 23,115
Accounting changes -- -- -- -- -- (468)
-------- ---- -------- ------ ------ ------
Net income $ 31,817 17.3% $ 27,136 25,797 26,885 22,647
======== ==== ======== ====== ====== ======
Earnings per share $ 2.65 17.3% $ 2.26 2.15 2.24 1.89
Dividends paid per share $ 1.05 31.3% $ 0.80 0.78 0.60 0.50
</TABLE>
TABLE II
CHANGES IN RETURN ON ASSETS
1996 VS 1995
------------
Return on assets, prior year 1.07%
Increases
Net interest income (TEB) 0.04
Service charges 0.04
Insurance 0.04
Trust fees 0.01
Brokerage 0.04
Gain on sale of loans 0.03
Employee benefits 0.03
FDIC premiums and examination fees 0.07
----
Total increases 0.30
====
Decreases
Provision for loan loss 0.03
Gain on sale of other assets 0.02
Gain on sale of securities 0.01
Salaries and wages 0.03
Furniture and equipment 0.02
Provision for income taxes 0.07
Other noninterest expense, net 0.01
----
Total decreases 0.19
----
Return on assets, current year 1.18%
====
EQUITY OF SHAREHOLDERS. Shareholder's equity and redeemable class A common stock
totaled $254.2 million at December 31, 1996. Book value per share increased from
$19.83 at December 31, 1995 to $21.18 at December 31, 1996, while dividends paid
per share increased from $.80 to $1.05. The 1996 dividends paid of $12.6 million
represented 5.3% of the equity of shareholders at December 31, 1995 and 39.6% of
1996 net income. Realized book value per share, which excludes the impact of
Financial Accounting Standards No. 115 (FAS 115), increased from $19.47 at
December 31, 1995 to $21.08 at December 31, 1996.
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME. The most significant component of the Company's earnings is
net interest income, which is the difference between interest earned on assets
and interest paid on liabilities. Net interest margin measures the effectiveness
of generating net interest income on earning assets and is calculated by
dividing net interest income by earning assets. The following table sets forth
certain information regarding changes in net interest income (tax-equivalent
basis), by volume and rate, of the Company for the periods indicated.
TABLE III
CHANGES IN NET INTEREST INCOME (TEB)
<TABLE>
<CAPTION>
1996 VS 1995 1995 VS 1994
-------------------------------- -------------------------------
VOLUME YIELD/RATE* TOTAL VOLUME YIELD/RATE* TOTAL
------ ----------- ----- ------ ----------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income
Loans $ 9,136 1,272 10,408 13,641 14,895 28,536
Taxable securities 2,995 (2,704) 291 4,643 3,272 7,915
Tax-exempt
securities 1,048 (380) 668 1,757 (105) 1,652
Federal funds sold -- -- -- 4 (41) (37)
Other earning assets 12 (41) (29) 13 73 86
------- ------ ------ ------ ------ ------
Total 13,191 (1,853) 11,338 20,058 18,094 38,152
------- ------ ------ ------ ------ ------
Interest expense
Savings deposits 1,056 (3,040) (1,984) 1,876 502 2,378
Other time deposits 4,214 (856) 3,358 5,712 17,595 23,307
Short-term
borrowings 787 1,385 2,172 1,105 2,957 4,062
Long-term debt 98 (270) (172) 49 1,156 1,205
------- ------ ------ ------ ------ ------
Total 6,155 (2,781) 3,374 8,742 22,210 30,952
------- ------ ------ ------ ------ ------
Net interest income $ 7,036 928 7,964 11,316 (4,116) 7,200
======= ====== ====== ====== ====== ======
</TABLE>
- ----------------------
* All changes in net interest income, other than those due to volume, have
been allocated to yield/rate.
Tax-equivalent net interest income for 1996 was $115.9 million, an increase of
$8.0 million or 7.4% from 1995. The increase in net interest income resulted
primarily from a $159 million increase in average earning assets and an increase
in the net interest margin, which improved 4 basis points from 4.33% in 1995 to
4.37% in 1996. The increase in net interest margin was primarily due to an
increased spread in rates during 1996, as costs on interest bearing liabilities
decreased more than yields on earning assets. The interest bearing liabilities
cost and net interest margin were impacted by decreased rates paid on interest
bearing savings deposits and certificates, offset partially by the increased use
of other borrowings, with higher costs, to fund a portion of the earning asset
growth experienced in 1996. Adversely impacting the net interest margin, but not
enough to offset the decreased cost on interest bearing liabilities, was a
decline in the earning asset yield of 7 basis points, resulting from a 17 basis
point decline in loan yields, coupled with an unfavorable change in the mix of
earning assets.
PROVISION FOR LOAN LOSSES. The provision for loan losses reflects the cost
associated with the risks inherent in the loan portfolio, taking into
consideration an evaluation of economic conditions, changes in the composition
and size of the loan portfolio, net charge-offs, and the level of nonperforming
and other problem loans. From December 31, 1995 to December 31, 1996,
nonperforming loans increased $2.2 million to $11.2 million. However, the
quality of the portfolio, as measured by the ratio of classified loans to total
loans, reflected only modest deterioration during each quarter of 1996, despite
strong loan growth. The modest deterioration in credit quality occurred
primarily in the commercial real estate, agricultural, and consumer segments of
the loan portfolio. Several commercial real estate credits continued to
experience pressure on their margins, while farmers in certain geographical
locations experienced another adverse growing season this past year. The reserve
to outstanding loan ratio remained at 1.74% in 1996 while the reserve to
nonperforming loan coverage decreased from 313.0% to 271.1% from 1995 to 1996.
The reserve for loan losses remains strong as compared to the Company's peer
group. A complete discussion of asset quality and credit management can be found
in the "Corporate Risk Profile" section of Item 7 in this Form 10-K.
NONINTEREST INCOME. Noninterest income was $33.8 million in 1996 compared to
$27.9 million in 1995, representing a $5.9 million or 21.3% increase.
Contributing to this increase in noninterest income were strong growth in
service charge income of $1.8 million or 16.2% and brokerage commissions of $1.3
million or 103.6%. Also contributing to the increase in noninterest income was
an increase in insurance commissions of $1.5 million, due in large part to the
acquisition of United Agency in January 1996. Gains on loans sold in the
secondary market grew as the volume of real estate mortgage financing increased
in 1996 driven by a more favorable interest rate environment. Decreasing $574
thousand from 1995 were gains on the sale of other assets, primarily other real
estate owned (OREO). Table IV presents the components of noninterest income.
TABLE IV
NONINTEREST INCOME
<TABLE>
<CAPTION>
1996 CHANGE 1995 1994 1993 1992
------- ------ ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service charges $12,837 16.2% $11,047 9,627 8,823 8,455
Insurance 7,082 28.7 5,503 4,716 4,671 4,576
Trust 5,332 11.5 4,784 4,502 4,462 4,087
Brokerage 2,531 103.6 1,243 1,865 1,950 1,361
Gain on sale of loans 2,138 64.2 1,302 1,649 3,949 2,891
Gain on sale of other assets 135 (81.0) 709 1,548 2,118 941
Other 3,640 21.3 3,000 3,131 3,058 3,176
------- ------- ------ ------ ------
Operating noninterest income 33,695 22.1 27,588 27,038 29,031 25,487
Gain on sale of subsidiary -- -- -- -- -- 500
Gain (loss) on sale of securities 147 (51.6) 304 (270) 1,785 650
------- ------- ------ ------ ------
Total $33,842 21.3% $27,892 26,768 30,816 26,637
======= ======= ====== ====== ======
</TABLE>
NONINTEREST EXPENSE. Noninterest expense increased $5.0 million or 5.8% from
1995 to 1996. The following table summarizes the components of noninterest
expense from 1992 to 1996.
TABLE V
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
1996 CHANGE 1995 1994 1993 1992
------- ------ ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Salaries and wages $40,676 9.0% $37,325 36,556 33,633 31,297
Employee benefits 10,739 (1.3) 10,878 11,254 10,340 8,994
Occupancy 5,756 5.9 5,433 4,871 4,614 4,370
Furniture and equipment 6,020 19.9 5,020 4,320 3,994 4,028
Printing, postage and
office supplies 4,824 4.9 4,599 3,918 3,723 3,557
Marketing 3,306 8.7 3,041 2,954 2,440 1,707
Data processing fees 7,680 4.7 7,334 7,031 6,595 5,399
Other real estate owned 56 (33.3) 84 (63) 791 1,948
Minority interest in earnings 1,400 9.6 1,277 1,271 1,408 1,166
FDIC premiums and
examination fees 1,075 (62.9) 2,901 4,719 4,449 4,190
Other 10,793 14.8 9,404 8,805 7,775 7,765
------- ------- ------ ------ ------
Total $92,325 5.8% $87,296 85,636 79,762 74,421
======= ======= ====== ====== ======
</TABLE>
Personnel costs, which accounted for 55.7% of noninterest expense, increased
$3.2 million or 6.7%, as salaries and wages increased 9.0%. Affecting 1996
personnel costs were $1.3 million in salaries and benefits relating to entities
acquired over the past two years. Excluding acquisitions, personnel costs would
have increased $1.9 million or 4.1% over 1995. Employee benefits costs declined
$139 thousand during the year as the Company's benefit plan expenses, which
include pension, profit sharing and employee stock ownership, declined
approximately $300 thousand. Also, contributing to the decline in benefit costs
was a decline of approximately $307 thousand, during 1996, in costs associated
with the relocation of personnel.
Excluding personnel costs, noninterest expense increased $1.8 million or 4.6%.
Contributing to this increase was a $1 million increase in furniture and
equipment expense primarily due to the depreciation expense associated with the
upgrading of technology throughout the Company. Also contributing to the
increase in noninterest expense was a $1.4 million increase in other expenses
driven by a $517 thousand increase in lending costs associated with the growth
experienced in real estate mortgage lending; a $199 thousand increase in
amortization of intangible assets; and increases in several other miscellaneous
categories. Offsetting some of the increase in noninterest expense was a
continued decline in FDIC insurance premiums in 1996.
A common industry statistic used to measure the productivity of banking
organizations is the efficiency ratio. The efficiency ratio measures the cost
required to generate each dollar of revenue and is calculated by dividing
recurring noninterest expense by tax-equivalent net interest income and
recurring noninterest income. The Company's efficiency ratio improved from 63.0%
in 1995 to 59.9% in 1996. Contributing to this improvement were significant
increases in tax-equivalent net interest income of 7.4% and modest growth in
recurring noninterest expense of 5.6%. The Company will continue its strategic
focus to operate with an efficiency ratio below 60%.
INCOME TAXES. Income tax expense, which consists of provisions for federal and
state income taxes, was $15.1 million for 1996, representing an increase of $2.8
million from 1995. Comparing 1996 to 1995, the Company's effective tax rate also
increased, from 31.2% to 32.2%, reflecting the impact of proportionately more
taxable than tax-exempt income in 1996. For further discussion and detail on the
Company's income taxes, refer to Notes A and M to the Consolidated Financial
Statements found in Item 8. Financial Statements and Supplementary Data of this
Form 10-K.
CORPORATE RISK PROFILE
THE MANAGEMENT OF RISK. Managing risk is an essential part of the operation of a
banking organization. When risk is undertaken, the Company expects a return
commensurate with the risk. If the risk profile is lowered, expectations of
returns also are reduced. By effectively managing and balancing the many risks
involved in its business, the Company believes consistent growth in earnings
will occur.
The most prominent risks facing the Company are credit risk, interest rate risk,
and liquidity risk. Credit risk involves the risk of either not collecting
interest when it is due or not receiving the principal balance of a loan or
investment when it matures. Credit risk is the most significant risk the Company
must manage. Interest rate risk is the risk to net interest income caused by
differences in the repricing and maturing characteristics of assets and
liabilities. Liquidity risk is the risk that the Company will not be able to
fund its obligations and is largely a function of how effectively the Company
manages its other risks. The Company has established policies, procedures, and
constraint levels to enable it to contain, accurately measure, monitor, and have
senior management regularly review the Company's total risk position.
CREDIT RISK MANAGEMENT. The Company manages asset quality and controls credit
risk through standardized lending policies and procedures and an internal loan
review system. The Company, through its corporate credit administration and
review department in cooperation with the Subsidiary Banks, has developed a
credit philosophy aimed at minimizing credit risk by emphasizing the importance
of a strong credit management process. This process is essentially aimed at
managing credit risk from the initial request through the life of the loan on
all business purpose credits.
LOAN PORTFOLIO REVIEW. One of the ways the Company manages its credit risk is by
maintaining a loan portfolio that management believes is well diversified by
industry and size of loan. The Company also benefits from significant diversity
among its banks, both as to loan type and local economic conditions. For
example, while high corn prices adversely affected certain livestock growers,
other areas more involved in small grain production did very well. Similarly,
the hospitality industry was stronger in some geographical areas than in other
areas. As a result of this type of diversification, concentrations and risks in
any single category are acceptable, as indicated by the following table
summarizing the composition of the portfolio.
TABLE VI
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------- ------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
---------- ----- ---------- ----- ---------- ----- ---------- ------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and other $ 346,472 19.69% $ 331,605 20.34% $ 292,643 20.23% $ 240,772 19.43% $ 200,600 17.53%
Commercial real estate 340,621 19.36 313,287 19.22 282,203 19.51 273,204 22.04 286,395 25.03
Construction 30,039 1.71 31,952 1.96 26,421 1.83 12,704 1.03 6,093 0.53
Agricultural 378,399 21.50 350,786 21.52 299,127 20.68 250,163 20.19 233,132 20.37
Residential real estate 351,946 20.00 322,296 19.77 293,671 20.30 252,085 20.34 231,947 20.27
Construction 11,904 0.68 11,511 0.71 10,577 0.73 8,597 0.69 6,020 0.53
Consumer 247,511 14.06 221,727 13.60 192,865 13.33 157,169 12.68 128,084 11.19
Tax-exempt 52,819 3.00 46,936 2.88 49,135 3.39 44,612 3.60 52,052 4.55
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total $1,759,711 100.0% $1,630,100 100.0% $1,446,642 100.0% $1,239,306 100.0% $1,144,323 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
In recent years the composition of the Company's loan portfolio has reflected a
general stability in portfolio segments. The Company's Subsidiary Banks
continued to actively seek credit opportunities of all loan types including
commercial real estate. The Company believes that even if the economy were to
suffer modest deterioration, its exposure to significant commercial real estate
losses in the foreseeable future is limited.
Of the Company's real estate lending, approximately 50% is in commercial real
estate loans, as compared to 51% in 1995 and 50% in 1994. These commercial real
estate loans consist primarily of loans to business customers who occupy the
property or use it for income production. The remaining 50% of real estate
lending is in the form of residential mortgages and home equity loans. The
commercial real estate loan portfolio experienced growth of $25.4 million or
7.4% between 1995 and 1996, reflecting continued strong business loan demand and
the effect of acquisitions. The residential real estate loan portfolio
experienced growth of $30.0 million or 9.0% due to the effect of acquisitions
and the more favorable interest rate environment. The Company is not involved in
highly leveraged transaction lending or lending to foreign countries.
While 1996 generally was a good year for the Company's agricultural customers, a
few isolated segments of the portfolio continued to experience difficulties.
This included some producers in the dairy and livestock industries who
experienced low market prices and/or high input costs. Geographic dispersion of
the Subsidiary Banks and diversity of agricultural products and activities were
especially beneficial to the Company's agricultural portfolio and mitigated the
negative effects of the segments of the portfolio experiencing these poor
conditions. Of that loan portfolio, approximately two-thirds represented crop
production lending, with the remainder primarily related to livestock and dairy
lending.
NET LOAN CHARGE-OFFS. Net loan charge-offs decreased to $527 thousand in 1996
from $1.2 million in 1995 and increased slightly from $251 thousand in 1994.
Correspondingly, net charge-offs as a percentage of average loans decreased to
.03% in 1996 from .08% in 1995 and increased slightly from .02% in 1994.
Charge-offs during 1996 were widely distributed among Subsidiary Banks and loan
types. No individual charge-off represented more than 10% of the total. Table
VIII includes a summary of the charge-offs by loan category for the past five
years.
NONPERFORMING ASSETS. Nonperforming assets include nonaccrual loans,
restructured loans, and other real estate acquired in loan settlements. The
accrual of interest on loans is suspended when the credit becomes 90 days or
more past due, unless the loan is fully secured and in the process of
collection. Restructured loans accrue interest but include concessions in terms
which have been made as a result of deterioration in the borrower's financial
condition. Table VII summarizes the nonperforming assets as of December 31 for
the past five years.
TABLE VII
NON-PERFORMING ASSETS AT DECEMBER 31
<TABLE>
<CAPTION>
1996 CHANGE 1995 1994 1993 1992
------- ------ ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $10,830 29.1% $ 8,392 10,401 13,356 20,983
Restructured loans 414 (34.7) 634 764 1,127 7,515
------- ------- ------ ------ ------
Total nonperforming loans 11,244 24.6 9,026 11,165 14,483 28,498
Other real estate owned (OREO) 240 (36.8) 380 1,208 3,325 5,732
------- ------- ------ ------ ------
Total nonperforming assets $11,484 22.1 $ 9,406 12,373 17,808 34,230
======= ======= ====== ====== ======
Past due loans* $ 2,205 (11.9)% $ 2,504 1,563 1,985 902
======= ======= ====== ====== ======
Nonperforming loans to total loans 0.64% -- 0.55% 0.77 1.17 2.49
Nonperforming assets to total loans
and OREO 0.65 -- 0.58 0.86 1.43 2.98
Nonperforming assets and past due
loans* to total loans and OREO 0.78 -- 0.73 0.96 1.59 3.06
Reserve to nonperforming loans 271.10 -- 313.02 241.34 190.73 95.95
Reserve to total loans 1.74 -- 1.74 1.87 2.23 2.39
Reserve for Loan Losses
Beginning of year $28,253 4.9% $26,946 27,624 27,344 25,866
Charge-offs (2,230) (21.3) (2,834) (2,065) (3,022) (7,302)
Recoveries 1,703 5.8 1,610 1,814 2,705 1,936
------- ------- ------ ------ ------
Net charge-offs (527) (56.9) (1,224) (251) (317) (5,366)
Provision for loan losses 2,756 54.8 1,780 (1,300) (1,000) 6,844
Reserve related to acquired assets -- (100.0) 751 873 1,597 --
------- ------- ------ ------ ------
End of year $30,482 7.9% $28,253 26,946 27,624 27,344
======= ======= ====== ====== ======
</TABLE>
- -----------------------
* Past due loans include accruing loans 90 days or more past due.
Nonperforming assets were $11.5 million at December 31, 1996, compared to $9.4
million at December 31, 1995, and $12.4 million at December 31, 1994.
Correspondingly, as a percentage of total loans and other real estate owned,
nonperforming assets increased to .65% in 1996 from .58% in 1995, and down from
.86% in 1994. Nonperforming loans were $11.2 million and .64% of total loans at
December 31, 1996, compared to $9.0 million and .55% of total loans at December
31, 1995 and $11.2 million and .77% at December 31, 1994. The increase in
nonperforming loans reflects loan growth and continued penetration into markets
with limited opportunities for high quality volumes. The Subsidiary Banks also
continue to closely monitor emerging repayment issues. The Company will continue
to enhance systems for monitoring portfolio segments to identify deterioration
and non-performance at the earliest possible stages.
RESERVE FOR LOAN LOSSES. The purpose of the reserve for loan losses is to
provide for loan losses inherent in the Company's loan portfolio. Even in the
presence of credit policies and procedures, credit quality is subject to many
economic and non-economic factors that influence a borrower's financial
condition over time. Table VIII summarizes the activity in the reserve for loan
losses along with the loan loss reserve allocation from 1992 through 1996.
TABLE VIII
RESERVE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning of year $ 28,253 26,946 27,624 27,344 25,866
Charge-offs
Commercial and other 480 532 680 1,004 4,416
Commercial real estate 117 381 67 868 1,256
Construction -- -- -- -- 110
Agricultural 489 375 675 247 570
Residential real estate 47 170 157 141 188
Construction -- 10 -- -- --
Consumer 1,097 835 486 526 759
Tax-exempt -- 531 -- 236 3
---------- --------- --------- --------- ---------
Total 2,230 2,834 2,065 3,022 7,302
---------- --------- --------- --------- ---------
Recoveries
Commercial and other 911 352 688 1,478 522
Commercial real estate 194 389 466 565 604
Construction -- -- -- -- --
Agricultural 159 232 184 238 383
Residential real estate 58 313 81 115 58
Construction -- 10 13 -- --
Consumer 381 280 236 309 358
Tax-exempt -- 34 146 -- 11
---------- --------- --------- --------- ---------
Total 1,703 1,610 1,814 2,705 1,936
---------- --------- --------- --------- ---------
Net charge-offs 527 1,224 251 317 5,366
Provision for loan losses 2,756 1,780 (1,300) (1,000) 6,844
Reserve related to acquired assets -- 751 873 1,597 --
---------- --------- --------- --------- ---------
End of year $ 30,482 28,253 26,946 27,624 27,344
========== ========= ========= ========= =========
Average loans $1,687,450 1,545,231 1,330,269 1,173,332 1,166,926
Net charge-offs/average loans 0.03% 0.08 0.02 0.03 0.46
ALLOCATION OF RESERVE
FOR LOAN LOSSES
Commercial and other $ 6,800 5,500 4,700 5,500 6,600
Commercial real estate 7,000 7,000 6,700 8,000 8,800
Construction 500 500 300 200 80
Agricultural 6,400 5,500 4,100 3,800 4,000
Residential real estate 2,100 2,000 1,800 1,700 1,500
Construction 100 100 100 50 30
Consumer 1,500 1,200 1,100 1,000 1,100
Tax-exempt 300 400 500 1,000 1,100
---------- --------- --------- --------- ---------
Total allocated 24,700 22,200 19,300 21,250 23,210
Unallocated 5,782 6,053 7,646 6,374 4,134
---------- --------- --------- --------- ---------
Total $ 30,482 28,253 26,946 27,624 27,344
========== ========= ========= ========= =========
Reserve to total loans 1.74% 1.74 1.87 2.23 2.39
</TABLE>
The reserve for loan losses was $30.5 million or 1.74% of total loans at
December 31, 1996, compared to $28.3 million or 1.74% at December 31, 1995. In
establishing the reserve, management has considered its current credit process,
continued strong loan growth in 1996, the Company's level of unfunded
commitments, unfavorable conditions in certain segments of the agricultural
markets, and continued uncertainty about economic strength in some of the
Company's markets. Management believes the reserve is adequate to cover the
risks inherent in the portfolio, specifically nonperforming loans and other
loans that have been identified for careful monitoring.
Although the Company has prepared an allocation of the reserve based on loan-and
industry-specific risk parameters, this allocation does not represent the total
amount available for actual future loan losses in any single category, nor does
it prohibit losses from being absorbed by portions allocated to other categories
or by the unallocated portion.
INTEREST RATE RISK MANAGEMENT. The primary objective of the asset/liability
management process is to maintain an appropriate balance between the stability
of net interest income and the risks associated with significant changes in
market interest rates. The responsibility for this process rests with both the
Subsidiary Banks' and the Company's asset/liability committees (the "ALCOs").
Together, the ALCOs and the Company's financial staff establish asset/liability
policies and develop strategies to minimize Company-wide exposure to adverse
interest rate trends.
Interest rate risk is the risk that changing interest rates will adversely
affect net interest income. While certain levels of interest rate risk are
unavoidable, and may even be desirable, it is important to measure and manage
this risk as closely as possible to ensure that it does not reach levels that
are unacceptable. Interest rate sensitivity is determined by the amount of
assets and liabilities repricing or maturing within a specified time period.
One tool for measuring interest rate sensitivity is the gap report, which is the
traditional measurement of interest rate risk from an accounting perspective.
Gap reports assign each asset and liability to a time interval based on
contractual maturity or repricing. The difference between assets and liabilities
in each interval represents the interest sensitivity gap. A positive gap, when
assets exceed liabilities, theoretically means that rising rates during the
given time interval will positively affect net interest income. The opposite is
true for a negative gap. While providing a rough measure of rate risk, the gap
report has a number of shortcomings, including the fact that it is a static
point-in-time measurement that is not effective in capturing changing rate
relationships or the velocity at which assets and liabilities reprice.
TABLE IX
INTEREST RATE SENSITIVITY AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
REPRICING OR MATURING
----------------------------------------------------------------
WITHIN 3 - 12 1 - 5 OVER 5
3 MONTHS MONTHS YEARS YEARS TOTAL
---------- -------- --------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST SENSITIVE ASSETS
Loans $ 734,124 288,928 609,967 122,737 1,755,756
Tax-exempt securities 9,230 18,458 125,840 57,328 210,856
Taxable securities 260,014 101,453 312,393 48,827 722,687
Interest bearing deposits 660 -- -- -- 660
Other earning assets 55 1,224 229 -- 1,508
---------- -------- --------- ------- ---------
Total 1,004,083 410,063 1,048,429 228,892 2,691,467
---------- -------- --------- ------- ---------
INTEREST SENSITIVE LIABILITIES
Savings deposits 687,574 -- -- -- 687,574
Other time deposits 341,704 509,329 410,844 1,852 1,263,729
Short-term borrowings 243,647 29,274 2,100 -- 275,021
Long-term debt 53,712 473 5,890 2,314 62,389
---------- -------- --------- ------- ---------
Total 1,326,637 539,076 418,834 4,166 2,288,713
---------- -------- --------- ------- ---------
REPRICING GAP $ (322,554) (129,013) 629,595 224,726 402,754
========== ======== ========= ======= =========
CUMULATIVE REPRICING GAP $ (322,554) (451,567) 178,028 402,754
========== ======== ========= =======
CUMULATIVE GAP TO TOTAL ASSETS (11.47)% (16.06) 6.33 14.32
</TABLE>
Because of the shortcomings of gap reports, the Company uses simulation modeling
as its primary method of measuring interest rate risk. Modeling, because of its
dynamic rather than static nature, can better capture the effects of future
balance sheet trends, different patterns of rate movements, and changing
relationships between rates. For these reasons, a gap report by itself could
considerably overstate the rate risk in the Company's current sensitivity
position. From a gap report perspective, interest rate risk constraints are
quantified by the ratio of gap to total assets, which represents the percentage
of total assets exposed to interest rate risk. As presented in Table IX, at
December 31, 1996, the cumulative gap to total assets ratio within one year was
a negative 16.06%, with the Company's interest rate sensitivity gap within one
year a negative $451.6 million. However, simulation modeling results indicate
the amount of net interest income at risk as a result of an immediate and
substantial change in market interest rates was within acceptable policy limits.
LIQUIDITY MANAGEMENT. The objective of liquidity management is to ensure the
continuous availability of funds to meet the demands of depositors, investors,
and borrowers. The ALCOs are responsible for managing balance sheet and
off-balance sheet commitments to meet the needs of customers while achieving the
Company's financial objectives. ALCOs meet regularly to review funding capacity,
current and forecasted loan demand, investment opportunities, and liquidity
positions as outlined in the Company's liquidity policy. With this information,
the ALCOs guide changes in the balance sheet structure to provide for adequate
ongoing liquidity.
Several factors provide a favorable liquidity position for the Company. The
first is the ability to acquire and retain deposits. Core deposits, which
generally include all deposits and repurchase agreements except for those
greater than $100 thousand of nonpersonal and public entities, and certain other
public funds, provide a historically stable source of funding. The Company has a
high proportion of core deposits to total liabilities compared to industry
averages; this index was approximately 83% for 1996 and 84% for 1995. The
Company's available for sale securities portfolio is a secondary source of
liquidity because of its readily marketable nature and predictable stream of
maturities, as approximately 18% of the portfolio matures within 1997. While the
Company prefers to fund its balance sheet with core deposits, a third source of
liquidity is the Company's ready access to regional and national wholesale
funding sources, including federal funds purchased and Federal Home Loan Bank
("FHLB") advances for several Subsidiary Banks who are FHLB members.
CAPITAL MANAGEMENT. The Company's capital position is both a strength and an
opportunity, as it provides a degree of safety and soundness and a foundation
for future growth. The capital position of the Company and the Subsidiary Banks
reflects management's commitment to maintain ratios above the regulatory
minimums.
TABLE X
CAPITAL RATIOS (1)
REGULATORY
1996 1995 REQUIREMENT
---- ---- -----------
Equity to assets (2) 8.69% 8.46 --
Equity to tangible assets (2) 8.62 8.40 --
Tier I capital (3) 12.89 12.75 4.00
Tier I and tier II capital (3) 14.15 14.01 8.00
Leverage ratio (3) 8.79 8.41 3.00
- --------------------------
(1) Calculations include redeemable class A common stock.
(2) Computed in accordance with generally accepted accounting principles,
including the unrealized market value adjustment of securities available for
sale.
(3) Computed exclusive of the unrealized market value adjustment of securities
available for sale.
The Company's Tier I capital ratio at December 31, 1996 was 12.89%, its total
risk-adjusted capital ratio (Tier I plus Tier II) was 14.15%, and its Tier I
leverage ratio was 8.79%.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required
the establishment of a capital-based supervisory system of prompt corrective
action for all depository institutions. The Federal Reserve Board's
implementation of FDICIA defines "well-capitalized" institutions as those whose
Tier I Capital ratio equals or exceeds 6%, total risk-based capital ratio equals
or exceeds 10%, and leverage ratio equals or exceeds 5%. The Company's
Subsidiary Banks ratios in each of these categories met or exceeded the
"well-capitalized" ratios as of December 31, 1996.
IMPACT OF INFLATION. The assets and liabilities of a financial institution are
primarily monetary in nature. Because banks generally have an excess of monetary
assets over monetary liabilities, inflation, in theory, will cause a loss of
purchasing power in the value of shareholder's equity. Other sections of this
financial review provide the information necessary for an understanding of the
Company's ability to react to changing interest rates.
BALANCE SHEET ANALYSIS
Table XII on pages 20 and 21 sets forth for the periods indicated the average
balance sheets and related yields and rates on earning assets and interest
bearing liabilities.
Acquisitions completed in the first half of 1995 had an impact on the 1996
average balance sheet growth. Specifically, these acquisitions increased the
Company's full-year 1996 total averages in assets by $24.1 million, gross loans
by $9.6 million, securities by $11.7 million, and core deposits by $21.1
million.
SOURCES OF FUNDS
The Company's balance sheet strength rests in its strong capital position and
its share of the deposit base in the communities served. The Company relies on
three major sources of funding: core deposits, short-term borrowings, and equity
capital. The diversity and supply of this funding base enable the Company to
replace maturing liabilities and finance asset growth on an ongoing basis.
CORE DEPOSITS. Average core deposits increased $97.8 million or 4.8% in 1996.
Average total deposits increased $98.2 million or 4.6% from 1995 to $2.2 billion
in 1996. Excluding the effects of acquisitions, average total deposits increased
$76.3 million or 3.8% during 1996. Within core deposits, savings certificates
had the strongest growth, increasing $67.5 million or 6.5%, while demand
deposits, a non-interest bearing source of funds, increased $19.1 million or
7.4%, money market checking accounts increased $3.1 million or 1.8%, savings and
NOW accounts increased $2.1 million or .8%, and money market savings accounts
increased $1.8 million or .7%.
The table below sets forth the amount and maturity of time deposits that had
balances of more than $100,000 at December 31, 1996.
TABLE XI
MATURITY OF TIME DEPOSITS OVER $100,000
DECEMBER 31
-------------------
1996 1995
-------- -------
(IN THOUSANDS)
Within 3 months $ 56,645 44,650
3 - 6 months 29,451 38,901
6 - 12 months 36,286 32,259
After 12 months 41,823 37,640
-------- -------
Total $164,205 153,450
======== =======
SHORT-TERM BORROWINGS. Average short-term borrowings, which include federal
funds purchased, securities sold under agreements to repurchase, treasury tax
and loan notes, and FHLB advances with maturities of one year or less, increased
23.0% from $229.9 million in 1995 to $282.8 million in 1996. This increase can
be attributed to an increase in the Company's use of FHLB advances. While
deposit growth was strong throughout the year, asset growth (as discussed below)
was more intense, creating the need for this funding source. The associated
interest rate risk was monitored closely and steps were taken to match the
repricability of assets and liabilities.
LONG-TERM DEBT. Average long-term debt, which includes FHLB advances with
maturities of greater than one year, and installment promissory notes, decreased
$1.1 million. This decline can be attributed to normal installment payments on
the promissory notes and FHLB advances being reclassified to short-term within
one year of maturity.
USES OF FUNDS
Between 1995 and 1996, average total assets increased $169.3 million or 6.4%.
Acquisitions accounted for $24.1 million or 14.3% of this growth. Average
earning assets increased $158.7 million or 6.4%. Strong loan growth, which
started in 1994 and continued throughout 1995 and 1996, increased loans as a
percent of average earning assets from 62.0% in 1995 to 63.7% in 1996, while
securities decreased from 37.8% to 36.2%.
LOAN PORTFOLIO. The increase in average loans from 1995 to 1996 was $142.2
million with all categories of loans experiencing increases as loan demand
remained strong in the Company's markets. Agricultural loans led the loan growth
in 1996, increasing $31.0 million or 9.4%. Of the remaining loan categories,
residential real estate loans increased $28.4 million, commercial loans
increased $26.7 million, commercial real estate loans increased $26.5 million,
consumer loans increased $26.4 million and tax-exempt loans increased $3.2
million.
TABLE XII
CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
AVERAGE RATE/ AVERAGE RATE/
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD BALANCE INTEREST YIELD
- ---------------------- ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (net of unearned discount)*
Commercial and other $ 341,649 $ 31,251 9.15% $ 314,903 $ 30,092 9.56%
Commercial real estate 354,614 32,262 9.10 328,163 30,542 9.31
Agricultural 361,401 33,461 9.26 330,422 31,615 9.57
Residential real estate 346,875 30,211 8.71 318,447 27,638 8.68
Consumer 232,168 21,244 9.15 205,766 18,706 9.09
Tax-exempt 50,743 5,371 10.58 47,530 4,799 10.10
---------- -------- ---------- -------- ----
TOTAL LOANS 1,687,450 153,800 9.11 1,545,231 143,392 9.28
Reserve for loan losses (29,689) (27,858)
---------- ----------
NET LOANS 1,657,761 1,517,373
Securities
Mortgage-backed 230,624 16,203 7.03 245,227 17,195 7.01
Other taxable 520,218 31,094 5.98 499,632 29,811 5.97
Tax-exempt 208,436 17,112 8.21 197,662 16,444 8.32
---------- -------- ---------- -------- ----
TOTAL SECURITIES 959,278 64,409 6.71 942,521 63,450 6.73
Federal funds sold -- -- -- -- -- --
Other earning assets 2,806 163 5.81 3,083 192 6.23
---------- -------- ---------- -------- ----
TOTAL EARNING ASSETS** 2,649,534 218,372 8.24 2,490,835 207,034 8.31
Cash and due from banks 94,912 69,625
Nonearning assets 102,305 115,156
---------- ----------
TOTAL ASSETS $2,817,062 $2,647,758
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest bearing deposits $ 276,948 $ 257,888
Interest bearing deposits
Savings and NOW accounts 257,166 4,331 1.68 255,104 5,160 2.02
Money market checking 176,078 2,964 1.68 172,994 3,507 2.03
Money market savings 243,208 7,731 3.18 241,417 8,343 3.46
Savings certificates 1,102,819 62,671 5.68 1,035,354 59,461 5.74
Certificates over $100,000 155,061 8,549 5.51 150,313 8,401 5.59
---------- -------- ---------- -------- ----
TOTAL TIME DEPOSITS 1,934,332 86,246 4.46 1,855,182 84,872 4.57
TOTAL DEPOSITS 2,211,280 2,113,070
CORE DEPOSITS*** 2,132,674 2,034,837
Short-term borrowings 282,813 14,850 5.25 229,935 12,678 5.51
Long-term debt 22,178 1,414 6.38 23,306 1,586 6.81
---------- -------- ---------- -------- ----
TOTAL INTEREST BEARING LIABILITIES 2,239,323 102,510 4.58 2,108,423 99,136 4.70
Other liabilities 43,357 47,179
---------- ----------
TOTAL LIABILITIES 2,559,628 2,413,490
Minority interest 9,216 8,676
Redeemable preferred stock 2,144 4,698
Redeemable class A common stock 19,686 17,672
Shareholder's equity 226,388 203,222
---------- ----------
TOTAL LIABILITIES AND EQUITY $2,817,062 $2,647,758
========== ==========
Net interest income $115,862 $107,898
======== ========
Gross spread 3.66% 3.61%
Percent of earning assets
Interest income 8.24 8.31
Interest cost 3.87 3.98
----- -----
NET INTEREST MARGIN 4.37% 4.33%
Interest bearing liabilities to earning
assets 84.52% 84.65%
Profitability
Net income $ 31,817 $ 27,136
Return on average assets 1.18% 1.07%
Leverage 11.35X 11.74X
Return on average realized equity 13.08% 12.06%
</TABLE>
- ---------------------------
INTEREST AND RATES ARE REALIZED ON A FULLY TAXABLE EQUIVALENT BASIS USING A 35%
TAX RATE IN 1996, 1995, 1994 AND 1993, AND A 34% TAX RATE IN 1992.
* LOAN AMOUNTS INCLUDE NONACCRUAL LOANS.
** BEFORE DEDUCTING THE RESERVE FOR LOAN LOSSES.
*** TOTAL DEPOSITS LESS NONPERSONAL AND PUBLIC CERTIFICATES OF DEPOSITS OVER
$100,000, AND CERTAIN OTHER PUBLIC FUNDS, PLUS REPURCHASE AGREEMENTS LESS
THAN $100,000 AND PERSONAL REPURCHASE AGREEMENTS GREATER THAN $100,000.
<TABLE>
<CAPTION>
1994 1993 1992 AVERAGE BALANCE
--------------------------------- --------------------------------- --------------------------------- --------------------
AVERAGE RATE/ AVERAGE RATE/ AVERAGE RATE/ 1996 VS FIVE-YEAR
BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD 1995 GROWTH RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 270,415 $ 22,305 8.25% $ 221,719 $ 17,328 7.82% $ 212,115 $ 17,524 8.26% 8.49% 7.54
295,579 25,955 8.78 286,986 24,189 8.43 301,973 28,068 9.29 8.06 1.11
269,266 23,696 8.80 233,632 20,852 8.93 233,379 23,167 9.93 9.38 8.87
276,860 23,268 8.40 244,719 22,016 9.00 235,080 23,516 10.00 8.93 6.86
173,193 15,044 8.69 138,377 12,949 9.36 129,361 13,763 10.64 12.83 10.52
44,956 4,588 10.21 47,899 5,301 11.07 55,018 6,306 11.46 6.76 (2.90)
---------- -------- ---------- -------- ---------- --------
1,330,269 114,856 8.63 1,173,332 102,635 8.75 1,166,926 112,344 9.63 9.20 6.05
(28,632) (28,893) (27,902) 6.57 4.29
---------- ----- ---------- ----------
1,301,637 1,144,439 1,139,024 9.25 6.08
227,915 13,933 6.11 330,208 21,156 6.41 357,127 26,678 7.47 (5.95) (1.07)
483,384 25,158 5.20 350,708 17,935 5.11 297,279 19,125 6.43 4.12 11.74
181,967 14,792 8.13 162,478 13,927 8.57 98,726 9,789 9.92 5.45 17.46
---------- -------- ---------- -------- ---------- --------
893,266 53,883 6.03 843,394 53,018 6.29 753,132 55,592 7.38 1.78 8.59
789 37 4.69 1,690 44 2.60 5,923 228 3.85 N/M N/M
2,094 106 5.06 1,898 66 3.48 4,645 282 6.07 (8.98) (12.05)
---------- -------- ---------- -------- ---------- --------
2,226,418 168,882 7.59 2,020,314 155,763 7.71 1,930,626 168,446 8.72 6.37 6.81
64,141 73,867 65,540 36.32 9.06
94,499 72,664 72,443 (11.16) 7.18
---------- ---------- ----------
$2,356,426 $2,137,952 $2,040,707 6.39 6.93
========== ========== ==========
$ 242,439 $ 210,386 $ 185,188 7.39 10.57
259,947 4,424 1.70 231,702 4,576 1.97 191,508 5,547 2.90 0.81 7.21
156,658 2,827 1.80 156,572 3,133 2.00 161,672 4,506 2.79 1.78 6.57
270,850 7,381 2.73 255,498 6,829 2.67 238,528 8,257 3.46 0.74 4.38
886,245 40,719 4.59 852,055 39,992 4.69 870,088 48,908 5.62 6.52 3.95
87,145 3,836 4.40 70,182 3,006 4.28 71,860 3,898 5.42 3.16 12.13
---------- -------- ---------- -------- ---------- --------
1,660,845 59,187 3.56 1,566,009 57,536 3.67 1,533,656 71,116 4.64 4.27 5.19
1,903,284 1,776,395 1,718,844 4.65 5.78
1,867,688 1,747,904 1,691,067 4.81 5.48
199,186 8,616 4.33 139,119 4,539 3.26 114,664 4,695 4.09 23.00 13.33
8,813 381 4.32 357 23 6.44 883 71 8.04 (4.84) 74.80
---------- -------- ---------- -------- ---------- --------
1,868,844 68,184 3.65 1,705,485 62,098 3.64 1,649,203 75,882 4.60 6.21 6.24
29,850 23,447 25,918 (8.10) 9.20
---------- ---------- ----------
2,141,133 1,939,318 1,860,309 6.06 6.71
8,536 8,741 8,671 6.22 2.09
2,424 -- -- N/M N/M
16,347 15,191 13,738 11.40 9.41
187,986 174,702 157,989 11.40 9.41
---------- ---------- ----------
$2,356,426 $2,137,952 $2,040,707 6.39 6.93
========== ========== ==========
$100,698 $ 93,665 $ 92,564
======== ======== ========
3.94% 4.07% 4.12%
7.59 7.71 8.72
3.07 3.07 3.93
----- ----- -----
4.52% 4.64% 4.79%
83.94% 84.42% 85.42%
$ 25,797 $ 26,885 $ 22,647
1.15% 1.32% 1.17%
11.40X 11.26X 11.88X
12.41% 14.16% 13.19%
</TABLE>
The following table summarizes the amount and maturity of the loan portfolio as
of December 31, 1996.
TABLE XIII
MATURITY OF LOANS
<TABLE>
<CAPTION>
WITHIN 1 - 5 AFTER 5
1 YEAR YEARS YEARS TOTAL
-------- -------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and other $213,622 119,664 13,186 346,472
Commercial real estate 79,304 207,258 54,059 340,621
Construction 8,409 13,473 8,157 30,039
Agricultural 204,704 124,696 48,999 378,399
Residential real estate 54,104 189,855 107,987 351,946
Construction 10,318 1,138 448 11,904
Consumer 100,255 135,057 12,199 247,511
Tax-exempt 11,430 19,669 21,720 52,819
-------- -------- ------- ---------
Total $682,146 810,810 266,755 1,759,711
======== ======== ======= =========
Loans maturing after one year
Fixed interest rate $461,504 100,574 562,078
Variable interest rate 349,306 166,181 515,487
-------- ------- ---------
Total $810,810 266,755 1,077,565
======== ======= =========
</TABLE>
SECURITIES. Average total securities rose $16.8 million or 1.8% from 1995 to
1996, with mortgage-backed and other taxable securities increasing $6.0 million
or .8%. The increase in tax-exempt securities of $10.8 million or 5.5% was due
to the Company's continued ability to utilize tax-exempt income. Mortgage-backed
securities represented 61.1% of total securities at December 31, 1996 compared
to 58.2% at December 31, 1995. The primary risk of these types of securities is
prepayment risk, which is continuously monitored to assess the impact on the
yield of the portfolio. While the Company believes the yield on these securities
adequately compensates for the risks unique to this type of investment, it is
the Company's position to primarily acquire securities that carry limited risk
of prepayment.
The table below sets forth the maturities of the Company's investment and
mortgage-backed securities at December 31, 1996 and the weighted average yields
of such securities.
TABLE XIV
MATURITY OF INVESTMENT AND MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
AMORTIZED COST
-----------------------------------------------------------------------------------------------------------
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS AFTER 10 YEARS TOTAL
----------------- ----------------- ----------------- ----------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Governments and
agencies $ 52,837 6.29% $ 34,568 6.24% $ -- -- % $ -- -- % $ 87,405 6.27%
State and political
subdivisions 31,712 8.20 87,659 7.99 65,882 7.97 2,337 8.01 187,590 8.02
Corporate bonds 1,916 6.43 34,193 5.99 -- -- -- -- 36,109 6.02
Mortgage-backed
securities 96,591 6.20 309,101 6.44 71,460 6.42 92,842 6.31 569,994 6.37
Equity securities 2,896 9.47 18,369 9.17 -- -- 24,072 7.16 45,337 8.12
Other securities 6,553 6.76 355 6.58 86 7.90 113 7.90 7,107 6.79
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total $192,505 6.63% $484,245 6.77% $137,428 7.17% $119,364 6.51% $933,542 6.77%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The average maturity of the portfolio was 50 months at December 31, 1996, with
an average tax-equivalent yield to maturity on the $934 million portfolio of
6.71%, unrealized gains of $9.3 million and unrealized losses of $4.0 million.
At December 31, 1996, the market value of the Company's securities was $938.8
million or $5.3 million over its amortized cost. This compares to a market value
of $988.2 million or $10.8 million over amortized cost at December 31, 1995. In
accordance with FAS 115, the available for sale securities are recorded at
market value. For further discussion and detail on the Company's securities
portfolio, refer to Note C to the Consolidated Financial Statements.
ANALYSIS OF 1995 COMPARED WITH 1994
The following analysis compares 1995 consolidated financial results with 1994
results.
NET INCOME. Net income was $27.1 million or $2.26 per share in 1995 compared to
$25.8 million or $2.15 per share in 1994. Included in the 1994 results were
approximately $2.5 million of costs to consolidate certain operations and
accounting functions. Excluding these expenses, net income for 1994 would have
been $27.2 million or $2.27 per share.
NET INTEREST INCOME. Tax-equivalent net interest income for 1995 was $107.9
million, an increase of $7.2 million or 7.2% from 1994. The increase in net
interest income in 1995 resulted primarily from a $264 million increase in
average earning assets. Approximately 34.3% of that growth was due to assets
acquired in late 1994 and in the first half of 1995. Offsetting the increase in
earning assets was a decrease in the net interest margin, which declined 19
basis points from 4.52% in 1994 to 4.33% in 1995.
The decrease in net interest margin was primarily due to a reduced spread in
rates during 1995, as costs on interest bearing liabilities increased faster
than yields on earning assets. The interest bearing liabilities costs and net
interest margin were impacted significantly by increased rates paid on savings
certificates and the increased use of other borrowings to fund a portion of the
earning asset growth experienced in 1995. Contributing positively to the net
interest margin, but not enough to offset the increased cost on interest bearing
liabilities and a less favorable mix in interest bearing liabilities, were
favorable improvements in earning asset yields driven by a 65 basis point
improvement in the loan yields coupled with a 70 basis point improvement in the
investment portfolio yield and a more favorable mix of assets.
PROVISION FOR LOAN LOSSES. From December 31, 1994 to December 31, 1995,
nonperforming loans decreased $2.1 million to $9.0 million. However, after ten
consecutive quarters of improvement, the quality of the portfolio, as measured
by the ratio of classified loans to total loans, reflected modest deterioration
during each quarter of 1995, despite strong loan growth. The modest
deterioration in credit quality occurred primarily in the commercial (non-real
estate), agricultural, and residential real estate segments of the loan
portfolio. Several large commercial credits continued to experience pressure on
their margins, while farmers in certain geographical locations experienced
another adverse growing season. The reserve to outstanding loan ratio decreased
from 1.87% in 1994 to 1.74% in 1995, and the reserve to nonperforming loan
coverage increased from 241.3% to 313.0% during this time.
NONINTEREST INCOME. Noninterest income was $27.9 million in 1995 compared to
$26.8 million in 1994, representing a $1.1 million or 4.2% increase.
Contributing to this increase in noninterest income were the strong growth in
service charges of $1.4 million or 14.8% and an increase in insurance
commissions of $787 thousand, due in large part to acquisitions completed in
early 1995. Also contributing to the increase in noninterest income was a $574
thousand difference between the $270 thousand of securities losses in 1994 and
the $304 thousand of security gains in 1995. Decreasing $839 thousand from 1994
were gains on the sale of other assets, primarily other real estate owned
(OREO).
NONINTEREST EXPENSE. Noninterest expense increased $1.7 million or 1.9% from
1994 to 1995. Personnel costs, which accounted for 55.2% of noninterest expense,
experienced a slight increase of $393 thousand or .8%, as salaries and wages
increased 2.1% while the cost of employee benefits decreased 3.3%. Affecting
1994 personnel costs were $1.8 million of one-time costs associated with the
consolidation of the Company's operations. Affecting 1995 personnel costs were
$1.8 million in salaries and benefits relating to acquisitions; therefore,
excluding the 1994 one-time costs and the net increase associated with
acquisitions, personnel costs would have increased $715 thousand or 1.6% over
1994.
The acquisitions completed in the second half of 1994 and the first half of 1995
also had an impact on the comparison of non-personnel expenditures. Excluding
the $2.5 million in non-personnel expenditures attributed to these acquired
entities, non-personnel expenses collectively declined $681 thousand or 1.8%
from 1994 to 1995, driven primarily from a decline in FDIC insurance premiums in
1995 and operational efficiency initiatives implemented in mid-1995.
INCOME TAXES. Income tax expense, which consists of provisions for federal and
state income taxes, was $12.3 million for 1995, representing an increase of $1.6
million from 1994. Comparing 1995 to 1994, the Company's effective tax rate
increased from 29.4% to 31.2%, reflecting the impact of proportionately more
taxable than tax-exempt income in 1995.
(The remainder of this page was intentionally left blank.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks $ 159,832 127,786
Interest bearing deposits 1,778 3,008
Investment securities held to maturity (fair value of
$187,045 and $203,607, respectively) 183,095 198,515
Mortgage-backed securities held to maturity (fair value of
$108,111 and $116,772, respectively) 109,036 118,390
---------- -------
TOTAL SECURITIES HELD TO MATURITY 292,131 316,905
Investment securities available for sale (amortized cost of
$180,453 and $209,978, respectively) 180,679 213,520
Mortgage-backed securities available for sale (amortized
cost of $460,958 and $450,551, respectively) 462,964 454,343
---------- -------
TOTAL SECURITIES AVAILABLE FOR SALE 643,643 667,863
Loans 1,759,711 1,630,100
Reserve for loan losses (30,482) (28,253)
Unearned discount (3,954) (3,484)
---------- -------
NET LOANS 1,725,275 1,598,363
Premises and equipment, net 45,980 44,252
Interest receivable and other assets 57,012 54,055
---------- -------
TOTAL ASSETS $2,925,651 2,812,232
========== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest bearing deposits $ 332,143 326,531
Interest bearing deposits 1,951,303 1,915,776
---------- -------
TOTAL DEPOSITS 2,283,446 2,242,307
Federal funds purchased and repurchase agreements 188,129 187,100
Other short-term borrowings 86,892 69,427
Long-term debt 62,389 25,568
Accrued expenses and other liabilities 39,125 38,633
---------- -------
TOTAL LIABILITIES 2,659,981 2,563,035
Minority interests 9,319 9,112
Redeemable preferred stock, $100 par, 80,000 shares
authorized; 71,594 shares issued; 21,437 shares outstanding 2,144 2,144
Redeemable class A common stock, 960,000 shares
issued and outstanding 20,337 19,035
Shareholder's equity
Common stock
Class A, no par, 12,000,000 shares authorized;
240,000 shares issued and outstanding 57 57
Class B, no par, 10,800,000 shares authorized,
issued and outstanding 2,562 2,562
Retained earnings 230,071 212,392
Net unrealized gain on securities available for sale 1,180 3,895
---------- -------
TOTAL SHAREHOLDER'S EQUITY 233,870 218,906
---------- -------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $2,925,651 2,812,232
========== =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Loans, including fees $151,964 141,754 113,295
Securities
Taxable 47,297 47,006 39,091
Tax-exempt 11,285 10,839 9,748
Federal funds sold -- -- 37
Other 157 182 96
-------- ------- -------
Total interest income 210,703 199,781 162,267
-------- ------- -------
INTEREST EXPENSE
Deposits 86,246 84,872 59,187
Federal funds purchased and
repurchase agreements 8,823 8,175 6,771
Other short term borrowings 6,027 4,503 1,844
Long term debt 1,414 1,586 382
-------- ------- -------
Total interest expense 102,510 99,136 68,184
-------- ------- -------
Net interest income 108,193 100,645 94,083
Provision for loan losses 2,756 1,780 (1,300)
-------- ------- -------
Net interest income after
provision for loan losses 105,437 98,865 95,383
-------- ------- -------
NONINTEREST INCOME
Service charges 12,837 11,047 9,627
Insurance 7,082 5,503 4,716
Trust 5,332 4,784 4,502
Gain on sale of loans 2,138 1,302 1,649
Gain (loss) on sale of securities 147 304 (270)
Other 6,306 4,952 6,544
-------- ------- -------
Total noninterest income 33,842 27,892 26,768
-------- ------- -------
NONINTEREST EXPENSE
Salaries and wages 40,676 37,325 36,556
Employee benefits 10,739 10,878 11,254
Occupancy 5,756 5,433 4,871
Furniture and equipment 6,020 5,020 4,320
Data processing fees 7,680 7,334 7,031
FDIC premiums and examination fees 1,075 2,901 4,719
Other 20,379 18,405 16,885
-------- ------- -------
Total noninterest expense 92,325 87,296 85,636
-------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 46,954 39,461 36,515
Income tax expense 15,137 12,325 10,718
-------- ------- -------
NET INCOME $ 31,817 27,136 25,797
======== ======= =======
Per common share amounts
Net income $ 2.65 2.26 2.15
Dividends paid $ 1.05 0.80 0.78
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
COMMON STOCK SECURITIES
------------------- AVAILABLE RETAINED
CLASS A CLASS B FOR SALE EARNINGS TOTAL
------- ------- -------------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 $57 2,562 4,678 181,137 188,434
Net income 25,797 25,797
Dividends, $.78 per share (9,360) (9,360)
Allocation of net income in excess of
dividends and change in net unrealized
gain (loss) on securities available for
sale to redeemable class A common stock 1,393 (1,315) 78
Change in net unrealized gain (loss) on
securities available for sale (17,411) (17,411)
--- ----- ------- ------- -------
BALANCE, DECEMBER 31, 1994 57 2,562 (11,340) 196,259 187,538
Net income 27,136 27,136
Dividends, $.80 per share (9,600) (9,600)
Allocation of net income in excess of
dividends and change in net unrealized
gain (loss) on securities available for
sale to redeemable class A common stock (1,324) (1,403) (2,727)
Change in net unrealized gain (loss) on
securities available for sale 16,559 16,559
--- ----- ------- ------- -------
BALANCE, DECEMBER 31, 1995 57 2,562 3,895 212,392 218,906
Net income 31,817 31,817
Dividends, $1.05 per share (12,600) (12,600)
Allocation of net income in excess of
dividends and change in net unrealized
gain (loss) on securities available for
sale to redeemable class A common stock 236 (1,538) (1,302)
Change in net unrealized gain (loss) on
securities available for sale (2,951) (2,951)
--- ----- ------- ------- -------
BALANCE, DECEMBER 31, 1996 $57 2,562 1,180 230,071 233,870
=== ===== ===== ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 31,817 27,136 25,797
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 2,756 1,780 (1,300)
Depreciation and amortization 7,135 6,525 9,531
Deferred income taxes (1,204) 1,074 (459)
Minority interests in earnings of subsidiaries 1,400 1,277 1,271
(Gain) loss on sale of securities (147) (304) 270
Valuation writedown on other real estate owned -- 13 6
Gains on sale of other real estate owned, net (33) (517) (1,471)
Other assets and liabilities, net (915) 2,758 (793)
Proceeds from sales of other real estate owned 269 2,192 4,466
Cash receipts related to loans originated
specifically for resale 123,549 74,672 81,401
Cash payments related to loans originated
specifically for resale (123,397) (73,370) (79,752)
--------- -------- --------
Net cash provided by operating activities 41,230 43,236 38,967
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits in other banks, net 1,230 (1,396) 11
Federal funds sold, net -- -- 21,547
Purchases of securities available for sale (208,159) (273,311) (294,536)
Purchases of securities held to maturity (33,762) (20,738) (54,868)
Proceeds from maturities of securities available
for sale 128,539 92,292 95,976
Proceeds from maturities of securities held to
maturity 59,942 55,081 60,900
Proceeds from sales of securities available for
sale 97,713 112,886 143,593
Loans, net (129,819) (149,885) (163,484)
Business acquisitions, net of cash acquired -- (1,469) 1,621
Acquisition of premises and equipment (7,637) (11,540) (5,913)
--------- -------- --------
Net cash used by investing activities (91,953) (198,080) (195,153)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Noninterest bearing deposits, net 5,612 36,160 5,781
Interest bearing deposits (excluding certificates
of deposit), net (7,416) 16,692 (32,545)
Certificates of deposits, net 42,943 119,120 97,316
Federal funds and repurchase agreements, net 1,029 (16,961) 68,016
Other short-term borrowings, net 17,465 25,611 29,889
Long-term debt, net 36,821 1,780 13,924
Minority interests acquired and dividends paid (1,085) (1,105) (1,098)
Redeemable preferred stock -- (5,108) --
Dividends paid (12,600) (9,600) (9,360)
--------- -------- --------
Net cash provided by financing activities 82,769 166,589 171,923
--------- -------- --------
Net increase in cash and due from banks 32,046 11,745 15,737
Cash and due from banks
Beginning of year 127,786 116,041 100,304
--------- -------- --------
End of year $ 159,832 127,786 116,041
========= ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for interest $ 103,494 89,977 64,366
Cash paid during the year for income taxes 16,229 8,640 13,270
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: ACCOUNTING POLICIES
NATURE OF BUSINESS -- Bremer Financial Corporation (the "Company") is a regional
multi-state bank holding company headquartered in St. Paul, Minnesota. The
Company is a majority owner of sixteen subsidiary banks which draw most of their
deposits from and make substantially all of their loans within the states of
Minnesota, North Dakota, and Wisconsin. Additionally, the Company also provides
trust and insurance services to its customers through wholly-owned nonbanking
subsidiaries, and investment services through a third party relationship.
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and general practices
within the financial services industry. The more significant accounting
policies are summarized below:
CONSOLIDATION -- The consolidated financial statements include the accounts of
the Company (a bank holding company majority owned by the Otto Bremer
Foundation) and all banks and financial service subsidiaries in which the
Company has a majority interest. All significant intercompany accounts and
transactions have been eliminated.
CASH FLOWS -- For purposes of this statement, the Company has defined cash
equivalents as cash and due from banks. During the years ended December 31,
1996, 1995, and 1994, the Company received real estate valued at $481,000,
$1,312,000, and $506,000, respectively, in satisfaction of outstanding loan
balances. During the years ended December 31, 1996, 1995 and 1994, the Company
issued installment notes totaling $250,000, $5,577,000 and $3,801,000,
respectively, and redeemable preferred stock during 1994 of $7,160,000, in
connection with acquisitions. Of the preferred stock issued in 1994, $5,108,000
was redeemed during 1995.
INVESTMENT AND MORTGAGE-BACKED SECURITIES -- HELD TO MATURITY SECURITIES consist
of debt securities which the Company has the intent and ability to hold to
maturity, and are valued at amortized historical cost, increased for accretion
of discounts and reduced by amortization of premiums, computed by the
constant-yield method. Under certain circumstances (including the deterioration
of the issuer's creditworthiness or a change in tax law or statutory or
regulatory requirements), securities held to maturity may be sold or transferred
to another portfolio.
AVAILABLE FOR SALE SECURITIES consist of debt and equity securities that will be
held for indefinite periods of time, including securities that may be sold in
response to changes in market interest or prepayment rates, needs for liquidity
or changes in the availability or yield of alternative investments. These
securities are valued at current market value with the resulting unrealized
holding gains and losses excluded from earnings and reported, net of tax and
minority interest effects and the resultant allocation to redeemable class A
common stock, as a separate component of shareholder's equity until realized.
Gains or losses on these securities are computed based on the adjusted cost of
the specific securities sold.
The Company does not engage in trading activities.
LOANS -- Interest income is accrued on loan balances based on the principal
amount outstanding. Loans are reviewed regularly by management and placed on
nonaccrual status when the collection of interest or principal is unlikely.
Thereafter, no interest is recognized as income unless received in cash or until
such time the borrower demonstrates the ability to pay interest and principal.
Certain net loan and commitment fees are deferred and amortized over the life of
the related loan or commitment as an adjustment of yield.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures" (FAS 114 and
118). Under the Company's credit policies and practices, all nonaccrual and
restructured commercial, agricultural, construction, and commercial real estate
loans plus certain other loans identified by the Company meet the definition of
impaired loans under FAS 114 and 118. Impaired loans as defined by FAS 114 and
118 exclude certain large groups of smaller balance homogeneous loans such as
consumer loans and residential real estate loans. Under these statements, loan
impairment is required to be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the observable market price of the loan or the fair
value of the collateral if the loan is collateral dependent. The adoption of FAS
114 and 118 did not have a material effect on the Company's financial position
or results of operations.
RESERVE FOR LOAN LOSSES -- Management determines the adequacy of the reserve
based upon a number of factors, including credit loss experience and a
continuous review of the loan portfolio. Being an estimate, the reserve is
subject to change through evaluation of the loan composition, economic
conditions, and the economic prospects of borrowers.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation and amortization computed principally on accelerated
methods based on estimated useful lives.
OTHER REAL ESTATE -- Other real estate owned, which is included in other assets,
represents properties acquired through foreclosure and other proceedings
recorded at the lower of the amount of the loan satisfied or fair value. Any
write-down to fair value at the time of foreclosure is charged to the reserve
for loan losses. Property is appraised periodically to ensure that the recorded
amount is supported by the current fair value. Market write-downs, operating
expenses and losses on sales are charged to other expenses. Income, including
gains on sales, is credited to other income.
INTANGIBLE ASSETS -- Intangible assets consist primarily of goodwill. The
remaining unamortized balances at December 31, 1996 and 1995 were approximately
$10,635,000 and $10,200,000, respectively, which are amortized over a 15 year
period.
INCOME TAXES -- Bremer Financial Corporation and subsidiaries file a
consolidated federal tax return, accounting for income taxes under FAS 109.
Deferred taxes are recorded to reflect the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end. Such differences are primarily related to
the differences between providing for loan losses for financial reporting
purposes while deducting charged-off loans for tax purposes.
ESTIMATES -- The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans.
EARNINGS PER SHARE CALCULATIONS -- Earnings per common share have been computed
using 12,000,000 common shares for all periods. See Note O.
RECLASSIFICATIONS -- Certain amounts have been reclassified to provide
consistent presentation among the various accounting periods shown. The
reclassifications have no effect on previously reported net income or total
shareholder's equity.
NOTE B: RESTRICTIONS ON CASH AND DUE FROM BANKS
Subsidiary Banks are required to maintain average reserve balances in accordance
with the Federal Reserve Bank requirements. The amount of those reserve balances
was approximately $15,883,000 and $15,388,000 as of December 31, 1996 and 1995,
respectively.
NOTE C: INVESTMENT AND MORTGAGE-BACKED SECURITIES
At December 31, 1996 and 1995, investment and mortgage-backed securities with
amortized cost of $655,439,000 and $606,895,000, respectively, were pledged as
collateral to secure public deposits and for other purposes. The amortized cost
and estimated fair value by maturity at December 31, 1996, are shown below
(contractual maturity or, if earlier, call dates are used):
HELD TO MATURITY AVAILABLE FOR SALE
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- -------- -------
(IN THOUSANDS)
Within 1 year $ 74,676 74,634 117,829 118,237
1 -- 5 years 130,204 131,627 354,041 356,237
5 -- 10 years 71,893 73,643 65,535 65,504
After 10 years 15,358 15,252 104,006 103,665
-------- ------- ------- -------
Total $292,131 295,156 641,411 643,643
======== ======= ======= =======
The amortized cost and fair value of investment and mortgage-backed securities
available for sale as of December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------- --------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
-------- ---------- ---------- ------- --------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Governments $ 54,966 317 25 55,258 76,335 851 63 77,123
State and political
subdivisions 36,934 271 7 37,198 41,500 431 8 41,923
Corporate bonds 36,109 88 80 36,117 48,236 130 319 48,047
Mortgage-backed
securities 460,958 3,886 1,880 462,964 450,551 5,257 1,465 454,343
Equity securities 45,337 145 136 45,346 33,436 2,718 15 36,139
Other 7,107 42 389 6,760 10,471 27 210 10,288
-------- ----- ----- ------- ------- ----- ----- -------
Total $641,411 4,749 2,517 643,643 660,529 9,414 2,080 667,863
======== ===== ===== ======= ======= ===== ===== =======
</TABLE>
Proceeds from sales of investments and mortgage-backed securities were
$97,713,000, $112,886,000, and $143,593,000, for 1996, 1995, and 1994,
respectively. Gross gains of $727,000, $938,000, and $1,583,000 and gross losses
of $580,000, $634,000, and $1,853,000 were realized on those sales for 1996,
1995, and 1994, respectively.
A summary of amortized cost and fair value of investment and mortgage-backed
securities held to maturity at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------- --------------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
-------- ---------- ---------- ------- --------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government agencies $ 32,439 93 79 32,453 51,222 240 54 51,408
State and political
subdivisions 150,656 4,123 187 154,592 147,293 5,160 254 152,199
Mortgage-backed
securities 109,036 308 1,233 108,111 118,390 3 1,621 116,772
-------- ----- ----- ------- ------- ----- ----- -------
Total $292,131 4,524 1,499 295,156 316,905 5,403 1,929 320,379
======== ===== ===== ======= ======= ===== ===== =======
</TABLE>
State and political subdivision investments largely involve governmental
entities within the Company's market area.
NOTE D: LOANS
The Company is engaged in lending activities with borrowers in a wide variety of
industries. Lending is concentrated in the areas in which its Subsidiary Banks
are located. Loans at December 31 consist of the following:
1996 1995
---------- ---------
(IN THOUSANDS)
Commercial and other $ 346,472 331,605
Commercial real estate 340,621 313,287
Construction 30,039 31,952
Agricultural 378,399 350,786
Residential real estate 351,946 322,296
Construction 11,904 11,511
Consumer 247,511 221,727
Tax-exempt 52,819 46,936
---------- ---------
Total $1,759,711 1,630,100
========== =========
Impaired loans were $11,244,000 and $10,248,000 at December 31, 1996 and 1995,
respectively. Impaired loans include nonaccrual, restructured loans and certain
other loans identified by the Company. Restructured loans are those for which
the terms (principal and/or interest) have been modified as a result of the
inability of the borrower to meet the original terms of the loan. The reserve
for loan losses includes approximately $1,519,000 and $1,623,000 relating to
impaired loans at December 31, 1996 and 1995, respectively.
The effect of nonaccrual and restructured loans on interest income for each of
the three years ended December 31 was as follows:
1996 1995 1994
------ ----- -----
(IN THOUSANDS)
Interest income
As originally contracted $1,227 1,575 1,662
As recognized (291) (429) (346)
------ ----- -----
Reduction of interest income $ 936 1,146 1,316
====== ===== =====
Other nonperforming assets, consisting of other real estate owned, amounted to
$240,000 and $380,000 at December 31, 1996 and 1995, respectively.
Loans totaling $62,300,000 and $45,300,000 were pledged to secure Federal Home
Loan Bank (FHLB) advances at December 31, 1996 and 1995, respectively.
The Company and its subsidiaries have granted loans to the officers and
directors (the "Group") of significant subsidiaries. The aggregate dollar amount
of loans to the Group was $16,483,000 and $14,115,000 at December 31, 1996 and
1995, respectively. During 1996, $15,417,000 of new loans were made, repayments
totaled $13,512,000, and changes in the composition of the Group or their
associations increased loans outstanding by $463,000. Rates on these loans were
made at the prevailing market rates.
NOTE E: RESERVE FOR LOAN LOSSES
Changes in the reserve for loan losses are as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Beginning of year $28,253 26,946 27,624
Charge-offs (2,230) (2,834) (2,065)
Recoveries 1,703 1,610 1,814
------- ------- -------
Net charge-offs (527) (1,224) (251)
Provision for loan loss 2,756 1,780 (1,300)
Reserve related to acquired assets -- 751 873
------- ------- -------
End of year $30,482 28,253 26,946
======= ======= =======
NOTE F: PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
1996 1995
------- ------
(IN THOUSANDS)
Land $ 6,521 6,582
Buildings and improvements 49,836 47,057
Furniture and equipment 38,538 35,331
------- ------
Total premises and equipment 94,895 88,970
Less: accumulated depreciation and amortization 48,915 44,718
------- ------
Premises and equipment, net $45,980 44,252
======= ======
NOTE G: SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds and repurchase agreements (which
generally mature within one to sixty days of the transaction date), treasury,
tax and loan notes (which generally mature within one to thirty days), and FHLB
advances (which mature within one year).
Information related to short-term borrowings for the two years ended December 31
is provided below:
<TABLE>
<CAPTION>
FEDERAL FUNDS FEDERAL HOME TREASURY
AND REPURCHASE LOAN BANK TAX AND LOAN
AGREEMENTS BORROWINGS NOTES
-------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31
1995 $187,100 64,500 4,927
1996 188,129 78,200 8,692
Weighted average interest rate at December 31
1995 5.12% 5.84 5.24
1996 5.58 5.85 5.16
Maximum amount outstanding at any month end
1995 $193,777 95,990 21,083
1996 204,332 130,500 13,466
Average amount outstanding during the year
1995 $154,453 67,203 8,279
1996 175,196 101,081 6,536
Weighted average interest rate during the year
1995 5.30% 6.01 5.57
1996 5.04 5.62 5.16
</TABLE>
NOTE H: LONG-TERM DEBT
Long-term debt (debt with original maturities of more than one year) at December
31 consists of the following:
1996 1995
------- ------
(IN THOUSANDS)
Federal Home Loan Bank borrowings $54,514 16,200
Installment promissory notes and other 7,875 9,368
------- ------
Total $62,389 25,568
======= ======
The FHLB borrowings bear interest at rates ranging from 5.46% to 7.35%, with
maturity dates from 1998 through 2011.
The promissory notes and other bear interest at rates ranging from 5.68% to
8.53%, paid predominantly in annual installments through 2007.
Maturities of long-term debt outstanding at December 31, 1996, were as follows:
(IN THOUSANDS)
1997 $ 1,748
1998 52,197
1999 1,703
2000 673
2001 1,423
Thereafter 4,645
-------
Total $62,389
=======
The Company had an unused line of credit of $10 million with a bank at December
31, 1996. Borrowings under this line are noncollateralized and would bear
interest at an applicable reserve adjusted certificate of deposit rate.
The line of credit expires on September 11, 1997.
NOTE I: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the estimated fair values of the Company's
financial instruments. For the Company, most of its assets and liabilities are
considered financial instruments as defined in FAS 107. Many of the Company's
financial instruments, however, lack an available trading market which is
characterized by an exchange transaction of the instrument by a willing buyer
and seller. It is also the Company's general practice and intent to hold most of
its financial instruments to maturity and not engage in trading activities.
Therefore, significant estimations and present value calculations were utilized
by the Company for purposes of this disclosure. The use of different market
assumptions and/or estimation methodologies may have a material effect on these
estimated fair value amounts.
The fair value estimates presented herein are based on pertinent information
available to the Company as of December 31, 1996 and 1995. Although the Company
is not aware of any factors that would significantly affect the estimated fair
value amounts, these amounts have not been comprehensively revalued for purposes
of these financial statements since December 31, 1996 and, therefore, current
estimates of fair value may differ from the amounts presented. As of December
31, carrying amounts and estimated fair values are:
<TABLE>
<CAPTION>
1996 1995
------------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 159,832 159,832 127,786 127,786
Interest bearing deposits 1,778 1,778 3,008 3,008
Securities held to maturity 292,131 295,156 316,905 320,379
Securities available for sale 643,643 643,643 667,863 667,863
Loans 1,725,275 1,749,205 1,626,616 1,678,937
LIABILITIES
Demand deposits 1,019,717 1,019,717 1,013,415 1,013,415
Time deposits 1,263,729 1,266,944 1,228,892 1,261,969
Short-term borrowings 275,021 275,021 256,527 256,527
Long-term debt 62,389 62,826 25,568 26,169
</TABLE>
CASH AND DUE FROM BANKS AND INTEREST BEARING DEPOSITS -- The carrying values for
these financial instruments approximates fair value due to the relatively short
period of time between the origination of the instruments and their expected
realization.
SECURITIES -- Fair values of these financial instruments were estimated using
quoted market prices, when available. If quoted market prices were not
available, fair value was estimated using market prices for similar assets. As
required by FAS 115, securities available for sale are carried at fair market
value.
LOANS -- The fair value of loans (net of unearned discount) is estimated by
discounting the future cash flows using the current rates at which similar loans
would be made to qualified borrowers and for the same remaining maturities,
adjusted by a related portion of the reserve for loan losses.
DEPOSITS -- The estimated fair value of deposits with no stated maturity, such
as non-interest bearing savings and money-market checking accounts, is the
amount payable on demand. The fair value of time deposits is estimated using the
rates currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS -- Due to the short term nature of repricing and
maturities of these instruments, fair value is considered carrying value.
LONG-TERM DEBT -- The majority of the long-term debt reprices monthly, and
therefore, fair value is considered carrying value. For fixed rate debt, the
fair value is determined by discounting future cash flows at current rates for
debt with similar remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- The estimated fair value of these
instruments, such as loan commitments and standby letters of credit,
approximates their off-balance sheet carrying value due to repricing ability and
other terms of the contracts.
NOTE J: EMPLOYEE BENEFIT PLANS
PENSION PLAN -- The Company has a defined benefit pension plan covering
substantially all of its employees. The benefits are based on age, years of
service and the employee's highest average compensation during 60 consecutive
months of the last 120 months of employment. The Company's funding policy is
generally to contribute annually an amount approximating the Company's annual
net pension expense.
Contributions are intended to provide for benefits attributed to service to date
and for those expected to be earned in the future. The following table sets
forth the plan's funded status and amount recognized in the Company's balance
sheet at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$12,986 in 1996, and $11,302 in 1995 $ 14,836 14,089
Increase due to salary projections 5,067 6,159
-------- -------
Projected benefit obligation for service rendered to date 19,903 20,248
Plan assets (marketable securities) at fair value (21,124) (18,667)
-------- -------
Projected benefit obligation (less than)/in excess of plan assets (1,221) 1,581
Unrecognized actuarial gain (loss) 2,019 (162)
Prior service cost not yet recognized in net periodic expense (612) (734)
-------- -------
Accrued pension expense $ 186 685
======== =======
</TABLE>
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the
period $ 1,145 973 1,143
Interest cost on projected benefit obligation 1,597 1,434 1,279
Actual return on plan assets (1,240) (3,645) 202
Net amortization and deferral (297) 2,526 (1,258)
------- ------ ------
Net pension cost $ 1,205 1,288 1,366
======= ====== ======
</TABLE>
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.0% and 4.5%, respectively, at December 31, 1996, and 7.5% and
5.0%, respectively, at December 31, 1995. The expected long-term rate of return
on assets in 1996, 1995, and 1994 was 9.0%.
OTHER POSTRETIREMENT BENEFITS -- The Company provides certain retiree health
care benefits relating primarily to medical insurance co-payments to retired
employees between the ages of 55 and 65. In accordance with Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" (FAS 106), the Company accrues the
cost of these benefits during the employees' active service.
The following table sets forth the unfunded plan's accumulated postretirement
obligation on the Company's balance sheet at December 31:
1996 1995
------ -----
(IN THOUSANDS)
Retirees $ 517 240
Fully eligible active plan participants 280 377
Other active plan participants 1,133 1,158
------ -----
Total $1,930 1,775
====== =====
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period $ 122 106 118
Interest cost on accumulated postretirement benefit
obligation 148 130 138
Net amortization and deferral (82) (106) (87)
------ ---- ---
Net postretirement benefit cost $ 188 130 169
====== ==== ===
</TABLE>
For the 1996 measurements, the assumed annual rate of increase in the per capita
cost of covered health care benefits was 9.6% for 1996 and 8.6% for 1997; the
rate was assumed to decrease gradually to 5.0% for 2001 and remain at that level
thereafter. The health care cost trend assumption has a significant effect on
the amounts reported. To illustrate, increasing the assumed health care cost
trend rates by 1 percentage point in each year would increase the accumulated
post-retirement benefit obligation as of December 31, 1996 by $210,000 and the
aggregate of the service cost and interest cost components of net periodic
post-retirement benefit cost for the year then ended by $36,000.
The weighted average discount rates used in determining the accumulated
postretirement benefit obligation at December 31, 1996 and 1995 were 8.0% and
7.5%, respectively.
OTHER POSTEMPLOYMENT BENEFITS -- The Company accounts for postemployment
benefits in accordance with Statement of Financial Accounting Standards No. 112,
"Employer's Accounting for Postemployment Benefits" (FAS 112), adopted in 1994.
The adoption of FAS 112 had no material impact on income in 1994.
PROFIT SHARING PLAN -- The profit sharing plan is a defined contribution plan
with contributions made by the participating employers. The profit sharing plan
is noncontributory at the employee level, except for the employees' option to
contribute under a 401(k) savings plan available as part of the profit sharing
plan.
Contributions are calculated using a formula based primarily upon the Company's
earnings. The expense for 1996 was approximately $1,757,000. Contributions to
the plan were $1,560,000 and $1,893,000 in 1995 and 1994, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN -- The ESOP is a defined contribution plan
covering substantially all employees, with contributions made exclusively by the
Company on a discretionary year-by-year basis. The expense for 1996 was
approximately $350,000. Contributions for the plan were $350,000 and $140,000 in
1995, and 1994, respectively.
NOTE K: OTHER NONINTEREST INCOME
Other noninterest income consists of the following:
1996 1995 1994
------ ----- -----
(IN THOUSANDS)
Brokerage commissions $2,531 1,243 1,856
Fees on loans 2,484 1,726 1,538
Other 1,291 1,983 3,150
------ ----- -----
Total $6,306 4,952 6,544
====== ===== =====
NOTE L: OTHER NONINTEREST EXPENSE
Other noninterest expense consists of the following:
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
Printing, postage and office supplies $ 4,824 4,599 3,918
Marketing 3,306 3,041 2,954
Other real estate owned 56 84 (63)
Other 12,193 10,681 10,076
------- ------ ------
Total $20,379 18,405 16,885
======= ====== ======
NOTE M: INCOME TAXES
The components of the provision for income taxes are as follows:
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
Current
Federal $12,290 8,295 8,236
State 4,051 2,956 2,941
Deferred (1,204) 1,074 (459)
------- ------ ------
Total $15,137 12,325 10,718
======= ====== ======
A reconciliation between income tax expense and the amount computed by applying
the statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate $16,434 13,811 12,780
Plus state income tax, net of federal tax benefits 2,634 1,922 1,912
------- ------ ------
19,068 15,733 14,692
Less tax effect of:
Interest on state and political subdivision
securities 3,003 2,980 2,855
Other tax-exempt interest 1,499 1,553 1,196
Amortization (249) (93) 105
Minority interest in earnings (560) (511) (508)
Other 238 (521) 326
------- ------ ------
3,931 3,408 3,974
------- ------ ------
Income tax expense $15,137 12,325 10,718
======= ====== ======
</TABLE>
The following table sets forth the temporary differences comprising the net
deferred taxes included with interest receivable and other assets on the
consolidated balance sheet at December 31:
1996 1995
-------- ------
(IN THOUSANDS)
Deferred tax assets
Provision for loan losses $ 12,113 11,135
Employee compensation and benefits accruals 1,757 1,425
Deferred income 270 208
Other 378 --
-------- ------
Total 14,518 12,768
-------- ------
Deferred tax liabilities
Deferred expense 1,196 1,334
Depreciation 1,630 1,402
Unrealized gains on securities available for sale 888 2,933
Other 396 665
-------- ------
Total 4,110 6,334
-------- ------
Net deferred tax assets $ 10,408 6,434
======== ======
NOTE N: COMMITMENTS AND CONTINGENCIES
The Company utilizes various off-balance sheet instruments to satisfy the
financing needs of customers. These instruments represent contractual
obligations of the Company to provide funding, within a specified time period,
to a customer. The following represents the outstanding obligations at December
31:
1996 1995
-------- ------
(IN THOUSANDS)
Standby letters of credit $ 35,863 39,889
Loan commitments 341,822 325,692
Standby letters of credit represent a conditional commitment to satisfy an
obligation to a third party, generally to support public and private borrowing
arrangements, on behalf of the customer. Loan commitments represent contractual
agreements to provide funding to customers over a specified time period as long
as there is no violation of any condition of the contract. These loans generally
will take the form of operating lines.
The Company's potential exposure to credit loss in the event of nonperformance
by the other party is represented by the contractual amount of those
instruments. The credit risk associated with letters of credit and loan
commitments is substantially the same as extending credit in the form of a loan;
therefore, the same credit policies apply in evaluating potential letters of
credit or loan commitments. The amount of collateral obtained, if deemed
necessary upon the extension of credit, is based on management's credit
evaluation. Collateral held varies, but includes accounts receivable, inventory,
and productive assets.
Under a substantially noncancelable contract, the Company is obligated to pay
approximately $2 million in annual fees, through February 2004, to its data
processing provider. In addition, the Company has a separate contract, with its
item processing provider, which covers item processing services to the Company's
subsidiary banks through March 1999. The costs under this contract are
calculated in accordance with a volume-based fee schedule, which is subject to
change annually.
The Company is routinely involved in legal actions which are incidental to the
business of the Company. Although it is difficult to predict the ultimate
outcome of these cases, management believes, based on discussions with counsel,
that any ultimate liability will not materially affect the consolidated
financial position or operations.
The Company issued redeemable preferred stock of Dunn County Bankshares, Inc.
("DCBI") in connection with the acquisition of Menomonie, Wisconsin operation on
September 1, 1994. This stock is cumulative, pays dividends of 3.85% annually,
and is generally redeemable at par value plus unpaid dividends after the earlier
to occur of (i) the death of the holder, or (ii) the lapse of 5 years from the
date of issuance.
NOTE O: COMMON STOCK
The Company has authorized 12,000,000 shares of class A common stock and
10,800,000 shares of class B common stock. The shares of class A common stock
have full rights to vote on all matters properly before the Company's
shareholders, including the election of the Company's directors. The class B
common stock, all of which is held by the Otto Bremer Foundation, is non-voting
except with respect to certain extraordinary corporate transactions, upon which
the holders would have the right to vote on an equivalent per share basis with
the holders of class A common stock.
Each share of class B common stock is convertible into one share of class A
common stock upon the occurrence of the following events: (i) at the affirmative
election of a third party or entity, upon the transfer of class B common stock
from the Otto Bremer Foundation to any third party or entity, or (ii) at the
affirmative election of the holder of class B common stock, if cash dividends
have not been paid on class A and class B common stock with respect to any year
in an amount equal to at least 5% of the Company's net book value as of the last
day of the immediately preceding year. The Company has reserved 10,800,000
shares of class A common stock in the event of conversion of the class B common
stock.
At December 31, 1996 and 1995, 960,000 shares of redeemable class A common stock
were issued and outstanding. With the exception of shares held in the Company's
ESOP, these shares were subject to redemption at a price of $21.18 and $19.83
per share, respectively, which approximated book value. Shares held in the
Company's ESOP were redeemed at a price of $26.35 and $23.75 per share,
respectively, as determined by an independent appraiser. These shares are owned
by employees and Directors of the Company and its subsidiaries and the employee
benefit plans of the Company. These holders of class A common stock have the
right to require the Company to purchase their shares under certain
circumstances. The shares have been classified as redeemable class A common
stock subject to redemption at a price, which approximates book value. It is the
Company's intent that these 960,000 shares will continue to be held by
employees, directors, and employee benefit plans of the Company or its
subsidiaries and not be directly repurchased by the Company or the Otto Bremer
Foundation.
Certain restrictions exist regarding the extent to which banks may transfer
funds to the Company in the form of dividends. Federal law prevents the Company
and its non-bank subsidiaries from borrowing from the Subsidiary Banks unless
the loans are secured by specified U.S. obligations. Further, the secured loans
that may be made by Subsidiary Banks are generally limited in amount to 10% of
the Subsidiary Bank's equity if made to the Company or any individual affiliate
and 20% of the Subsidiary Bank's equity if made to all affiliates and the
Company in the aggregate. At December 31, 1996, 1995 and 1994, no Subsidiary
Banks had extended credit to the Company.
Payment of dividends to the Company by its Subsidiary Banks is subject to
various limitations by bank regulators, which includes maintenance of certain
minimum capital ratios. As of December 31, 1996, $37,833,000 of retained
earnings of the Subsidiary Banks was available for distribution to the Company
as dividends subject to these limitations. Approximately $19,551,000 was
available for distribution without obtaining the prior approval of the
appropriate bank regulator.
NOTE P: REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines, the Company
must meet specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below and as defined in the regulations) of total and Tier I capital to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of December 31, 1996, that the Company meets all capital adequacy
requirements to which it is subject.
The Company's actual capital amounts and ratios are also presented below.
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------------------ ------------------
AMOUNT RATIO AMOUNT RATIO
------- ------ -------- -----
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) $274,447 14.15% $155,213 8.00%
TIER I CAPITAL (TO RISK WEIGHTED ASSETS) 250,118 12.89 77,607 4.00
TIER I CAPITAL (TO AVERAGE ASSETS) 250,118 8.79 85,410 3.00
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) 253,522 14.01 143,813 8.00
Tier I Capital (to Risk Weighted Assets) 230,825 12.75 72,407 4.00
Tier I Capital (to Average Assets) 230,825 8.41 82,322 3.00
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required
the establishment of a capital-based supervisory system of prompt corrective
action for all depository institutions. The Federal Reserve Board's
implementation of FDICIA defines "well-capitalized" institutions as those whose
Tier I capital ratio equals or exceeds 6%, total risk-based capital ratio equals
or exceeds 10%, and leverage ratio equals or exceeds 5%. The Company's
Subsidiary Banks ratios in each of these categories met or exceeded the
"well-capitalized" ratios as of December 31, 1996.
NOTE Q: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS:
BALANCE SHEETS
DECEMBER 31
1996 1995
-------- -------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 2,048 5,399
Marketable securities 22,391 21,091
Investment in and advances to:
Bank subsidiaries 220,929 206,636
Non-bank subsidiaries 11,432 8,227
Other assets 3,482 3,814
-------- -------
Total assets $260,282 245,167
======== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Accrued expenses and other liabilities $ 1,629 2,356
Long-term debt 4,446 4,870
Redeemable class A common stock 20,337 19,035
Shareholder's equity 233,870 218,906
-------- -------
Total liabilities and shareholder's
equity $260,282 245,167
======== =======
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
INCOME
Dividends from:
Bank subsidiaries $19,281 23,357 20,349
Non-bank subsidiaries 603 200 190
Interest from subsidiaries 313 248 185
Other interest income 1,363 942 484
Gain on sale of securities 200 (13) --
Other income 14 14 --
------- ------ ------
Total income 21,774 24,748 21,208
------- ------ ------
EXPENSES
Salaries and benefits 702 621 640
Operating expense paid to subsidiaries 1,190 1,165 1,402
Interest expense 373 266 --
Other operating expenses 1,105 546 215
------- ------ ------
Total expenses 3,370 2,598 2,257
------- ------ ------
Income before income tax benefit 18,404 22,150 18,951
Income tax benefit 788 747 773
------- ------ ------
Income of parent company only 19,192 22,897 19,724
Equity in undistributed earnings of
subsidiaries 12,625 4,239 6,073
------- ------ ------
NET INCOME $31,817 27,136 25,797
======= ====== ======
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTITIVIES
Net income $ 31,817 27,136 25,797
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed earnings of subsidiaries (12,625) (4,239) (6,073)
(Gain) loss on sale of securities (200) 13 --
Securities amortization 470 185 279
Other, net (262) (1,080) (271)
-------- ------- -------
Net cash provided by operating activities 19,200 22,015 19,732
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in and advances to subsidiaries, net (7,624) (10,332) (5,729)
Purchases of securities, net (22,746) (28,127) (14,428)
Proceeds from maturities of securities 5,303 13,968 --
Proceeds from sales of securities 15,540 9,409 --
Long term debt, net (424) 4,870 --
-------- ------- -------
Net cash used by investing activities (9,951) (10,212) (20,157)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (12,600) (9,600) (9,360)
-------- ------- -------
Net cash used by financing activities (12,600) (9,600) (9,360)
-------- ------- -------
Increase (decrease) in cash and cash equivalents (3,351) 2,203 (9,785)
Cash and cash equivalents
Beginning of year 5,399 3,196 12,981
-------- ------- -------
End of year $ 2,048 5,399 3,196
======== ======= =======
</TABLE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF BREMER FINANCIAL CORPORATION
We have audited the accompanying consolidated balance sheets of Bremer Financial
Corporation and subsidiaries (the Company), a subsidiary of the Otto Bremer
Foundation as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Bremer Financial Corporation
and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
January 24, 1997
Saint Paul, Minnesota
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
No event requiring disclosure pursuant to this Item 9 has occurred during the
two years ended December 31, 1996.
PART III.
Items 10 through 13 of the Form 10-K are omitted because the Company will file
before April 30, 1997 a definitive Proxy Statement (the "Proxy Statement")
conforming to Schedule 14A involving the election of directors. The information
required by Items 10, 11, 12 and 13 of Part III of the Form 10-K are hereby
incorporated by reference to such Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) The following financial statements of Bremer Financial Corporation are
part of this document under Item 8. Financial Statements and
Supplementary Data:
Consolidated Balance Sheets -- December 31, 1996 and December 31,
1995
Consolidated Statements of Income -- Years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholder's Equity -- Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
(2) Financial statement schedules are omitted as they are not applicable,
not required, or the required information is included in the financial
statements or notes thereto.
(3) The following exhibits are filed as a part of this report:
10.1 Bremer Financial Corporation 1996 Executive Incentive
Compensation Plan for Chief Financial Officer, Chief Credit
Officer, and Human Resources Director.
10.2 Bremer Financial Corporation 1996 Executive Incentive
Compensation Plan for Group Presidents.
10.3 Bremer Financial Corporation 1996 Executive Incentive
Compensation Plan for Chief Operating Officer.
10.4 Bremer Financial Corporation 1996 Executive Incentive
Compensation Plan for President and CEO.
10.5 Bremer Financial Corporation 1996 Long-Term Incentive
Compensation Plan for Group Presidents and Chief Operating
Officer.
10.6 Bremer Financial Corporation 1996 Long-Term Incentive
Compensation Plan for President and CEO.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
The following exhibits are incorporated by reference to Exhibits 10.1, 10.2,
10.3, 10.4, and 10.5, respectively, to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995:
10.7 Bremer Financial Corporation 1995 Executive Incentive
Compensation Plan for Group Presidents.
10.8 Bremer Financial Corporation 1995 Executive Incentive
Compensation Plan for Retail Banking Services Director
(Chief Operating Officer).
10.9 Bremer Financial Corporation 1995 Executive Incentive
Compensation Plan for President and CEO.
10.10 Bremer Financial Corporation 1995 Long-Term Compensation
Plan for Group Presidents and Retail Banking Services
Director (Chief Operating Officer).
10.11 Bremer Financial Corporation 1995 Long-Term Incentive
Compensation Plan for President and CEO.
The following exhibits are incorporated by reference to Exhibits 10.2, 10.3,
10.4, 10.5, 10.6, 10.7, 10.8, 10.9, and 10.10, respectively, to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994:
10.12 Resolutions of the Board of Directors of the Company
adopted on April 29, 1994 amending the Employment
Agreements incorporated by reference as Exhibits 10.15 and
10.16 and Exhibits 10.21 through 10.24 (inclusive).
10.13 Bremer Financial Corporation 1994 Executive Incentive
Compensation Plan for Gene H. Sipe and Duaine C. Espegard.
10.14 Bremer Financial Corporation 1994 Executive Incentive
Compensation Plan for Kenneth P. Nelson.
10.15 Bremer Financial Corporation 1994 Executive Incentive
Compensation Plan for Stan K. Dardis.
10.16 Bremer Financial Corporation 1994 Executive Incentive
Compensation Plan for President and CEO.
10.17 Bremer Financial Corporation 1994 Long-Term Incentive
Compensation Plan for Group Presidents and Retail Banking
Services Director.
10.18 Bremer Financial Corporation 1994 Long-Term Incentive
Compensation Plan for President and CEO.
10.19 Deferred Compensation Plan for Directors of Bremer
Financial Services, Inc.
10.20 Bremer Financial Corporation Supplemental Executive
Retirement Plan (Effective January 1, 1994).
The following exhibit is incorporated by reference to Exhibit 10.5, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1992:
10.21 Resolutions of the Board of Directors of the Company
adopted on February 9, 1993 amending the Employment
Agreements filed or incorporated by reference as Exhibits
10.22 through 10.25 (inclusive).
The following exhibits are incorporated by reference to Exhibits 3.1, 28.7, and
28.8, respectively, to the Company's Annual Report on Form 10-K for the year
ended December 31, 1989:
3.1 Bylaws of the Company in effect on the date hereof.
99.1 The portion of the final Prospectus of the Company dated
April 20, 1989 ("Prospectus"), which was filed with the SEC
on April 20, 1989, entitled "Description of Capital Stock
Description of Class A Common Stock -- Restrictions on
Transfer."
99.2 The portion of the Prospectus entitled "Description of
Capital Stock -- Description of Class A Common Stock --
First Call Option to Company" on page 64 of the Prospectus.
The following exhibits are incorporated by reference to Exhibits 3.1, 10.3,
10.4, 10.5, 10.7, 10.12, 10.13, 10.14, 10.15, and 10.16, respectively, to the
Company's Registration Statement on Form S-1 filed with the SEC on February 10,
1989:
3.2 Restated Articles of Incorporation of the Company in effect
on the date hereof.
10.22 Employment Agreement by and between Bremer Financial
Services, Inc. ("BFS") and Terry Cummings dated January 9,
1985 and Amendment thereto dated March 23, 1988.
10.23 Employment Agreement by and between BFS and Duaine Espegard
dated January 2, 1986 and Amendments thereto dated October
28, 1987 and March 23, 1988.
10.24 Employment Agreement by and between BFS and Kenneth Nelson
dated January 2, 1986 and Amendments thereto dated October
28, 1987 and March 23, 1988.
10.25 Employment Agreement by and between BFS and Gene Sipe dated
January 2, 1986 and Amendments thereto dated October 28,
1987 and March 23, 1988.
10.26 Bremer Financial Corporation Employee Stock Ownership Plan
and Trust Agreement.
10.27 Bremer Banks Profit Sharing Plus Plan, as amended and
restated effective January 1, 1986, and Amendment No. 1
thereto.
10.28 Bremer Banks Profit Sharing Plus Trust Agreement dated
October 1, 1986 and Amendment No. 1 thereto.
10.29 Bremer Banks Retirement Plan as effective April 1, 1985.
10.30 Bremer Banks Retirement Plan Trust Agreement (as revised
and restated effective January 1, 1976).
The following exhibits are incorporated by reference to Exhibits 4.1, 4.2, and
28.1, respectively, to the Company's Amendment No. 1 to Registration Statement
on Form S-1 filed with the SEC on March 29, 1989:
4.1 Specimen of Stock Certificate evidencing Class A Common
Stock.
4.2 Specimen of Stock Certificate evidencing Class B Common
Stock.
99.3 Otto Bremer Foundation Trust Instrument dated May 22, 1944.
(b) The Company filed no Current Reports on Form 8-K during the fourth quarter
of 1996, which ended December 31, 1996.
A copy of this Form 10-K and exhibits herein can be obtained by writing Brent J.
Gray, Senior Vice President and Chief Financial Officer, Bremer Financial
Corporation, 445 Minnesota Street, Suite 2000, St. Paul, MN 55101.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 14, 1997. Bremer Financial Corporation
By /S/ TERRY M. CUMMINGS
-----------------------------------------------
Terry M. Cummings
ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the registrant on March
14, 1997 in the capacities indicated.
/S/ TERRY M. CUMMINGS
------------------------------------------------------
Terry M. Cummings
ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER AND DIRECTOR
/S/ WILLIAM H. LIPSCHULTZ
------------------------------------------------------
William H. Lipschultz
CHAIRMAN OF THE BOARD AND DIRECTOR
/S/ CHARLOTTE S. JOHNSON
------------------------------------------------------
Charlotte S. Johnson
VICE PRESIDENT AND DIRECTOR
/S/ SHERMAN WINTHROP
------------------------------------------------------
Sherman Winthrop
DIRECTOR
/S/ DANIEL C. REARDON
------------------------------------------------------
Daniel C. Reardon
VICE PRESIDENT AND DIRECTOR
/S/ BRENT J. GRAY
------------------------------------------------------
Brent J. Gray
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
/S/ STUART F. BRADT
------------------------------------------------------
Stuart F. Bradt
CONTROLLER (CHIEF ACCOUNTING OFFICER)
(This page was intentionally left blank)
INDEX TO EXHIBITS
Description of Exhibits Page
10.1 Bremer Financial Corporation 1996 Executive Incentive
Compensation Plan for Chief Financial Officer, Chief Credit
Officer, and Human Resources Director.
10.2 Bremer Financial Corporation 1996 Executive Incentive
Compensation Plan for Group Presidents.
10.3 Bremer Financial Corporation 1996 Executive Incentive
Compensation Plan for Chief Operating Officer.
10.4 Bremer Financial Corporation 1996 Executive Incentive
Compensation Plan for President and CEO.
10.5 Bremer Financial Corporation 1996 Long-Term Incentive
Compensation Plan for Group Presidents and Chief Operating
Officer.
10.6 Bremer Financial Corporation 1996 Long-Term Incentive
Compensation Plan for President and CEO.
21 Subsidiaries of the Company.
27 Financial Data Schedule.
EX-10.1
EXHIBIT 10.1
BREMER FINANCIAL CORPORATION
1996 EXECUTIVE INCENTIVE COMPENSATION PLAN
Chief Financial Officer
Chief Credit Officer
Human Resources Director
Contained herein is a detailed outline of the Executive Incentive Compensation
Plan which has been designed for the Chief Financial Officer, Chief Credit
Officer, and Human Resources Director of Bremer Financial Services, Inc.
A. Purpose
1) To provide an annual incentive award to the Chief Financial
Officer, Chief Credit Officer, and Human Resources Director of
Bremer Financial Services, Inc. for the achievement of Bremer
Financial Corporation's goals and objectives.
2) To focus attention on those activities which will positively
affect the Corporation's financial well-being.
B. Eligibility
1) The Chief Financial Officer, Chief Credit Officer, and Human
Resources Director of Bremer Financial Services, Inc. are the
participants in this plan.
C. Plan Year
1) The Executive Incentive Compensation program will begin on
January 1 and will end on December 31.
D. Payment of Award
1) At year end, formal reviews will be conducted by the
appropriate designated management to determine and measure
performance. Upon completion of the measurement of the
participant's goals and objectives, an award will be approved.
3) Award payments will be made in the first quarter, following
the end of defined incentive plan year.
E. Potential Awards
1) The target (planned) and maximum potential award, stated as a
percentage of base salary, will be:
Target Maximum
------ -------
10% 20%
F. Performance Measures and Determination of Award
1) 100% of the target incentive award will be based upon
Corporate RORE*. The following table will be utilized to
determine the actual percentage of salary to be granted. When
performance falls between the RORE percentages shown,
interpolation will be utilized to determine the actual
percentage of salary to be awarded.
Corporate RORE Percentage Award
-------------- ----------------
11.00 -0-
12.00 5.0%
13.00 TARGET 10.0%
14.00 12.5%
15.00 15.0%
16.00 17.5%
17.00 and over 20.0%
* Restructuring costs will be amortized over the years
1996 and 1997 when calculating incentive.
2) Other Measures
Will be included in Corporate RORE performance measure.
G. Administration
1) The plan shall be subject to the approval of the Board of
Directors of Bremer Financial Corporation which shall have
sole authority to establish the terms and conditions under
which the plan will be administered.
2) The Executive Incentive Compensation Plan and awards are not
transferable or assignable.
3) Award may not be deferred.
H. Administrative Procedures
1) Additions to Plan -- Eligible individuals will be added to the
plan at any time upon the approval of the Board of Directors
of Bremer Financial Corporation. However, the size of their
awards will be prorated by the number of months they were
eligible to receive an award. An example would be:
- Employee "A" is added to plan in mid-year so s/he has six
(6) months of eligible service.
- Calculated incentive award is $15,000
- $15,000 X 6/12 = $7,500
2) Terminations -- If the eligible participant terminates during
the plan year, the incentive award will be handled as follows:
- Voluntary resignations -- no incentive award.
- Involuntary terminations for cause -- no incentive award.
- Involuntary termination without cause -- incentive award
prorated by number of months service during current incentive
plan year, based on approval by President of BFC.
- Retirement/disability -- incentive award prorated by number
of months of service during current incentive plan year.
3) Change in Position -- If the eligible participant has a change
in position during a plan year, their incentive award will be
calculated under both plan award levels and prorated by the
months of service at each level.
4) Interpolation -- When actual performance falls between cells
on the appropriate element, the individual completing the
formula should interpolate to the actual percentage to be
awarded.
5) Performance -- If a participant's performance rating for the
plan year is less than fully competent and/or certain
performance goals are not met, the President of Bremer
Financial Corporation has the authority to reduce partially or
totally the incentive payout that would normally be due the
participant.
6) Exceptions -- Upon occasion, there may be specific reasons for
exceptions to the incentive compensation program for events
beyond the control of the participant in the plan. The
President of Bremer Financial Corporation has the authority to
determine and approve all such exceptions.
I. Amendment and termination
1) The Board of Bremer Financial Corporation may at any time
amend the plan for the purposes of satisfying the requirements
of any changes in applicable laws or for any purpose which may
be permitted by law. The Board of Bremer Financial Corporation
may also terminate the plan at any time. No such amendment or
termination shall, however, adversely affect the rights of any
participant (without his/her prior consent) to any award
previously approved.
________________________________________________________________________________
NAME TITLE
CALCULATION OF EXECUTIVE INCENTIVE AWARD
----------------------------------------
Plan Year 1996
Percentage of Salary
To Be Awarded
F-1 - Corporate RORE --------------------
- --------------------
Corporate RORE __________% __________%
Total Award Earned as % of Salary __________%
- ---------------------------------
X 1996 Salary $___________
= 1996 INCENTIVE AWARD $___________
Approved:
_______________________________ ___________________________________
Date
_______________________________ ___________________________________
Date
EX-10.2
EXHIBIT 10.2
BREMER FINANCIAL CORPORATION
1996 EXECUTIVE INCENTIVE COMPENSATION PLAN
Group Presidents
Contained herein is a detailed outline of the Executive Incentive Compensation
Plan which has been designed for Bremer Group Presidents.
A. Purpose
1) To provide an annual incentive award to Group Presidents who
contribute significantly toward the achievement of Bremer
Financial Corporation's goals and objectives.
2) To focus attention on those activities which will positively
affect the Corporation's financial well-being.
B. Eligibility
1) Participants will be Group Presidents.
C. Plan Year
1) The Executive Incentive Compensation program will begin on
January 1 and will end on December 31.
D. Payment of Award
1) At year end, formal reviews will be conducted by the
appropriate designated management to determine and measure
performance. Upon completion of the measurement of the
participant's goals and objectives, award payments will be
recommended and approved.
2) Award payments will be made in the first quarter, following
the end of defined incentive plan year.
E. Potential Awards
1) The target (planned) and maximum potential award, stated as a
percentage of base salary, will be:
Target Maximum
------ -------
Group Presidents 20% 40%
F. Performance Measures and Determination of Award
1) Corporate RORE
100% of the target incentive award will be based upon
Corporate RORE*. The following table will be utilized to
determine the actual percentage of salary to be granted. When
performance falls between the RORE percentages shown,
interpolation will be utilized to determine the actual
percentage of salary to be awarded.
Corporate RORE Percentage Award
-------------- ----------------
11.00 0%
12.00 10.0%
13.00 TARGET 20.0%
14.00 25.0%
15.00 30.0%
16.00 35.0%
17.00 and over 40.0%
* Restructuring costs will be amortized over the years
1996 and 1997 when calculating incentive.
2) Other Measures
Will be included in Corporate RORE performance measure.
G. Administration
1) The plan shall be subject to the approval of the Board of
Directors of Bremer Financial Corporation which shall have
sole authority to establish the terms and conditions under
which the plan will be administered.
2) The Executive Incentive Compensation Plan and awards are not
transferable or assignable.
3) Award may be deferred.
H. Administrative Procedures
1) Addition to Plan -- Eligible individuals will be added to the
plan at any time upon the approval of the Board of Directors
of Bremer Financial Corporation. Criteria for award is subject
to approval by the President of BFC. However, the size of
their awards will be prorated by the number of months they
were eligible to receive an award. An example would be:
- Employee "A" is added to plan in mid-year so s/he has six
(6) months of eligible service.
- Calculated incentive award is $15,000
- $15,000 X 6/12 = $7,500
2) Terminations -- Eligible employees who terminate during the
plan year will be handled as follows:
- Voluntary resignations -- no incentive award.
- Involuntary terminations for cause -- no incentive award.
- Involuntary termination without cause -- incentive award
prorated by number of months service during current incentive
plan year, based on approval by President of BFC.
- Retirement/disability -- incentive award prorated by number
of months of service during current incentive plan year.
3) Change in Position -- Eligible employees who have a change in
position during a plan year will have their incentive award
calculated under both plan award levels and prorated by the
months of service at each level.
4) Interpolation -- When actual performance falls between cells
on the appropriate element, the individual completing the
formula should interpolate to the actual percentage to be
awarded.
5) Performance -- If a participant's performance rating for the
plan year is less than fully competent and/or certain
performance goals are not met, the President of Bremer
Financial Corporation has the authority to reduce partially or
totally the incentive payout that would normally be due the
participant.
6) Exceptions -- Upon occasion, there may be specific reasons for
exceptions to the incentive compensation program for events
beyond the control of the participant in the plan. The
President of Bremer Financial Corporation has the authority to
determine and approve all such exceptions.
I. Amendment and termination
1) The Board of Bremer Financial Corporation may at any time
amend the plan for the purposes of satisfying the requirements
of any changes in applicable laws or for any purpose which may
be permitted by law. The Board of Bremer Financial Corporation
may also terminate the plan at any time. No such amendment or
termination shall, however, adversely affect the rights of any
participant (without his/her prior consent) to any award
previously approved.
________________________________________________________________________________
NAME GROUP
CALCULATION OF GROUP PRESIDENT INCENTIVE AWARD
----------------------------------------------
Plan Year 1996
Percentage of Salary
To Be Awarded
F-1 - Corporate RORE --------------------
- --------------------
Corporate RORE __________% __________%
Total Award Earned as % of Salary __________%
- ---------------------------------
X 1996 Salary $___________
= 1996 INCENTIVE AWARD $___________
Approved:
____________________________ _____________________________________________
Date
____________________________ _____________________________________________
Date
EX-10.3
EXHIBIT 10.3
BREMER FINANCIAL CORPORATION
1996 EXECUTIVE INCENTIVE COMPENSATION PLAN
Chief Operating Officer
Contained herein is a detailed outline of the Executive Incentive Compensation
Plan which has been designed for the Chief Operating Officer.
A. Purpose
1) To provide an annual incentive award to executives who
contribute significantly toward the achievement of Bremer
Financial Corporation's goals and objectives.
2) To focus attention on those activities which will positively
affect the Corporation's financial well-being.
B. Eligibility
1) Participant will be the Chief Operating Officer for Bremer
Financial Corporation.
C. Plan Year
1) The Executive Incentive Compensation program will begin on
January 1 and will end on December 31.
D. Payment of Award
1) At year end, formal reviews will be conducted by the President
of Bremer Financial Corporation to determine and measure
performance. Upon completion of the measurement of the
participant's goals and objectives, an award will be approved.
2) Award payments will be made in the first quarter, following
the end of defined incentive plan year.
E. Potential Awards
1) The target (planned) and maximum potential award, stated as a
percentage of base salary, will be:
Target Maximum
------ -------
Chief Operating Officer 20% 40%
F. Performance Measures and Determination of Award
1) 100% of the target incentive award will be based upon
Corporate RORE*. The following table will be utilized to
determine the actual percentage of salary to be granted. When
performance falls between the RORE percentages shown,
interpolation will be utilized to determine the actual
percentage of salary to be awarded.
Corporate RORE Percentage Award
-------------- ----------------
11.00 0%
12.00 10.0%
13.00 TARGET 20.0%
14.00 25.0%
15.00 30.0%
16.00 35.0%
17.00 and over 40.0%
* Restructuring costs will be amortized over the years 1996
and 1997 when calculating incentive.
2) Other Measures
Will be included in Corporate RORE performance measure.
G. Administration
1) The plan shall be subject to the approval of the Board of
Directors of Bremer Financial Corporation which shall have
sole authority to establish the terms and conditions under
which the plan will be administered.
2) The Executive Incentive Compensation Plan and awards are not
transferable or assignable.
3) Award may be deferred.
H. Administrative Procedures
1) Addition to Plan -- Eligible individuals will be added to the
plan at any time upon the approval of the Board of Directors
of Bremer Financial Corporation. However, the size of their
awards will be prorated by the number of months they were
eligible to receive an award. An example would be:
- Employee "A" is added to plan in mid-year so s/he has six
(6) months of eligible service.
- Calculated incentive award is $15,000
- $15,000 X 6/12 = $7,500
2) Terminations -- Eligible employees who terminate during the
plan year will be handled as follows:
- Voluntary resignations -- no incentive award.
- Involuntary terminations for cause -- no incentive award.
- Involuntary termination without cause -- incentive award
prorated by number of months service during current incentive
plan year, based on approval by President of BFC.
- Retirement/disability -- incentive award prorated by number
of months of service during current incentive plan year.
3) Change in Position -- Eligible employees who have a change in
position during a plan year will have their incentive award
calculated under both plan award levels and prorated by the
months of service at each level.
4) Interpolation -- When actual performance falls between cells
on the appropriate element, the individual completing the
formula should interpolate to the actual percentage to be
awarded.
5) Performance -- If a participant's performance rating for the
plan year is less than fully competent and/or certain
performance goals are not met, the President of Bremer
Financial Corporation has the authority to reduce partially or
totally the incentive payout that would normally be due the
participant.
6) Exceptions -- Upon occasion, there may be specific reasons for
exceptions to the incentive compensation program for events
beyond the control of the participant in the plan. The
President of Bremer Financial Corporation has the authority to
determine and approve all such exceptions.
I. Amendment and termination
1) The Board of Bremer Financial Corporation may at any time
amend the plan for the purposes of satisfying the requirements
of any changes in applicable laws or for any purpose which may
be permitted by law. The Board of Bremer Financial Corporation
may also terminate the plan at any time. No such amendment or
termination shall, however, adversely affect the rights of any
participant (without his/her prior consent) to any award
previously approved.
________________________________________________________________________________
NAME TITLE
CALCULATION OF GROUP PRESIDENT INCENTIVE AWARD
----------------------------------------------
Plan Year 1996
Percentage of Salary
To Be Awarded
F-1 - Corporate RORE --------------------
- --------------------
Corporate RORE __________% __________%
Total Award Earned as % of Salary __________%
- ---------------------------------
X 1996 Salary $___________
= 1996 INCENTIVE AWARD $___________
Approved:
____________________________ _____________________________________________
Date President, Bremer Financial Corporation
EX-10.4
EXHIBIT 10.4
BREMER FINANCIAL CORPORATION
1996 EXECUTIVE INCENTIVE COMPENSATION PLAN
President and CEO of Bremer Financial Corporation
Contained herein is a detailed outline of the Executive Incentive Compensation
Plan which has been designed for the President and CEO of Bremer Financial
Corporation.
A. Purpose
1) To provide an annual incentive award to the President of
Bremer Financial Corporation for the achievement of Bremer
Financial Corporation's goals and objectives.
2) To focus attention on those activities which will positively
affect the Corporation's financial well-being.
B. Eligibility
1) The President and CEO of Bremer Financial Corporation is the
participant in this plan.
C. Plan Year
1) The Executive Incentive Compensation program will begin on
January 1 and will end on December 31.
D. Payment of Award
1) At year end, formal reviews will be conducted by the Board of
Directors of Bremer Financial Corporation to determine and
measure performance. Upon completion of the measurement of the
participant's goals and objectives, an award will be approved.
2) Award payments will be made in the first quarter, following
the end of defined incentive plan year.
E. Potential Awards
1) The target (planned) and maximum potential award, stated as a
percentage of base salary, will be:
Target Maximum
------ -------
30% 60%
F. Performance Measures and Determination of Award
1) 100% of the target incentive award will be based upon
Corporate RORE*. The following table will be utilized to
determine the actual percentage of salary to be granted. When
performance falls between the RORE percentages shown,
interpolation will be utilized to determine the actual
percentage of salary to be awarded.
Corporate RORE Percentage Award
11.00 0.0%
12.00 15.0%
13.00 TARGET 30.0%
14.00 37.5%
15.00 45.0%
16.00 52.5%
17.00 and over 60.0%
* Restructuring costs will be amortized over the years 1996
and 1997 when calculating incentive.
G. Administration
1) The plan shall be subject to the approval of the Board of
Directors of Bremer Financial Corporation which shall have
sole authority to establish the terms and conditions under
which the plan will be administered.
2) The Executive Incentive Compensation Plan and awards are not
transferable or assignable.
3) Award may be deferred.
H. Administrative Procedures
1) Additions to Plan -- Eligible individuals will be added to the
plan at any time upon the approval of the Board of Directors
of Bremer Financial Corporation. However, the size of their
awards will be prorated by the number of months they were
eligible to receive an award. An example would be:
- Employee "A" is added to plan in mid-year so he has six (6)
months of eligible service.
- Calculated incentive award is $15,000
- $15,000 X 6/12 = $7,500
2) Terminations -- If the eligible participant terminates during
the plan year, the incentive award will be handled as follows:
- Voluntary resignations -- no incentive award.
- Involuntary terminations for cause -- no incentive award.
- Involuntary termination without cause -- incentive award
prorated by number of months service during current incentive
plan year, based on approval of Board of Directors of BFC.
- Retirement/disability -- incentive award prorated by number
of months of service during current incentive year.
3) Change in Position -- If the eligible participant has a change
in position during a plan year, the incentive award will be
calculated under both plan award levels and prorated by the
months of service at each level.
4) Interpolation -- When actual performance falls between cells
on the appropriate element, the individual completing the
formula should interpolate to the actual percentage to be
awarded.
5) Performance -- If a participant's performance rating for the
plan year is less than fully competent, the Board of Directors
of Bremer Financial Corporation has the authority to reduce
partially or totally the incentive payout that would normally
be due the participant.
6) Exceptions -- Upon occasion, there may be specific reasons for
exceptions to the incentive compensation program for events
beyond the control of the participant in the plan. The Board
of Directors of Bremer Financial Corporation has the authority
to determine and approve all such exceptions.
I. Amendment and termination
1) The Board of Directors of Bremer Financial Corporation may at
any time amend the plan for the purposes of satisfying the
requirements of any changes in applicable laws or for any
purpose which may be permitted by law. The Board of Directors
of Bremer Financial Corporation may also terminate the plan at
any time. No such amendment or termination shall, however,
adversely affect the rights of any participant (without
his/her prior consent) to any award previously approved.
________________________________________________________________________________
NAME
CALCULATION OF PRESIDENT OF BFC INCENTIVE AWARD
-----------------------------------------------
Plan Year 1996
Percentage of Salary
To Be Awarded
F-1 - Corporate RORE --------------------
- --------------------
Corporate RORE __________% __________%
Total Award Earned as % of Salary __________%
- ---------------------------------
X 1996 Salary $___________
= 1996 INCENTIVE AWARD $___________
Approved:
____________________________ _____________________________________________
Date Board of Directors of BFC
EX-10.5
EXHIBIT 10.5
BREMER FINANCIAL CORPORATION
1996 LONG-TERM INCENTIVE COMPENSATION PLAN
Group President
Chief Operating Officer
Contained herein is a detailed outline of the Long-Term Executive Incentive
Compensation Plan which has been designed for the Group Presidents and Chief
Operating Officer.
A. Purpose
1) To provide a long-term incentive award to the participants for
the achievement of Bremer Financial Corporation's goals and
objectives.
2) To focus attention on those activities that will have an
impact on the Corporation's long-term financial well-being.
Those activities include long term profitability, growth
through acquisitions, and maximization of efficiencies
resulting in high productivity.
B. Eligibility
1) The Group Presidents and Chief Operating Officer are the
participants in this plan.
C. Plan Years
1) The Executive Incentive Compensation program will begin on
January 1, 1996 and will end on December 31, 1998.
D. Payment of Award
1) At the end of 1997, formal reviews will be conducted by the
President and CEO of Bremer Financial Corporation to determine
and measure performance. Upon completion of the measurement of
the participant's goals and objectives, an award will be
approved.
2) Award payments will be made in the first quarter of 1999, or
may be deferred.
E. Potential Awards
1) A target (planned) and maximum potential awards, stated as a
percentage of base salary will be:
Target Maximum
------ -------
45% 105%
F. Performance Measures and Determination of Award
Return on Realized Equity
100% of the target award will be based upon the simple average of the
Corporate RORE(1) for the years of 1996, 1997, and 1998. When
performance falls between the RORE percentages shown, interpolation
will be used to determine the actual percentage of salary to be
awarded. Base salary as of December 31, 1998 will be utilized.
RORE Percentage Award
13.00 25.0%
14.50 TARGET 45.0%
16.50 and over 105.0%
(1) RORE excludes from equity the FAS 115 net unrealized gain or
loss on securities available for sale.
G. Administration
1) The plan shall be subject to the approval of the Board of
Directors of Bremer Financial Corporation which shall have
sole authority to establish the terms and conditions under
which the plan will be administered.
2) The Executive Incentive Compensation Plan and awards are not
transferable or assignable.
H. Administrative Procedures
1) Additions to Plan -- Eligible individuals will be added to the
plan at any time upon the approval of the Board of Directors
of Bremer Financial Corporation. However, the size of their
award will be prorated by the number of months they were
eligible to receive an award. An example would be:
- Employee "A" is added to plan in mid 1995 so s/he has
eighteen (18) months of eligible service.
- Calculated incentive award is $100,000
- $100,000 X 18/36 = $50,000
2) Terminations -- If the eligible participant terminates during
the three-year plan. the incentive award will be handled as
follows:
- Voluntary resignations -- no incentive award.
- Involuntary terminations for cause -- no incentive award.
- Involuntary termination without cause -- incentive award
prorated by number of months service during current
incentive plan year.
- Retirement/disability -- incentive award prorated by number
of months of service during current incentive plan 3 year
period.
3) Change in Position -- If the eligible participant has a change
in position during the three-year plan, their incentive award
calculated under both plan award levels and prorated by the
months of service at each level
4) Interpolation -- When actual performance falls between
threshold, target, and maximum, the individual completing the
formula should interpolate to the actual percentage to be
awarded.
5) Performance -- If a participant's performance rating for any
year within the three year plan is less than fully competent,
the President and CEO of Bremer Financial Corporation has the
authority to reduce partially or totally the incentive payout
that would be normally be due the participant.
6) Exceptions -- Upon occasion, there may be specific reasons for
exceptions to the incentive compensation program for events
beyond the control of the participant in the plan. The
President and CEO of Bremer Financial Corporation has the
authority to determine and approve all such exceptions.
J. Amendment and termination
1) The Board of Directors of Bremer Financial Corporation may at
any time amend the plan for the purposes of satisfying the
requirements of any changes in applicable laws or for any
purpose which may be permitted by law. The Board of Directors
of Bremer Financial Corporation may also terminate the plan at
any time. No such amendment or termination shall, however,
adversely affect the rights of any participant (without
his/her prior consent) to any award previously approved.
_______________________________________
NAME
CALCULATION OF INCENTIVE AWARD
------------------------------
Plan Year 1996 - 1998
Percentage of Salary
To Be Awarded
F-1 - Return on Realized Equity --------------------
- -------------------------------
a. 1996______________________%
b. 1997 _____________________%
c. 1998 _____________________%
Simple average equals a + b + c ________________%
---------
3
X 12/31/98 Salary $__________________
= 1996-1998 INCENTIVE AWARD $__________________
Approved:
____________________________ ______________________________________
Date President and CEO, BFC
EX-10.6
EXHIBIT 10.6
BREMER FINANCIAL CORPORATION
1996 LONG-TERM INCENTIVE COMPENSATION PLAN
President and CEO of Bremer Financial Corporation
Contained herein is a detailed outline of the Long-Term Executive Incentive
Compensation Plan which has been designed for the President and CEO of Bremer
Financial Corporation.
A. Purpose
1) To provide a long-term incentive award to the President of
Bremer Financial Corporation for the achievement of Bremer
Financial Corporation's goals and objectives.
2) To focus attention on those activities that will have an
impact on the Corporation's long-term financial well-being.
Those activities include long term profitability, growth
through acquisitions, and maximization of efficiencies
resulting in high productivity.
B. Eligibility
1) The President and CEO of Bremer Financial Corporation is the
participant in this plan.
C. Plan Years
1) The Executive Incentive Compensation program will begin on
January 1, 1996 and will end on December 31, 1998.
D. Payment of Award
1) At the end of 1998, formal reviews will be conducted by the
Board of Directors of Bremer Financial Corporation to
determine and measure performance. Upon completion of the
measurement of the participant's goals and objectives, an
award will be approved.
2) Award payments will be made in the first quarter of 1999, or
may be deferred.
E. Potential Awards
1) A target (planned) and maximum potential awards, stated as a
percentage of base salary will be:
Target Maximum
------ -------
60% 120%
F. Performance Measures and Determination of Award
Return on Realized Equity
100% of the target award will be based upon the simple average of the
Corporate RORE(1) for the years of 1996, 1997, and 1998. When
performance falls between the RORE percentages shown, interpolation
will be used to determine the actual percentage of salary to be
awarded. Base salary as of December 31, 1998 will be utilized.
RORE Percentage Award
---- ----------------
13.00 33.0%
14.50 TARGET 60.0%
16.50 and over 120.0%
(1) RORE excludes from equity the FAS 115 net unrealized gain
or loss on securities available for sale.
G. Administration
1) The plan shall be subject to the approval of the Board of
Directors of Bremer Financial Corporation which shall have
sole authority to establish the terms and conditions under
which the plan will be administered.
2) The Executive Incentive Compensation Plan and awards are not
transferable or assignable.
H. Administrative Procedures
1) Additions to Plan -- Eligible individuals will be added to the
plan at any time upon the approval of the Board of Directors
of Bremer Financial Corporation. However, the size of their
award will be prorated by the number of months they were
eligible to receive an award. An example would be:
- Employee "A" is added to plan in mid 1995 so s/he has
eighteen (18) months of eligible service.
- Calculated incentive award is $100,000
- $100,000 X 18/36 = $50,000
2) Terminations -- If the eligible participant terminates during
the three-year plan. the incentive award will be handled as
follows:
- Voluntary resignations -- no incentive award.
- Involuntary terminations for cause -- no incentive award.
- Involuntary termination without cause -- incentive award
prorated by number of months service during current
incentive plan year.
- Retirement/disability -- incentive award prorated by number
of months of service during current incentive plan three
year period.
3) Change in Position -- If the eligible participant has a change
in position during the three-year plan, their incentive award
calculated under both plan award levels and prorated by the
months of service at each level.
4) Interpolation -- When actual performance falls between
threshold, target, and maximum, the individual completing the
formula should interpolate to the actual percentage to be
awarded.
5) Performance -- If a participant's performance rating for any
year within the three year plan is less than fully competent,
the Board of Directors of Bremer Financial Corporation have
the authority to reduce partially or totally the incentive
payout that would be normally be due the participant.
6) Exceptions -- Upon occasion, there may be specific reasons for
exceptions to the incentive compensation program for events
beyond the control of the participant in the plan. The Board
of Directors of Bremer Financial Corporation has the authority
to determine and approve all such exceptions.
J. Amendment and termination
1) The Board of Directors of Bremer Financial Corporation may at
any time amend the plan for the purposes of satisfying the
requirements of any changes in applicable laws or for any
purpose which may be permitted by law. The Board of Directors
of Bremer Financial Corporation may also terminate the plan at
any time. No such amendment or termination shall, however,
adversely affect the rights of any participant (without
his/her prior consent) to any award previously approved.
_______________________________________
NAME
CALCULATION OF PRESIDENT OF BFC INCENTIVE AWARD
-----------------------------------------------
Plan Year 1996 - 1998
Percentage of Salary
To Be Awarded
F-1 - Return on Realized Equity --------------------
- -------------------------------
a. 1996______________________%
b. 1997 _____________________%
c. 1998 _____________________%
Simple average equals a + b + c ________________%
---------
3
X 12/31/98 Salary $__________________
= 1996-1998 INCENTIVE AWARD $__________________
Approved:
____________________________ ______________________________________
Date Board of Directors of BFC
EX-21
EXHIBIT 21
Subsidiaries of Bremer Financial Corporation
Name of Subsidiaries and State or Other Jurisdiction of Incorporation as of
March 14, 1997:
State of Minnesota:
Bremer Business Finance Corporation
Bremer Financial Services, Inc.
Bremer Investment Services, Inc.
First American Insurance Agencies, Inc.
First American Trust Company of Minnesota
First American Services, Inc.
State of North Dakota:
First American Insurance Agencies, Inc.
State of Wisconsin:
Dunn County Bankshares, Inc., parent of First American Bank, National
Association (Menomonie, WI) and Premium Finance Corporation
State of Arizona:
Bremer First American Life Insurance Company
United States (National Bank Act):
First American Bank, National Association (Alexandria, MN)
First American Bank, National Association (Brainerd, MN)
First American Bank, National Association (Breckenridge, MN)
First American Bank, National Association (Crookston, MN)
First American Bank, National Association (Detroit Lakes, MN)
First American Bank, National Association (Grand Forks, ND)
First American Bank, National Association (International Falls, MN)
First American Bank, National Association (Lisbon, ND)
First American Bank, National Association (Marshall, MN)
First American Bank, National Association (Menomonie, WI)
First American Bank, National Association (Minot, ND)
First American Bank, National Association (Moorhead, MN)
First American Bank, National Association (St. Cloud, MN)
First American Bank, National Association (South Saint Paul, MN)
First American Bank, National Association (Wahpeton, ND)
First American Bank, National Association (Willmar, MN)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 159,832
<INT-BEARING-DEPOSITS> 1,778
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<ALLOWANCE> 30,482
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<SHORT-TERM> 275,021
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<LONG-TERM> 62,389
2,144
0
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<INCOME-PRETAX> 46,954
<INCOME-PRE-EXTRAORDINARY> 31,817
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,817
<EPS-PRIMARY> 2.65
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<LOANS-NON> 10,830
<LOANS-PAST> 2,205
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</TABLE>
