FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998.
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
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Bremer Financial Corporation
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(Exact name of registrant as specified in its charter)
Minnesota 41-0715583
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
445 Minnesota St., Suite 2000, St. Paul, MN 55101-2107
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(Address of principal executive offices)
(Zip Code)
(651) 227-7621
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(Registrant's telephone number, including area code)
Not applicable.
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(Former name, former address and former fiscal year, if changed since
last report)
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 ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of September 30, 1998, there were 1,200,000 shares of class A common
stock and 10,800,000 shares of class B common stock outstanding.
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BREMER FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PART I -- FINANCIAL INFORMATION Page
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Item 1 -- Financial Statements 2
Item 2 -- Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
PART II -- OTHER INFORMATION
Item 5 -- Other information 27
Item 6 -- Exhibits and Reports on Form 8-K 28
Signatures 29
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ITEM 1. FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
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September 30 December 31 September 30
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1997
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(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 108,656 135,966 123,756
Interest bearing deposits 2,325 1,886 1,746
Investment securities held to maturity (fair value of $164,514,
$185,402 and $193,138, respectively) 157,829 179,631 188,096
Mortgage-backed securities held to maturity (fair value of $34,198,
$91,508 and $99,633, respectively) 34,167 91,994 100,152
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TOTAL SECURITIES HELD TO MATURITY 191,996 271,625 288,248
Investment securities available for sale (amortized cost of $105,743,
$141,147 and $151,142, respectively) 107,447 142,051 151,834
Mortgage-backed securities available for sale (amortized cost of $608,400,
$570,363 and $542,451, respectively) 616,095 578,573 549,159
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TOTAL SECURITIES AVAILABLE FOR SALE 723,542 720,624 700,993
Loans and leases 2,186,512 1,969,085 1,953,307
Reserve for credit losses (36,301) (34,253) (34,455)
Unearned discount (5,526) (4,958) (4,590)
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NET LOANS AND LEASES 2,144,685 1,929,874 1,914,262
Premises and equipment, net 54,329 51,879 51,464
Interest receivable and other assets 64,128 61,847 63,918
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TOTAL ASSETS $ 3,289,661 3,173,701 3,144,387
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LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest bearing deposits $ 315,857 344,521 328,041
Interest bearing deposits 2,160,730 2,097,977 2,051,885
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TOTAL DEPOSITS 2,476,587 2,442,498 2,379,926
Federal funds purchased and repurchase agreements 227,282 167,174 146,371
Other short-term borrowings 136,990 198,090 257,342
Long-term debt 94,998 30,238 31,630
Accrued expenses and other liabilities 51,292 44,697 45,662
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TOTAL LIABILITIES 2,987,149 2,882,697 2,860,931
Minority interests 3,488 10,011 9,857
Redeemable preferred stock, $100 par, 80,000 shares authorized;
71,594 shares issued; and outstanding shares of 20,837,
21,437 and 21,437, respectively 2,084 2,144 2,144
Redeemable class A common stock, 960,000 shares
issued and outstanding 23,755 22,308 21,716
Shareholder's equity
Common stock
Class A, no par, 12,000,000 shares authorized;
240,000 shares issued and outstanding 57 57 57
Class B, no par, 10,800,000 shares authorized,
issued and outstanding 2,562 2,562 2,562
Retained earnings 265,541 249,079 243,354
Net unrealized gain on securities available for sale 5,026 4,843 3,766
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TOTAL SHAREHOLDER'S EQUITY 273,186 256,541 249,739
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 3,289,661 3,173,701 3,144,387
===================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
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BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
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Nine Months Ended September 30
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
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<S> <C> <C> <C>
INTEREST INCOME
Loans and leases, including fees $ 138,740 121,407 112,648
Securities
Taxable 35,387 36,744 35,668
Tax-exempt 8,261 8,408 8,417
Federal funds sold 567 -- --
Other 93 99 100
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Total interest income 183,048 166,658 156,833
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INTEREST EXPENSE
Deposits 73,585 66,457 64,417
Federal funds purchased and repurchase agreements 7,135 5,506 6,575
Other short term borrowings 7,733 6,284 4,325
Long term debt 2,773 2,728 1,110
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Total interest expense 91,227 80,975 76,427
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Net interest income 91,821 85,683 80,406
Provision for credit losses 3,769 4,029 1,965
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Net interest income after provision for credit losses 88,052 81,654 78,441
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NONINTEREST INCOME
Service charges 12,631 11,607 9,490
Insurance 5,239 4,907 4,702
Trust 5,145 4,574 3,919
Gain on sale of loans 3,491 1,628 1,627
Gain / (loss) on sale of securities 1,292 (133) 246
Other 7,496 4,991 4,533
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Total noninterest income 35,294 27,574 24,517
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NONINTEREST EXPENSE
Salaries and wages 36,469 32,744 29,829
Employee benefits 9,191 8,740 8,202
Occupancy 4,585 4,413 4,384
Furniture and equipment 5,584 5,042 4,555
Data processing fees 4,516 5,044 5,506
FDIC premiums and examination fees 888 352 1,084
Other 16,824 15,130 14,260
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Total noninterest expense 78,057 71,465 67,820
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INCOME BEFORE INCOME TAX EXPENSE 45,289 37,763 35,138
Income tax expense 15,516 12,524 11,462
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NET INCOME $ 29,773 25,239 23,676
===============================================================================================================
Per common share amounts:
Net income-basic $ 2.48 2.10 1.97
Dividends paid 0.99 0.90 0.75
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</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
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Three Months Ended September 30
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
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<S> <C> <C> <C>
INTEREST INCOME
Loans and leases, including fees $ 48,599 43,214 38,932
Securities
Taxable 11,038 12,705 11,769
Tax-exempt 2,782 2,875 2,846
Federal funds sold 245 -- --
Other 36 49 28
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Total interest income 62,700 58,843 53,575
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INTEREST EXPENSE
Deposits 24,851 22,914 21,678
Federal funds purchased and repurchase agreements 2,776 1,774 2,368
Other short term borrowings 2,364 3,233 1,828
Long term debt 1,361 885 221
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Total interest expense 31,351 28,806 26,095
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Net interest income 31,349 30,037 27,480
Provision for credit losses 1,307 1,431 661
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Net interest income after provision for credit losses 30,042 28,606 26,819
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NONINTEREST INCOME
Service charges 4,373 4,063 3,251
Insurance 2,047 1,786 1,854
Trust 1,701 1,563 1,311
Gain on sale of loans 1,147 779 519
Gain on sale of securities 154 60 57
Other 2,034 1,759 1,495
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Total noninterest income 11,456 10,010 8,487
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NONINTEREST EXPENSE
Salaries and wages 12,395 11,229 10,252
Employee benefits 3,054 2,857 2,735
Occupancy 1,510 1,484 1,435
Furniture and equipment 1,934 1,735 1,567
Data processing fees 1,532 1,503 1,819
FDIC premiums and examination fees 295 302 193
Other 5,730 5,443 4,899
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Total noninterest expense 26,450 24,553 22,900
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INCOME BEFORE INCOME TAX EXPENSE 15,048 14,063 12,406
Income tax expense 5,135 4,697 4,089
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NET INCOME $ 9,913 9,366 8,317
==============================================================================================================
Per common share amounts:
Net income-basic $ 0.83 0.78 0.69
Dividends paid 0.33 0.30 0.25
==============================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
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Net Unrealized
Gain (Loss) on
Common Stock Securities
--------------------- Available Retained
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Class A Class B for Sale Earnings Total
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<S> <C> <C> <C> <C> <C>
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)
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BALANCE, DECEMBER 31, 1996 57 2,562 1,180 230,071 233,870
Net income 35,060 35,060
Dividends, $1.20 per share (14,400) (14,400)
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 (319) (1,652) (1,971)
Change in net unrealized gain (loss) on securities available for sale 3,982 3,982
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BALANCE, DECEMBER 31, 1997 57 2,562 4,843 249,079 256,541
Net income 29,773 29,773
Dividends, $.99 per share (11,880) (11,880)
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 (16) (1,431) (1,447)
Change in net unrealized gain (loss) on securities available for sale 199 199
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BALANCE, SEPTEMBER 30, 1998 $ 57 2,562 5,026 265,541 273,186
====================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED.
5
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BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
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Nine Months Ended September 30
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(IN THOUSANDS) 1998 1997 1996
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<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,773 25,239 23,676
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses 3,769 4,029 1,965
Depreciation and amortization 6,564 5,072 5,210
Minority interests in earnings of subsidiaries 703 1,090 1,051
(Gain) loss on sale of securities (1,292) 133 (246)
Gain on sale of other real estate owned, net (26) (55) (7)
Other assets and liabilities, net 2,196 109 (3,073)
Proceeds from sales of other real estate owned 543 557 272
Cash receipts related to loans originated specifically for resale 188,677 87,129 90,687
Cash payments related to loans originated specifically for resale (189,451) (87,362) (90,450)
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Net cash provided by operating activities 41,456 35,941 29,085
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CASH FLOWS FROM INVESTING ACTIVITIES
Deposits in other banks, net (439) 32 1,155
Purchases of securities available for sale (234,000) (253,363) (164,126)
Purchases of securities held to maturity (7,425) (28,188) (19,641)
Proceeds from maturities of securities available for sale 165,340 95,876 87,257
Proceeds from maturities of securities held to maturity 86,918 24,531 42,636
Proceeds from sales of securities available for sale 67,179 130,031 80,258
Loans and leases, net (217,805) (153,381) (118,453)
Acquisitions, net of cash acquired -- (8,203) --
Acquisition of premises and equipment (7,430) (9,357) (5,511)
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Net cash used by investing activities (147,662) (202,022) (96,425)
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CASH FLOWS FROM FINANCING ACTIVITIES
Noninterest bearing deposits, net (28,664) (10,637) (19,361)
Interest bearing deposits (excluding certificates of deposit), net 73,565 21,087 (26,881)
Certificates of deposits, net (10,812) 33,101 48,405
Federal funds purchased and repurchase agreements, net 60,108 (40,410) 17,830
Other short-term borrowings, net (61,100) 169,273 64,433
Long-term debt, net 64,760 (30,759) (15,281)
Acquisition of and dividends paid to minority interests (7,021) (850) (855)
Redeemable preferred stock (60) -- --
Dividends paid (11,880) (10,800) (9,000)
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Net cash provided by financing activities 78,896 130,005 59,290
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Net decrease in cash and due from banks (27,310) (36,076) (8,050)
Cash and due from banks
Beginning of year 135,966 159,832 127,786
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End of period $ 108,656 123,756 119,736
===========================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. FINANCIAL STATEMENTS. The condensed financial statements included
herein have been prepared by Bremer Financial Corporation (the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading.
B. GENERAL. The consolidated financial statements include the accounts of
Bremer Financial Corporation and Subsidiaries. All material
intercompany transactions and balances are eliminated in consolidation.
The Company has not changed its accounting policies from those stated
for the year ended December 31, 1997 and included in its Annual Report
on Form 10-K for the year ended December 31, 1997 filed on March 13,
1998.
C. INTERIM PERIOD ADJUSTMENTS. The consolidated financial statements
contained herein reflect all adjustments which are, in the opinion of
management, of a normal recurring nature and are necessary for a fair
statement of the financial position, results of operations, and cash
flows for the unaudited interim periods. The results of operations for
the interim periods are not necessarily indicative of the results to be
expected for the entire year.
D. EARNINGS PER SHARE CALCULATIONS. Basic earnings per common share have
been computed using 12,000,000 common shares outstanding for all
periods. The Company does not have any dilutive securities.
E. MORTGAGE-BACKED SECURITIES. Mortgage-backed securities classified as
held to maturity are valued at amortized historical cost, increased for
accretion of discounts and reduced by amortization of premiums,
computed by the constant yield method. Mortgage-backed securities
classified as available for sale are valued at current market value
with the resulting unrealized holding gains and losses excluded from
earnings and reported, net of tax, as a separate component of
shareholder's equity. Gains and losses on these securities are computed
based on the adjusted cost of the specific securities sold.
F. REDEEMABLE CLASS A COMMON STOCK. At September 30, 1998, the 960,000
class A shares were generally redeemable at $24.75 per share. Since
January 1, 1998 and through September 30, 1998, options to call
24,957.4125 shares had been exercised and the shares subsequently
purchased by the Company's ESOP and profit sharing plan from employees
and non-employee directors of the Company and the Company's
Subsidiaries. During the same period, a total of 3,100 shares changed
hands directly between individuals.
G. 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 at the date of the financial
statements and the reported amounts of income and expenses during the
reported period. Actual results may differ from those estimates.
7
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H. COMPREHENSIVE INCOME. In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (FAS) No. 130,
"Reporting Comprehensive Income." The Company adopted FAS No. 130 on
January 1, 1998, and reported comprehensive income for the third
quarter of 1998 of $10.6 million as compared to the $11.1 million
reported for the third quarter of 1997. On a year-to-date basis,
comprehensive income was $30.0 million, as compared to the $28.0
million earned in the first nine months of 1997. Comprehensive income
is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period
except those resulting from investments by owners and distributions to
owners. For the Company, comprehensive income consists of net income,
as reported in the financial statements, and other comprehensive
income, which consists of the change in unrealized gains and losses on
securities available for sale.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Earnings Summary
Bremer Financial Corporation (the "Company") recorded net income of $9.9 million
for the third quarter of 1998, a 5.8% increase from the $9.4 million earned in
the third quarter of 1997. On a year-to-date basis, earnings were $29.8 million,
up 18.0% or $4.5 million from the $25.2 million earned in the first nine months
of 1997. Contributing positively to earnings in the first nine months of 1998
were a 28.0% or $7.7 million increase in noninterest income coupled with an
increase in net interest income of 7.2% or $6.1 million and a $260 thousand
decrease in the provision for credit losses. Partially offsetting these positive
increases were a 9.2% or $6.6 million increase in noninterest expense.
Return on average assets (ROA) was 1.21% for the third quarter of 1998, compared
to 1.26% for the same period in 1997. For the first nine months of 1998, ROA
increased from 1.20% to 1.26%, as compared to the first nine months of 1997.
Return on average realized equity (RORE) was 13.63% for the third quarter of
1998, compared to 14.05% for the same quarter of 1997. On a year-to-date basis,
RORE was 14.09%, compared to 12.97% recorded for the first nine months of 1997.
Table I presents a summary of the components affecting the change in
year-to-date return on assets from September 30, 1997 to September 30, 1998.
Shareholder's Equity and Dividends
Shareholder's equity and redeemable class A common stock totaled $296.9 million
at September 30, 1998, representing a book value per share of $24.75, a 9.4%
increase from $22.62 at September 30, 1997. Dividends paid per share of $.33 in
the third quarter of 1998 remained unchanged from the first and second quarters
of 1998, and are up from the $.30 dividend paid in each of the four quarters of
1997. The Company maintains a strong capital position compared to industry
standards. Table II presents various regulatory capital ratios.
Securities classified as available for sale are recorded at market value on the
Company's balance sheet, with unrealized gains or losses, net of tax, included
in shareholder's equity. The net unrealized gain or loss in shareholder's equity
had the effect of increasing the book value per share by $.46 as of September
30, 1998 and increasing the book value per share by $.34 as of September 30,
1997.
Net Interest Income
Tax-equivalent net interest income for the third quarter of 1998 was $33.3
million, an increase of $1.3 million or 4.1% from the third quarter of 1997.
This increase in net interest income resulted from a 7.3% increase in average
earning assets, enhanced by acquisitions. The increase in earning assets more
than offset the decline in the net interest margin from 4.40% in the third
quarter of 1997 to 4.27% in the third quarter of 1998. On a year-to-date basis,
tax-equivalent net interest income was $97.5 million, an increase of $6.1
million or 6.7% over the $91.4 million realized in the first nine months of
1997. Table III presents the quarter-to-quarter comparison of tax-equivalent
net interest income and net interest margins.
For both the third quarter and year-to-date 1998, the net interest margin
declined, as presented in Table IV, resulting from a decrease in the spread
between yields on earning assets and costs on
9
<PAGE>
interest bearing liabilities. Positively impacting the margin for both the
quarter and year-to-date was a more favorable product mix, as compared to the
same periods in 1997. Negatively impacting the margin for the quarter were an
increase in interest reversals on problem loans and a decrease in yield-related
loan fees, as compared to the third quarter of 1997.
The Company uses various tools to assess its current interest rate sensitivity
position, such as gap analysis, simulation of future net interest income, and a
valuation model which measures the sensitivity of balance sheet valuations to
changes in interest rates. In the valuation model, the market value of each
asset and liability as of the reporting date is calculated by computing the
present value of all cash flows generated. The impact on valuations is then
calculated for a 200 basis point rate shock. At September 30, 1998, the
valuation model indicates that the value of assets would decline 3% with a 200
basis point increase in interest rates. After considering the impact on
liabilities and tax effects, the market value of equity impact from this 200
basis point increase in interest rates would be a decrease of 6%.
Nonperforming Assets
Table VI shows the details of nonperforming assets at September 30, 1998,
December 31, 1997 and September 30, 1997. Nonperforming assets, which include
nonperforming loans and leases and other real estate owned (OREO), were $14.6
million at September 30, 1998. This total represents an increase of $4.0 million
from December 31, 1997 and an increase of $3.0 million from September 30, 1997.
Nonperforming assets as a percentage of total loans, leases and OREO increased
to .67% as of September 30, 1998 from .54% as of December 31, 1997, and from
.59% as of September 30, 1997.
Nonperforming loans and leases, which include nonaccrual and restructured loans
and leases, were $14.1 million at September 30, 1998, an increase of $4.2
million from December 31, 1997 and an increase of $3.3 million from September
30, 1997. The ratio of nonperforming loans and leases to total loans and leases
increased to .65% at September 30, 1998 from .50% as of December 31, 1997, and
from .56% at September 30, 1997. The ratio of nonperforming assets and past due
loans and leases to total loans, leases and OREO increased from .72% at December
31, 1997 to .83% at September 30, 1998, and increased from .73% at September 30,
1997. The level of at-risk performing loans and leases (with an internal loan
review rating of either substandard, doubtful or loss) increased $8.9 million or
9.9% from $89.5 million at September 30, 1997 to $98.4 million at September 30,
1998. The ratio of classified loans and leases to total loans and leases has
remained unchanged at 5.2% from September 30, 1997 to September 30, 1998. Net
charge-offs were $1.7 million for the first nine months of 1998 as compared to
$799 thousand in the same period in 1997.
OREO, which includes real estate acquired in loan settlements, decreased $224
thousand from December 31, 1997 and $303 thousand from September 30, 1997 to
$467 thousand at September 30, 1998.
Reserve for Credit Losses
The Company's reserve for credit losses was 257.5% of nonperforming loans and
leases at September 30, 1998 compared to 347.1% at December 31, 1997 and 318.3%
at September 30, 1997. Management believes the current reserve is adequate to
cover the risks inherent in the portfolio, including the risk of nonperforming
loans and leases that have been identified for careful monitoring.
10
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The reserve for credit losses increased from $34.5 million at September 30, 1997
to $36.3 million at September 30, 1998. While the reserve for credit losses
increased $1.8 million or 5.4% from September 30, 1997 to September 30, 1998,
the loan portfolio increased 11.9%, causing the reserve to outstanding loans and
leases ratio to decline from 1.77% to 1.66%. Table VII presents the activity in
the reserve for credit losses.
Noninterest Income
As presented in Table VIII, noninterest income was $11.5 million for the third
quarter of 1998 compared to $10.0 million for the third quarter of 1997,
representing a $1.4 million or 14.4% improvement. On a year-to-date basis,
noninterest income was $35.3 million compared to $27.6 million in 1997, an
increase of $7.7 million or 28.0%. On a year-to-date basis, operating
noninterest income, which excludes investment securities gains and losses and a
non-recurring $1.1 million state tax refund, increased $5.2 million or 18.8%
over 1997, with all categories posting increases. This increase in operating
noninterest income was driven primarily by a $1.9 million increase in gain on
sale of loans, as residential real estate activity was more intense in the first
nine months of 1998 versus 1997 due to a more favorable interest rate
environment, and a $1.0 million or 8.8% increase in service charge income. In
addition, brokerage commissions increased $715 thousand, or 33.9%, and gain on
sale of other assets increased $589 thousand, related primarily to insurance
proceeds received from the damages sustained to bank facilities in 1997 from the
flooding in the Red River Valley area of North Dakota and Minnesota.
Noninterest Expense
As presented in Table IX, noninterest expense increased $1.9 million or 7.7%
compared to the third quarter of 1997. On a year-to-date basis, noninterest
expense increased $6.6 million or 9.2% compared to the first nine months of
1997. While operating expenses of acquired entities and market expansions
unfavorably impacted the comparison of noninterest expense between the first
nine months of 1998 and 1997, the Company experienced a significant decline in
data processing fees as a result of a new data processing contract with a third
party provider.
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 was 58.57% for the
first nine months of 1998 compared to 58.26% for the same period in 1997.
Contributing to this slight increase were increases in tax-equivalent net
interest income of 6.7% coupled with strong growth in recurring noninterest
income of 17.5% and growth in recurring noninterest expense of 9.7%.
Taxes
Comparing the first nine months of 1998 to the first nine months of 1997, the
Company's effective tax rate increased from 33.2% to 34.3%. This results from
proportionately more taxable than tax-exempt income during the first nine months
of 1998 compared to the same period in 1997.
11
<PAGE>
Balance Sheet Growth
Assets
Average total assets increased $283.2 million or 9.6% from the first nine months
of 1997 to the first nine months of 1998, while average earning assets increased
$266.6 million or 9.6% when comparing the same two periods.
Loans and Leases
From the first nine months of 1997 to the first nine months of 1998, average
loans and leases increased $258.7 million or 14.4%, driven by increases in all
loan categories. Average loans in the third quarter of 1998 increased $103.6
million from the second quarter of 1998, resulting from seasonal activity.
On a year-to-date basis, the increase in average loan volume in 1998 over 1997
was driven by commercial real estate, commercial, agricultural, residential real
estate, consumer, and tax-exempt loans which increased $102.4 million, $66.9
million, $56.2 million, $23.3 million, $8.0 million, and $1.9 million,
respectively. The Company is not involved in highly-leveraged transaction
lending or lending to foreign countries.
Securities
Average securities decreased $5.4 million or .6% from the first nine months of
1997 to the first nine months of 1998. Taxable securities decreased $3.1 million
or .4%, while tax-exempt securities decreased $2.3 million or 1.1%. The average
maturity of the portfolio was 45 months at September 30, 1998, with an average
yield to maturity on the $915.5 million portfolio of 6.80%, unrealized gains of
$6.7 million and unrealized losses of $25 thousand for held to maturity
securities. In accordance with FAS No. 115, the available for sale investments
are recorded inclusive of any unrealized gains or losses.
Liabilities
Comparing the first nine months of 1998 to the first nine months of 1997,
average interest bearing liabilities increased $230.2 million or 9.8%, while
average deposits increased $175.4 million or 7.7%. Average short-term
borrowings, which include federal funds purchased, securities sold under
agreements to repurchase, treasury tax and loan notes, Federal Home Loan Bank
(FHLB) advances and an unsecured revolving credit facility, increased $73.8
million or 25.1%. Most of the increase in short-term borrowings can be
attributed to an increase in the Company's FHLB advances over the first nine
months of 1997, as continued strong asset growth, coupled with slower growth in
deposits, created the need for this funding source. Average long-term debt,
which includes long-term FHLB advances and installment promissory notes issued
in connection with acquisitions, increased $3.5 million or 5.6%.
12
<PAGE>
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer systems being written using two
digits rather than four to define the applicable year. Any of the computer
programs used by the Company that have date-sensitive software may recognize a
date using "00" for the year as the year 1900 rather than the year 2000, or vice
versa. This could result in a system failure or miscalculations causing
disruptions of operations including an inability to process transactions,
calculate interest accruals, or engage in similar normal business activities.
The Company has a Year 2000 project in place to anticipate, correct, and plan
for the many ways the century date change may affect its systems, customers, and
business infrastructure. The Company's definition of Year 2000 readiness
requires that all systems and services are reasonably assured to function
effectively through all Year 2000 related date issues, with contingency plans
for all medium and high priority systems. At September 30, 1998, the Company was
62% complete with this process, based on number of services, and is scheduled to
be 92% percent complete at December 31, 1998 and 100% complete at June 30, 1999.
The Company's Year 2000 issues relating to third parties with which it holds a
material relationship are discussed below:
CORE APPLICATIONS. The Company's core application systems, which include loans,
deposits, investments, and general ledger, are handled by Information
Technologies, Inc. (ITI), which is owned by FiServ, one of the largest
distributors of bank software in the world. The Company is working closely with
this vendor, including one completed expansive test of all modules. A second
test will be conducted in February 1999 to verify readiness of their new
release, scheduled to be issued by December 31, 1998.
DATA AND ITEM PROCESSING. The two most transaction-intensive and system-critical
operations in banking are related to data and item processing. Data processing
is managed off site by Electronic Data Services, Inc. (EDS), the largest
processor of bank data in the world. EDS has extensive disaster recovery plans
that include a remote processing site. EDS has also helped the Company
coordinate an extensive integrated test of the Company's core systems, as well
as all ITI interfaced systems. Some reporting-related errors were discovered,
but all have been corrected as part of the new release from ITI. Item processing
is currently managed by FiServ, a major provider of item processing services
throughout the United States. The Company is working very closely with both
companies in testing and validating their efforts and contingency plans. In
March 1999, the Company will be migrating its item processing services from
FiServ to an in-house operation managed by EDS.
CUSTOMERS. The Company has assessed the Year 2000 readiness of most of its major
customers and included the results of Year 2000 assessments into its credit
review and approval process. The Company will continue this process to assess
all major customers through December 31, 1999.
The Company has budgeted $536 thousand for the twelve months ended December 31,
1998 on specific Year 2000 issues, of which approximately $416 thousand has been
expended for the nine months ended September 30, 1998. These costs were
primarily for software upgrades, infrastructure changes, and testing. The
Company is also spending approximately $3.9 million on a new PC network
infrastructure, due to be completed by May 1999, some of which is directly
related to Year 2000 issues and some of which is additional investments in
technology. The Company estimates an additional $20-$100 thousand may be
expended in 1999 for costs associated with Year 2000 issues.
13
<PAGE>
The Company has identified three worst case scenarios that it has been
addressing and will continue to address through June 1999, as described below:
POWER OUTAGES. Bremer Services, which provides operations and support services
to the Subsidiary Banks, can operate as a contingency bank for any of the
Company's Subsidiary Banks through the Phone Bank. The facility will have
generators by February 1999 to operate and continue connectivity to its data
processor for access to core applications. Bremer Services has a disaster
recovery plan completed which will be tested again by December 31, 1998, except
for the generators, which will be tested in February 1999. Each Subsidiary Bank
will be creating their contingency plans for re-routing customers to Bremer
Services and are scheduled to be completed by June 30, 1999.
BREMER SERVICES FAILURE. Bremer Services houses the Company's connection to its
data processor and the staff to deal with customer service, phone banking, and
other operational issues. If Bremer Services is incapacitated, the Company has a
separate route for all Subsidiary Banks to get to EDS through one of the
Company's Subsidiary Banks located in South St. Paul, Minnesota. The Company has
standby T1 lines in place ready to re-route bank transactions to EDS. These
lines are scheduled to be tested by December 31, 1998.
DATA PROCESSOR (EDS) FAILURE. EDS has a disaster recovery system that includes a
remote processing site for a complete replication of the Company's information.
If EDS is completely unavailable, the Company has manual procedures in place to
keep its doors open and serve customers. These bank-level plans will be
completed and reviewed by June 30, 1999.
14
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30 Three Months Ended September 30
-----------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 Change 1998 1997 Change
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total interest income $ 183,048 166,658 9.8% $ 62,700 58,843 6.6%
Net interest income 91,821 85,683 7.2 31,348 30,037 4.4
Net interest income (1) 97,482 91,380 6.7 33,270 31,975 4.1
Provision for credit losses 3,769 4,029 (6.5) 1,307 1,431 (8.7)
Noninterest income 35,294 27,574 28.0 11,456 10,010 14.4
Noninterest expense 78,057 71,465 9.2 26,450 24,553 7.7
Net income 29,773 25,239 18.0 9,913 9,366 5.8
Dividends 11,880 10,800 10.0 3,960 3,600 10.0
AVERAGE BALANCES
Assets 3,222,669 2,939,420 9.6 3,289,205 3,063,270 7.4
Loans and leases 2,060,385 1,801,678 14.4 2,158,121 1,895,666 13.8
Securities 956,597 961,996 (0.6) 914,280 983,994 (7.1)
Deposits 2,441,003 2,265,570 7.7 2,460,102 2,313,540 6.3
Redeemable class A common stock 23,032 21,026 9.5 23,491 21,415 9.7
Shareholder's equity 264,863 241,805 9.5 270,145 246,273 9.7
PERIOD-END BALANCES
Assets 3,289,661 3,144,387 4.6
Loans and leases 2,180,986 1,948,717 11.9
Securities 915,538 989,241 (7.5)
Deposits 2,476,587 2,379,926 4.1
Redeemable class A common stock 23,755 21,716 9.4
Shareholder's equity 273,186 249,739 9.4
FINANCIAL RATIOS
Return on assets (2) 1.26% 1.20 5.0 1.21% 1.26 (4.0)
Return on realized equity (3)(4) 14.09 12.97 8.6 13.63 14.05 (3.0)
Average equity/assets (3)(4) 8.77 8.85 (0.9) 8.77 8.63 1.6
Dividend payout 39.90 42.79 (6.8) 39.95 38.44 3.9
Net interest margin (1) 4.30 4.42 (2.7) 4.27 4.40 (3.0)
Efficiency ratio 58.57 58.26 0.5 58.26 56.96 2.3
Net charge-offs/average loans and leases 0.11 0.06 83.3 0.08 0.05 60.0
Reserve/period-end loans and leases 1.66 1.77 (6.2) 1.66 1.77 (6.2)
PER SHARE OF COMMON STOCK (3)
Net income-basic $ 2.48 2.10 18.0% $ 0.83 0.78 5.8%
Dividends paid 0.99 0.90 10.0 0.33 0.30 10.0
Book value 24.75 22.62 9.4 24.75 22.62 9.4
Realized book value (4) 24.29 22.28 9.0 24.29 22.28 9.0
</TABLE>
(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.
================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
TABLE I
CHANGES IN RETURN ON ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year-To-Date
September 30
1998 vs 1997
- --------------------------------------------------------------------------------------------
<S> <C>
Return on assets, prior period 1.20%
- --------------------------------------------------------------------------------------------
Increases
Gain on sale of loans 0.07
Gain on sale of securities 0.06
State tax refund 0.05
Gain on sale of other assets 0.02
Brokerage 0.02
Provision for credit losses 0.03
Employee benefits 0.02
Printing, postage and office supplies 0.02
Data processing fees 0.04
- --------------------------------------------------------------------------------------------
Total increases 0.33
- --------------------------------------------------------------------------------------------
Decreases
Net interest income (TEB) 0.11
Salaries and wages 0.02
Marketing 0.02
Professional fees 0.02
FDIC premiums and examination fees 0.02
Provision for income taxes 0.05
Other noninterest expense, net 0.03
- --------------------------------------------------------------------------------------------
Total decreases 0.27
- --------------------------------------------------------------------------------------------
Return on assets, current period 1.26%
============================================================================================
</TABLE>
16
<PAGE>
TABLE II
CAPITAL RATIOS (1)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
September 30 December 31 September 30 Regulatory
1998 1997 1997 Minimums
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Equity to assets (2) 9.03% 8.79 8.63 --
Equity to tangible assets (2) 8.70 8.67 8.95 --
Tier I capital (3) 12.07 12.69 12.46 4.00
Tier I and tier II capital (3) 13.32 13.94 13.72 8.00
Leverage ratio (3) 8.56 8.70 8.61 3.00
</TABLE>
(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.
17
<PAGE>
TABLE III
NET INTEREST INCOME / MARGINS (TEB)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Net Net
Interest Interest
(DOLLARS IN THOUSANDS) Income Margin
- ----------------------------------------------------------------------------------
<S> <C> <C>
Quarter
- -------
1998
Third $ 33,270 4.27%
Second 32,686 4.31
First 31,527 4.32
1997
Fourth 32,790 4.47
Third 31,974 4.40
Second 30,570 4.45
First 28,835 4.41
1996
Fourth 29,732 4.40
Third 29,419 4.33
Second 28,734 4.38
First 27,977 4.35
1995
Fourth 28,405 4.37
Third 27,637 4.31
Second 26,369 4.31
First 25,487 4.36
==================================================================================
</TABLE>
18
<PAGE>
TABLE IV
CHANGES IN NET INTEREST INCOME (TEB)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30 Three Months Ended September 30
(DOLLARS IN THOUSANDS) 1998 vs 1997 1998 vs 1997
- --------------------------------------------------------------------------------------------------------------
Net Net Net Net
Interest Interest Interest Interest
Income Margin Income Margin
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CHANGE IN VOLUME
Earning assets $ 16,616 $ 4,463
Interest bearing liabilities (7,943) (2,158)
---------- ----------
8,673 2,305
CHANGE IN INTEREST RATE SPREAD
Earning assets (1,389) (0.06)% (812) (0.10)%
Interest bearing liabilities (2,430) (0.11) (494) (0.06)
---------- ---------- ---------- ----------
(3,819) (0.17) (1,306) (0.16)
CHANGE IN PRODUCT MIX
Earning assets 890 0.04 501 0.07
Interest bearing liabilities 122 0.01 107 0.01
---------- ---------- ---------- ----------
1,012 0.05 608 0.08
OTHER CHANGES
Nonaccruing loans (89) -- (247) (0.03)
Yield-related loan fees 325 0.01 (64) (0.01)
Free funds -- (0.01) -- (0.01)
---------- ---------- ---------- ----------
236 0.00 (311) (0.05)
CHANGE IN NET INTEREST INCOME 6,102 (0.12) 1,296 (0.13)
Net interest income, prior period 91,380 4.42 31,974 4.40
---------- ---------- ---------- ----------
Net interest income, current period $ 97,482 4.30% $ 33,270 4.27%
========== ========== ========== ==========
</TABLE>
19
<PAGE>
TABLE V
CHANGES IN NET INTEREST INCOME (TEB)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Nine Months Ended September 30
------------------------------------------------
(IN THOUSANDS) 1998 vs 1997
- ------------------------------------------------------------------------------------------
Volume Yield/Rate(1) Total
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN:
INTEREST INCOME
Loans and leases $ 17,650 (279) 17,371
Taxable securities (34) (1,323) (1,357)
Tax-exempt securities (139) (81) (220)
Interest bearing deposits -- -- --
Federal funds sold -- 567 567
Other earning assets 30 (37) (7)
------------ ------------ ------------
Total 17,507 (1,153) 16,354
INTEREST EXPENSE
Savings deposits 1,702 1,893 3,595
Other time deposits 3,007 527 3,534
Short-term borrowings 2,960 112 3,072
Long-term debt 152 (101) 51
------------ ------------ ------------
Total 7,821 2,431 10,252
------------ ------------ ------------
NET INTEREST INCOME $ 9,686 (3,584) 6,102
==========================================================================================
</TABLE>
(1) ALL CHANGES IN NET INTEREST INCOME, OTHER THAN THOSE DUE TO VOLUME, HAVE
BEEN ALLOCATED TO YIELD/RATE.
20
<PAGE>
TABLE VI
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
September 30 December 31 September 30
(DOLLARS IN THOUSANDS) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans and leases $ 13,509 8,958 10,003
Restructured loans and leases 589 910 822
- ------------------------------------------------------------------------------------------------------------
Total nonperforming loans and leases 14,097 9,868 10,825
Other real estate owned (OREO) 467 691 770
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 14,564 10,559 11,595
============================================================================================================
Past due loans and leases * $ 3,546 3,573 2,599
============================================================================================================
Nonperforming loans and leases to total loans and leases 0.65% 0.50 0.56
Nonperforming assets to total loans, leases and OREO 0.67 0.54 0.59
Nonperforming assets and past due loans and leases* to
total loans, leases and OREO 0.83 0.72 0.73
Reserve to nonperforming loans and leases 257.51 347.11 318.29
Reserve to total loans and leases 1.66 1.74 1.77
============================================================================================================
</TABLE>
* PAST DUE LOANS AND LEASES INCLUDE ACCRUING LOANS AND LEASES 90 DAYS OR MORE
PAST DUE.
21
<PAGE>
TABLE VII
RESERVE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Nine Months Ended September 30
--------------------------------
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Beginning of period $ 34,253 30,482
Charge-offs (2,596) (1,578)
Recoveries 875 779
- ----------------------------------------------------------------------------------
Net charge-offs (1,721) (799)
Provision for credit losses 3,769 4,029
Reserve related to acquired assets -- 743
- ----------------------------------------------------------------------------------
End of period $ 36,301 34,455
==================================================================================
</TABLE>
22
<PAGE>
TABLE VIII
NONINTEREST INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Nine Months Ended September 30 Increase/(Decrease)
--------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 Dollar Percent
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges $ 12,631 11,607 1,024 8.82%
Insurance 5,239 4,907 332 6.77
Trust 5,145 4,574 571 12.48
Brokerage 2,826 2,111 715 33.87
Gain on sale of loans 3,491 1,628 1,863 114.43
Gain on sale of other assets 715 126 589 NM
Other 2,854 2,754 100 3.63
- ------------------------------------------------------------------------------------------------------
Operating noninterest income 32,901 27,707 5,194 18.75
Gain / (loss) on sale of securities 1,292 (133) 1,425 NM
State tax refund 1,101 -- 1,101 NM
- ------------------------------------------------------------------------------------------------------
Total $ 35,294 27,574 7,720 28.00%
======================================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Three Months Ended September 30 Increase/(Decrease)
--------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 Dollar Percent
- ------------------------------------------------------------------------------------------------------
Service charges $ 4,373 4,063 310 7.63%
Insurance 2,047 1,786 261 14.61
Trust 1,701 1,563 138 8.83
Brokerage 1,025 768 257 33.46
Gain on sale of loans 1,147 779 368 47.24
Gain on sale of other assets 155 35 120 NM
Other 854 956 (102) (10.67)
- ------------------------------------------------------------------------------------------------------
Operating noninterest income 11,302 9,950 1,352 13.59
Gain on sale of securities 154 60 94 156.67
State tax refund -- -- -- --
- ------------------------------------------------------------------------------------------------------
Total $ 11,456 10,010 1,446 14.45%
======================================================================================================
</TABLE>
23
<PAGE>
TABLE IX
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Nine Months Ended September 30 Increase/(Decrease)
--------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 Dollar Percent
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and wages $ 36,469 32,744 3,725 11.38%
Employee benefits 9,191 8,740 451 5.16
Occupancy 4,585 4,413 172 3.90
Furniture and equipment 5,584 5,042 542 10.75
Printing, postage and office supplies 3,832 3,852 (20) (0.52)
Marketing 3,224 2,595 629 24.24
Data processing fees 4,516 5,044 (528) (10.47)
Professional fees 1,065 516 549 106.40
Other real estate owned 58 88 (30) (34.09)
Minority interest in earnings 703 1,090 (387) (35.50)
FDIC premiums and examination fees 888 352 536 152.27
Other 7,942 6,989 953 13.64
- --------------------------------------------------------------------------------------------------------
Total $ 78,057 71,465 6,592 9.22%
========================================================================================================
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Three Months Ended September 30 Increase/(Decrease)
--------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 Dollar Percent
- --------------------------------------------------------------------------------------------------------
Salaries and wages $ 12,395 11,229 1,166 10.38%
Employee benefits 3,054 2,857 197 6.90
Occupancy 1,510 1,484 26 1.75
Furniture and equipment 1,934 1,735 199 11.47
Printing, postage and office supplies 1,243 1,323 (80) (6.05)
Marketing 1,127 877 250 28.51
Data processing fees 1,532 1,503 29 1.93
Professional fees 356 255 101 39.61
Other real estate owned (2) 27 (29) (107.41)
Minority interest in earnings 109 381 (272) (71.39)
FDIC premiums and examination fees 295 302 (7) (2.32)
Other 2,897 2,580 317 12.29
- --------------------------------------------------------------------------------------------------------
Total $ 26,450 24,553 1,897 7.73%
========================================================================================================
</TABLE>
24
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
SEPTEMBER YTD 1998 SEPTEMBER YTD 1997
----------------------------------- -----------------------------------
ASSETS Average Rate/ Average Rate/ % Change
Loans and Leases (net of unearned discount) Balance Interest Yield Balance Interest Yield Avg Bal
---------- ---------- ------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 425,778 $ 29,255 9.19% $ 358,870 $ 24,609 9.17% 18.64%
Commercial Real Estate 486,174 33,134 9.11 383,748 26,013 9.06 26.69
Agricultural 442,050 30,309 9.17 385,856 26,748 9.27 14.56
Residential Real Estate 395,679 25,898 8.75 372,369 24,566 8.82 6.26
Consumer 256,563 17,459 9.10 248,603 16,859 9.07 3.20
Tax Exempt 54,140 4,081 10.08 52,232 3,969 10.16 3.65
---------- ---------- ---------- ----------
TOTAL LOANS AND LEASES 2,060,384 140,136 9.09 1,801,678 122,764 9.11 14.36
Reserve for Credit Losses (35,589) (31,885) 11.62
---------- ----------
NET LOANS AND LEASES 2,024,795 1,769,793 14.41
Mortgage Backed Securities 667,912 31,604 6.33 614,077 30,064 6.55 8.77
Taxable Other 81,604 3,783 6.20 138,550 6,680 6.45 (41.10)
Tax Exempt 207,081 12,526 8.09 209,369 12,747 8.14 (1.09)
---------- ---------- ---------- ----------
TOTAL SECURITIES 956,597 47,913 6.70 961,996 49,491 6.88 (0.56)
Total Fed Funds Sold 12,787 567 5.93 0 0 NM NM
Other earning assets 2,281 93 5.45 1,755 100 7.62 29.97
---------- ---------- ---------- ----------
TOTAL EARNING ASSETS 3,032,049 188,709 8.32 2,765,429 172,355 8.33 9.64
Total Cash & Due from Banks 104,097 96,393 7.99
Nonearning assets 122,112 109,483 11.53
---------- ----------
TOTAL ASSETS $3,222,669 $2,939,420 9.64
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Non-Interest Bearing Deposits $ 297,409 $ 274,934 8.17
Interest Bearing Deposits
Savings and NOW accounts 291,324 3,454 1.59 301,313 3,769 1.67 (3.32)
Money Market Checking 155,994 1,644 1.41 151,399 1,746 1.54 3.04
Money Market Savings 335,953 10,210 4.06 248,566 6,198 3.33 35.16
Savings Certificates 1,178,024 50,541 5.74 1,123,824 47,829 5.69 4.82
Certificates over $100K 182,299 7,737 5.67 165,534 6,915 5.59 10.13
---------- ---------- ---------- ----------
TOTAL INTEREST BEARING DEPOSITS 2,143,594 73,586 4.59 1,990,636 66,457 4.46 7.68
TOTAL DEPOSITS 2,441,003 2,265,570 7.74
Total Short Term Borrowings 367,836 14,868 5.40 294,060 11,796 5.36 25.09
Total Long Term Debt 65,303 2,773 5.68 61,841 2,722 5.88 5.60
---------- ---------- ---------- ----------
TOTAL INTEREST BEARING LIABILITIES 2,576,733 91,227 4.73 2,346,537 80,975 4.61 9.81
Other liabilities 51,782 43,355 19.44
TOTAL LIABILITIES 2,925,924 2,664,826 9.80
Minority Interest 6,750 9,588 (29.60)
Redeemable Preferred Stock 2,100 2,175 (3.45)
Redeemable Class A Common Stock 23,032 21,026 9.54
Shareholder's equity 264,863 241,805 9.54
---------- ----------
TOTAL LIABILITIES AND EQUITY $3,222,669 $2,939,420 9.64
========== ==========
Net Interest Income $ 97,482 $ 91,380
========== ==========
Gross Spread 3.59% 3.72%
Percent of earning assets
Interest Income 8.32 8.33
Interest Cost 4.02 3.91
------- -------
NET INTEREST MARGIN 4.30% 4.42%
</TABLE>
25
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
THIRD QUARTER 1998 THIRD QUARTER 1997
----------------------------------- -----------------------------------
ASSETS Average Rate/ Average Rate/ % Change
Loans and Leases (net of unearned discount) Balance Interest Yield Balance Interest Yield Avg Bal
---------- ---------- ------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 448,648 $ 10,327 9.13% $ 372,868 $ 8,738 9.30% 20.32%
Commercial Real Estate 516,619 11,728 9.01 399,720 9,076 9.01 29.25
Agricultural 486,110 11,138 9.09 426,832 10,030 9.32 13.89
Residential Real Estate 393,678 8,649 8.72 389,279 8,676 8.84 1.13
Consumer 256,573 5,825 9.01 254,652 5,822 9.07 0.75
Tax Exempt 56,492 1,417 9.95 52,315 1,324 10.04 7.98
---------- ---------- ---------- ----------
TOTAL LOANS AND LEASES 2,158,120 49,084 9.02 1,895,666 43,666 9.14 13.84
Reserve for Credit Losses (36,403) (33,349) 9.16
---------- ----------
NET LOANS AND LEASES 2,121,717 1,862,317 13.93
Mortgage Backed Securities 646,227 10,147 6.23 644,439 10,647 6.55 0.28
Taxable Other 59,558 892 5.94 126,257 2,058 6.47 (52.83)
Tax Exempt 208,495 4,218 8.03 213,298 4,358 8.11 (2.25)
---------- ---------- ---------- ----------
TOTAL SECURITIES 914,280 15,257 6.62 983,994 17,063 6.88 (7.08)
Total Fed Funds Sold 18,031 245 5.39 0 0 NM NM
Other earning assets 2,538 35 5.47 1,737 51 11.65 46.11
---------- ---------- ---------- ----------
TOTAL EARNING ASSETS 3,092,969 64,621 8.29 2,881,397 60,780 8.37 7.34
Total Cash & Due from Banks 107,383 99,702 7.70
Nonearning assets 125,256 115,520 8.43
---------- ----------
TOTAL ASSETS $3,289,205 $3,063,270 7.38
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Non-Interest Bearing Deposits $ 306,431 $ 293,172 4.52
Interest Bearing Deposits
Savings and NOW accounts 288,595 1,123 1.54 308,920 1,312 1.68 (6.58)
Money Market Checking 152,566 525 1.37 149,691 580 1.54 1.92
Money Market Savings 351,704 3,610 4.07 249,951 2,144 3.40 40.71
Savings Certificates 1,174,529 16,923 5.72 1,140,016 16,440 5.72 3.03
Certificates over $100K 186,277 2,670 5.69 171,790 2,438 5.63 8.43
---------- ---------- ---------- ----------
TOTAL INTEREST BEARING DEPOSITS 2,153,671 24,851 4.58 2,020,368 22,914 4.50 6.60
TOTAL DEPOSITS 2,460,102 2,313,540 6.33
Total Short Term Borrowings 383,164 5,140 5.32 364,630 5,013 5.45 5.08
Total Long Term Debt 90,305 1,361 5.98 59,073 879 5.90 52.87
---------- ---------- ---------- ----------
TOTAL INTEREST BEARING LIABILITIES 2,627,140 31,351 4.73 2,444,071 28,806 4.68 7.49
Other liabilities 56,445 46,386 21.69
TOTAL LIABILITIES 2,990,016 2,783,629 7.41
Minority Interest 3,470 9,758 (64.44)
Redeemable Preferred Stock 2,084 2,195 (5.06)
Redeemable Class A Common Stock 23,491 21,415 9.69
Shareholder's equity 270,145 246,273 9.69
---------- ----------
TOTAL LIABILITIES AND EQUITY $3,289,205 $3,063,270 7.38
========== ==========
Net Interest Income $ 33,270 $ 31,974
========== ==========
Gross Spread 3.55% 3.69%
Percent of earning assets
Interest Income 8.29 8.37
Interest Cost 4.02 3.97
------- -------
NET INTEREST MARGIN 4.27% 4.40%
</TABLE>
26
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other information.
(a) Under the Securities Exchange Act of 1934 ("Exchange Act"), the
Company's stockholders may submit proposals to be considered at an
annual stockholders' meeting. Rule 14a-8 under the Exchange Act sets
forth the procedure and requirements for requesting that a company
include these proposals in its proxy statement. However, a stockholder
may submit proposals to be voted on at an annual meeting without having
the proposals included in the company's proxy statement. These
proposals are known as "non-Rule 14a-8 proposals."
Rule 14a-4(c)(1) under the Exchange Act states when the proxies named
by a company for an annual meeting may excercise their discretionary
voting powers for proposals not included in the company's proxy
statement, including non-Rule 14a-8 stockholder proposals. Rule
14a-4(c)(1) was recently amended to provide that proxies named by a
company to vote at an annual meeting may be given discretionary
authority to vote all proxies with respect to any non-Rule 14a-8
proposals which properly come before the annual meeting for a vote of
the stockholders if (i) the company has not received advance notice of
the proposal at least 45 days before the date on which the company
first mailed its proxy materials for the prior year's annual
stockholder's meeting and (ii) stockholders have been notified by the
company of this 45-day advance notice requirement.
The Company hereby notifies its stockholders that for the annual
meeting of stockholders expected to be held in April 1999, the deadline
for notifying the Company of any non-Rule 14a-8 stockholder proposals
is February 1, 1999. Notice of any such proposal must be given in
writing to the Secretary of the Company, Ms. Janice Aus, Bremer
Financial Corporation, 445 Minnesota Street, Suite 2000, St. Paul,
Minnesota 55101. Therefore, the Company's proxies will be able to
exercise their discretionary voting authority with respect to any non-
Rule 14a-8 proposal not submitted to the Company or submitted to the
Company after February 1, 1999.
The notification deadline for stockholders wishing to have a Rule 14a-8
proposal considered for inclusion in the Company's proxy solicitation
materials for the Annual Meeting of Stockholders to be held in 1999 is
November 16, 1998, as set forth in the Company's Proxy Statement dated
March 16, 1998. Such proposals must be set forth in writing and
received by the Secretary of the Company, Ms. Janice Aus, at the above
address on or before November 16, 1998.
(b) On January 1, 1998, First American Insurance Agencies, Inc. of St.
Paul, Minnesota (a wholly-owned subsidiary of the Company) merged with
First American Insurance Agencies, Inc. of Casselton, North Dakota
(another wholly-owned subsidiary of the Company).
(c) This Quarterly Report on Form 10-Q contains a number of forward-looking
statements which reflect the current views of the Company's management
with respect to future events that will have an effect on its future
financial performance. These forward-looking statements are subject to
various risks and uncertainties that could cause actual results to
differ materially from historical results or those currently
anticipated. Readers are cautioned not to put undue reliance on these
forward-looking statements.
27
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are being filed as part of this Quarterly Report on Form
10-Q.
(b) No Current Reports on Form 8-K were filed during the quarter ended
September 30, 1998 or during the period from September 30, 1998 to the
date of this Quarterly Report on Form 10-Q.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1998 BREMER FINANCIAL CORPORATION
By: /s/ Stan K. Dardis
-----------------------------------
Stan K. Dardis
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Stuart F. Bradt
-----------------------------------
Stuart F. Bradt
Controller
(Chief Accounting Officer)
29
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