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 March 31, 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
Bremer Financial Corporation
(Exact name of registrant as specified in its charter)
Minnesota 41-0715583
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
445 Minnesota St., Suite 2000, St. Paul, MN 55101-2107
(Address of principal executive offices)
(Zip Code)
(612) 227-7621
(Registrant's telephone number, including area code)
Not applicable.
(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 March 31, 1998, there were 1,200,000 shares of class A common
stock and 10,800,000 shares of class B common stock outstanding.
<PAGE>
BREMER FINANCIAL CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
PART I -- FINANCIAL INFORMATION Page
Item 1 -- Financial Statements 2
Item 2 -- Management's Discussion and Analysis 8
of Financial Condition and Results
of Operations
PART II -- OTHER INFORMATION
Item 5-- Other information 23
Item 6 -- Exhibits and Reports on Form 8-K 23
Signatures 24
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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March 31 December 31 March 31
(IN THOUSANDS) 1998 1997 1997
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(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 114,616 135,966 98,664
Interest bearing deposits 1,922 1,886 1,598
Investment securities held to maturity (fair value of $174,036,
$185,402 and $178,581, respectively) 167,890 179,631 176,405
Mortgage-backed securities held to maturity (fair value of $70,286,
$91,508 and $104,696, respectively) 70,567 91,994 106,385
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY 238,457 271,625 282,790
Investment securities available for sale (amortized cost of $137,293,
$141,147 and $172,364, respectively) 138,515 142,051 172,005
Mortgage-backed securities available for sale (amortized cost of $632,603,
$570,363 and $493,392, respectively) 640,019 578,573 492,682
- --------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE 778,534 720,624 664,687
Loans and leases 2,003,510 1,969,085 1,739,348
Reserve for credit losses (35,206) (34,253) (31,139)
Unearned discount (5,067) (4,958) (4,016)
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NET LOANS AND LEASES 1,963,237 1,929,874 1,704,193
Premises and equipment, net 52,551 51,879 47,531
Interest receivable and other assets 58,859 61,847 58,215
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TOTAL ASSETS $ 3,208,176 3,173,701 2,857,678
==========================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest bearing deposits $ 301,834 344,521 276,587
Interest bearing deposits 2,141,238 2,097,977 1,965,431
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 2,443,072 2,442,498 2,242,018
Federal funds purchased and repurchase agreements 179,669 167,174 144,189
Other short-term borrowings 191,352 198,090 102,472
Long-term debt 55,119 30,238 62,312
Accrued expenses and other liabilities 42,201 44,697 38,590
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,911,413 2,882,697 2,589,581
Minority interests 10,059 10,011 9,449
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 22,770 22,308 20,520
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 254,637 249,079 233,939
Net unrealized gain (loss) on securities available for sale 4,594 4,843 (574)
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TOTAL SHAREHOLDER'S EQUITY 261,850 256,541 235,984
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 3,208,176 3,173,701 2,857,678
==========================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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Three Months Ended March 31
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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 $43,766 37,962 36,406
Securities
Taxable 12,228 11,543 12,002
Tax-exempt 2,740 2,758 2,756
Federal funds sold 222 -- --
Other 28 23 40
- -----------------------------------------------------------------------------------------------
Total interest income 58,984 52,286 51,204
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INTEREST EXPENSE
Deposits 24,024 21,590 21,600
Federal funds purchased and repurchase agreements 1,981 1,655 1,952
Other short term borrowings 2,662 1,188 1,101
Long term debt 656 889 431
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Total interest expense 29,323 25,322 25,084
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Net interest income 29,661 26,964 26,120
Provision for credit losses 1,209 858 611
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Net interest income after provision for credit losses 28,452 26,106 25,509
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NONINTEREST INCOME
Service charges 4,001 3,603 3,025
Insurance 1,686 1,664 1,452
Trust 1,742 1,495 1,311
Gain on sale of loans 1,112 328 470
Gain / (loss) on sale of securities 1,210 (265) 158
Other 2,268 1,739 1,577
- -----------------------------------------------------------------------------------------------
Total noninterest income 12,019 8,564 7,993
- -----------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and wages 11,734 10,376 9,545
Employee benefits 3,022 2,927 2,762
Occupancy 1,605 1,482 1,521
Furniture and equipment 1,797 1,668 1,530
Data processing fees 1,497 1,999 1,857
FDIC premiums and examination fees 300 (84) 435
Other 5,189 4,664 4,041
- -----------------------------------------------------------------------------------------------
Total noninterest expense 25,144 23,032 21,691
- -----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 15,327 11,638 11,811
Income tax expense 5,325 3,834 3,795
- -----------------------------------------------------------------------------------------------
NET INCOME $10,002 7,804 8,016
===============================================================================================
Per common share amounts
Net income-basic $ 0.83 0.65 0.67
Dividends paid 0.33 0.30 0.25
===============================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
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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
- ------------------------------------------------------------------------------------------------------------------------------------
<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)
- -----------------------------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 57 2,562 4,843 249,079 256,541
Net income 10,002 10,002
Dividends, $.33 per share (3,960) (3,960)
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 22 (484) (462)
Change in net unrealized gain (loss) on securities available for sale (271) (271)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 $57 2,562 4,594 254,637 261,850
===================================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INFORMATION SUBSEQUENT TO DECEMBER 31, 1997 IS UNAUDITED.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Ended March 31
-----------------------------------
(IN THOUSANDS) 1998 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,002 7,804 8,016
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses 1,209 858 611
Depreciation and amortization 2,033 1,748 1,731
Minority interests in earnings of subsidiaries 400 340 346
(Gain) loss on sale of securities (1,210) 265 (158)
Gain on sale of other real estate owned,net (1) (23) (8)
Other assets and liabilities, net (212) (1,356) (265)
Proceeds from sales of other real estate owned 286 54 263
Cash receipts related to loans originated specifically for resale 48,540 16,450 27,440
Cash payments related to loans originated specifically for resale (48,774) (16,506) (26,970)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,273 9,634 11,006
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits in other banks, net (36) 180 731
Purchases of securities available for sale (150,065) (103,123) (62,861)
Purchases of securities held to maturity (2,689) (6,525) (9,381)
Proceeds from maturities of securities available for sale 38,504 39,859 30,705
Proceeds from maturities of securities held to maturity 35,233 8,524 25,206
Proceeds from sales of securities available for sale 55,027 51,441 23,155
Loans and leases, net (34,338) 15,460 (8,854)
Acquisition of premises and equipment (2,304) (3,015) (1,530)
- ------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (60,668) 2,801 (2,829)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Noninterest bearing deposits, net (42,687) (55,556) (59,754)
Interest bearing deposits (excluding certificates of deposit), net 35,694 (2,133) (9,246)
Certificates of deposits, net 7,567 16,262 20,901
Federal funds purchased and repurchase agreements, net 12,495 (43,940) (20,707)
Other short-term borrowings, net (6,738) 15,580 24,853
Long-term debt, net 24,881 (77) 2,120
Minority interests acquired and dividends paid (147) (139) (272)
Redeemable preferred stock (60) -- --
Dividends paid (3,960) (3,600) (3,000)
- ------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 27,045 (73,603) (45,105)
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash and due from banks (21,350) (61,168) (36,928)
Cash and due from banks
Beginning of year 135,966 159,832 127,786
- ------------------------------------------------------------------------------------------------------------
End of year $ 114,616 98,664 90,858
============================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
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 March 31, 1998, the 960,000
class A shares were generally redeemable at $23.72 per share. Since
January 1, 1998 and through March 31, 1998, options to call
9,193.2044 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 2,600
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.
<PAGE>
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 first quarter of 1998 of $9.7 million as compared to
the $5.9 million reported for the first quarter 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.
<PAGE>
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 $10.0
million for the first quarter of 1998, compared to $7.8 million earned in the
first quarter of 1997. Contributing positively to first quarter earnings were a
$3.5 million or 40.3% increase in noninterest income and a $2.7 million or 10.0%
increase in net interest income. Partially offsetting these positive increases
were a $2.1 million or 9.2% increase in noninterest expense and a $351 thousand
increase in the provision for credit losses.
Return on average assets (ROA) was 1.34% for the first quarter of 1998, compared
to 1.17% for the same period in 1997. Return on average realized equity (RORE)
was 14.66% for the first quarter of 1998, compared to 12.41% for the same period
in 1997. Table I presents a summary of the components affecting the change in
return on assets from March 31, 1997 to March 31, 1998.
Shareholder's Equity and Dividends
Shareholder's equity and redeemable class A common stock totaled $284.6 million
at March 31, 1998, representing a book value per share of $23.72, an 11.0%
increase from $21.38 at March 31, 1997. Dividends paid per share in the first
quarter of 1998 increased to $.33 as compared to the $.30 paid in each of the
four quarters of 1997. The Company maintains a very 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 $.42 as of March 31,
1998 and decreasing the book value per share by $.05 as of March 31, 1997.
Net Interest Income
Tax-equivalent net interest income for the first quarter of 1998 was $31.5
million, an increase of $2.7 million or 9.3% from the first quarter of 1997.
This increase in net interest income resulted from an 11.6% increase in average
earning assets, enhanced by acquisitions. The increase in earning assets more
than offset the decline in the net interest margin from 4.41% in the first
quarter of 1997 to 4.32% in the first quarter of 1998. Table III presents the
quarter-to-quarter comparison of tax- equivalent net interest income and net
interest margins.
As presented in Table IV, in comparing the net interest margin for the first
quarter of 1998 to that of the first quarter of 1997, the margin was negatively
impacted by both a decrease in spread between yields on earning assets and costs
on interest bearing liabilities and a less favorable product mix. Positively
impacting the margin were an increase in yield-related loan fees and higher
levels of free funds.
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
<PAGE>
of all cash flows generated. The impact on valuations is then calculated for a
200 basis point rate shock. At March 31, 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 9%.
Nonperforming Assets
Table VI shows the details of nonperforming assets at March 31, 1998, December
31, 1997 and March 31, 1997. Nonperforming assets, which include nonperforming
loans and leases and other real estate owned (OREO), were $10.5 million at March
31, 1998. This total represents a decrease of $89 thousand from December 31,
1997 and a decrease of $680 thousand from March 31, 1997. Nonperforming assets
as a percentage of total loans, leases and OREO declined slightly to .52% as of
March 31, 1998 from .54% as of December 31, 1997, and have decreased from .64%
as of March 31, 1997.
Nonperforming loans and leases, which include nonaccrual and restructured loans
and leases, were $9.9 million at March 31, 1998, remaining unchanged from
December 31, 1997, and decreasing $596 thousand from March 31, 1997. The ratio
of nonperforming loans and leases to total loans and leases remained unchanged
at .50% at March 31, 1998 and December 31, 1997, and decreased from .60% at
March 31, 1997. The ratio of nonperforming assets and past due loans and leases
to total loans, leases and OREO increased slightly from .72% at December 31,
1997 to .73% at March 31, 1998 and decreased from .77% at March 31, 1997. The
level of at-risk performing loans and leases (with an internal loan review
rating of either substandard, doubtful or loss) increased $23.9 million or 27.2%
from $87.9 million at March 31, 1997 to $111.8 million at March 31, 1998.
Similarly, the ratio of classified loans and leases to total loans and leases
increased from 5.1% at March 31, 1997 to 5.6% at March 31, 1998. Net charge-offs
were $256 thousand for the first three months of 1998 as compared to net
charge-offs of $201 thousand in the same period of 1997.
OREO, which includes real estate acquired in loan settlements, decreased $115
thousand from December 31, 1997 and $84 thousand from March 31, 1997 to $576
thousand at March 31, 1998.
Reserve for Credit Losses
The Company's reserve for credit losses was 355.8% of nonperforming loans and
leases at March 31, 1998, compared to 347.1% at December 31, 1997 and 296.8% at
March 31, 1997. Significant loan growth within the past 12 months was an
important factor in management's decision to record a credit loss provision of
$1.2 million in the first quarter of 1998 compared to the $858 thousand
provision recorded in the first quarter of 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.
The reserve for credit losses increased from $31.1 million at March 31, 1997 to
$35.2 million at March 31, 1998. While the reserve for credit losses increased
$4.1 million or 13.1% from March 31, 1997 to March 31, 1998, the loan portfolio
increased 15.2%, causing the reserve to outstanding loans and leases ratio to
decline from 1.79% to 1.76%. Table VII presents the activity in the reserve for
credit losses.
<PAGE>
Noninterest Income
Noninterest income was $12.0 million for the first quarter of 1998 compared to
$8.6 million for the first quarter of 1997, representing a $3.5 million or 40.3%
improvement. Operating noninterest income, which excludes investment securities
gains and losses, increased 22.4% over the first quarter of 1997, with all
categories posting increases. This increase in operating noninterest income was
driven primarily by a $784 thousand increase in gain on sale of loans, as
residential real estate activity was more intense in the first quarter of 1998
versus 1997 due to a more favorable interest rate environment, and a $398
thousand increase in service charge income. In addition, gain on sale of other
assets increased $360 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. Table VIII presents a
comparison of significant noninterest income components.
Noninterest Expense
As presented in Table IX, noninterest expense increased $2.1 million or 9.2%
compared to the first quarter of 1997. While operating expenses of acquired
entities and select branch additions unfavorably impacted the comparison of
noninterest expense between the first quarters 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 improved slightly
from 59.33% at March 31, 1997 to 58.02% at March 31, 1998. Contributing to this
improvement were increases in tax-equivalent net interest income of 9.3% coupled
with strong growth in recurring noninterest income of 18.5%, driven by
significant increases in gain on sale of loans, and modest growth in recurring
noninterest expense of 8.9%.
Taxes
Comparing the first three months of 1998 to the first three months of 1997, the
Company's effective tax rate increased from 32.9% to 34.7%. This results from
proportionately more taxable than tax-exempt income during the first three
months of 1998 compared to the same period in 1997.
<PAGE>
Balance Sheet Growth
When comparing the first quarter 1998 average balances to first quarter 1997
average balances, acquisitions added approximately $65.0 million to average
total assets, increasing gross loans and leases by $45.0 million, securities by
$10.0 million, and total deposits by $67.0 million.
Assets
Average total assets increased $326.3 million or 11.6% from the first three
months of 1997 to the first three months of 1998, while average earning assets
increased $307.7 million or 11.6% when comparing the same two periods.
Loans and Leases
From the first quarter of 1997 to the first quarter of 1998, average loans and
leases increased $246.8 million or 14.4%, driven by increases in most loan
categories. Commercial real estate, commercial, agricultural, residential real
estate, and consumer loans and leases increased $90.5 million, $55.1 million,
$45.8 million, $41.5 million, and $14.2 million, respectively, while tax-exempt
loans and leases decreased $304 thousand. The Company is not involved in
highly-leveraged transaction lending or lending to foreign countries.
Securities
Average securities increased $44.6 million or 4.8% from the first quarter of
1997 to the first quarter of 1998. Taxable securities increased $44.7 million or
6.2%, while tax-exempt securities decreased $160 thousand or .08%. The average
maturity of the portfolio was 66.0 months at March 31, 1998, with an average
yield to maturity on the $1,017.0 million portfolio of 6.77%, unrealized gains
of $6.2 million and unrealized losses of $328 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 three months of 1998 to the first three months of 1997,
average interest bearing liabilities increased $258.5 million or 11.5%, while
average deposits increased $179.7 million or 8.1%. 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 $120.6
million or 53.8%. Most of the increase in short-term borrowings can be
attributed to an increase in the Company's FHLB advances over the first three
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, decreased $13.1 million or 20.9%. The
associated interest rate risk was monitored closely and steps were taken to
match repricability of assets and liabilities prior to any funding decisions.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS (UNAUDITED)
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Three Months Ended March 31
--------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 Change
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<S> <C> <C> <C>
OPERATING RESULTS
Total interest income $58,984 52,286 12.8%
Net interest income 29,661 26,964 10.0
Net interest income (1) 31,527 28,835 9.3
Provision for credit losses 1,209 858 40.9
Noninterest income 12,019 8,564 40.3
Noninterest expense 25,144 23,032 9.2
Net income 10,002 7,804 28.2
Dividends 3,960 3,600 10.0
AVERAGE BALANCES
Assets 3,147,870 2,821,578 11.6
Loans and leases 1,966,382 1,719,590 14.4
Securities 977,890 933,302 4.8
Deposits 2,409,899 2,230,210 8.1
Redeemable class A common stock 22,539 20,428 10.3
Shareholder's equity 259,195 234,927 10.3
PERIOD-END BALANCES
Assets 3,208,176 2,857,678 12.3
Loans and leases 1,998,443 1,735,332 15.2
Securities 1,016,991 947,477 7.3
Deposits 2,443,072 2,242,018 9.0
Redeemable class A common stock 22,770 20,520 11.0
Shareholder's equity 261,850 235,984 11.0
FINANCIAL RATIOS
Return on assets (2) 1.34% 1.17 14.5
Return on realized equity (3)(4) 14.66 12.41 18.1
Average equity/assets (3)(4) 8.79 9.04 (2.8)
Dividend payout 39.59 46.13 (14.2)
Net interest margin (1) 4.32 4.41 (2.0)
Efficiency ratio 58.02 59.33 (2.2)
Net charge-offs/average loans and leases 0.05 0.05 (0.0)
Reserve/period-end loans and leases 1.76 1.79 (1.7)
PER SHARE OF COMMON STOCK (3)
Net income-basic $0.83 0.65 28.2
Dividends paid 0.33 0.30 10.0
Book value 23.72 21.38 11.0
Realized book value (4) 23.30 21.43 8.7
==============================================================================================================================
</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.
<PAGE>
<TABLE>
<CAPTION>
TABLE I
CHANGES IN RETURN ON ASSETS
===================================================================================================
March 31
1998 vs 1997
---------------------------------------------------------------------------------------------------
<S> <C>
Return on assets, prior period 1.17%
---------------------------------------------------------------------------------------------------
Increases
Gain on sale of loans 0.10
Gain on sale of securities 0.19
Gain on sale of other assets 0.05
Trust fees 0.01
Data processing fees 0.09
Marketing 0.04
Employee benefits 0.03
Printing, postage and office supplies 0.02
---------------------------------------------------------------------------------------------------
Total increases 0.53
---------------------------------------------------------------------------------------------------
Decreases
Net interest income (TEB) 0.08
Provision for credit losses 0.03
Insurance commissions 0.02
Salaries and wages 0.02
Professional fees 0.02
FDIC premiums and examination fees 0.05
Provision for income taxes 0.11
Other noninterest expense, net 0.03
---------------------------------------------------------------------------------------------------
Total decreases 0.36
---------------------------------------------------------------------------------------------------
Return on assets, current period 1.34%
===================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE II
CAPITAL RATIOS (1)
====================================================================================================================================
March 31 December 31 March 31 Regulatory
1998 1997 1997 Minimums
------------------- ------------------------ ------------------- ----------------
<S> <C> <C> <C>
Equity to assets (2) 8.87% 8.79 8.98 --
Equity to tangible assets (2) 8.77 8.67 8.90 --
Tier I capital (3) 12.80 12.69 13.24 4.00
Tier I and tier II capital (3) 14.06 13.94 14.49 8.00
Leverage ratio (3) 8.81 8.70 9.04 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.
<PAGE>
TABLE III
NET INTEREST INCOME / MARGINS (TEB)
================================================================================
Net Net
Interest Interest
(DOLLARS IN THOUSANDS) Income Margin
- --------------------------------------------------------------------------------
Quarter
- -------------
1998
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
================================================================================
<PAGE>
TABLE IV
CHANGES IN NET INTEREST INCOME (TEB)
================================================================================
Three Months Ended March 31
(IN THOUSANDS) 1998 vs 1997
- --------------------------------------------------------------------------------
Net Net
Interest Interest
Income Margin
-------- --------
CHANGE IN VOLUME
Earning assets $ 6,279
Interest bearing liabilities (2,899)
--------
3,380
CHANGE IN INTEREST RATE SPREAD
Earning assets 274 0.04%
Interest bearing liabilities (1,096) (0.15)
-------- --------
(822) (0.11)
CHANGE IN PRODUCT MIX
Earning assets (29) (0.01)
Interest bearing liabilities (5) --
-------- --------
(34) (0.01)
CHANGE DUE TO NUMBER OF DAYS
Earning assets -- --
Interest bearing liabilities -- --
-------- --------
Other changes
Nonaccruing loans and leases (77) (0.01)
Yield-related loan and lease fees 245 0.03
30/360 investment adjustment -- --
Free funds -- 0.01
-------- --------
168 0.03
CHANGE IN NET INTEREST INCOME 2,692 (0.09)
Net interest income, prior period 28,835 4.41
-------- --------
Net interest income, current period $ 31,527 4.32%
======== ========
<PAGE>
TABLE V
CHANGES IN NET INTEREST INCOME (TEB)
================================================================================
Three Months Ended March 31
--------------------------------------
(IN THOUSANDS) 1998 VS 1997
- --------------------------------------------------------------------------------
Volume Yield/Rate (1) Total
------ -------------- -----
INCREASE (DECREASE) IN:
INTEREST INCOME
Loans and leases $ 5,498 311 5,809
Taxable securities 750 (66) 684
Tax-exempt securities (3) (26) (29)
Interest bearing deposits -- -- --
Federal funds sold -- 222 222
Other earning assets 5 1 6
------- ------ ------
Total 6,250 442 6,692
INTEREST EXPENSE
Savings deposits 471 621 1,092
Other time deposits 1,090 253 1,343
Short-term borrowings 1,529 270 1,799
Long-term debt (186) (48) (234)
------- ------ ------
Total 2,904 1,096 4,000
------- ------ ------
NET INTEREST INCOME $ 3,346 (654) 2,692
======= ====== ======
(1) ALL CHANGES IN NET INTEREST INCOME, OTHER THAN THOSE DUE TO VOLUME, HAVE
BEEN ALLOCATED TO YIELD/RATE.
<PAGE>
<TABLE>
<CAPTION>
TABLE VI
NONPERFORMING ASSETS
=================================================================================================
March 31 December 31 March 31
(DOLLARS IN THOUSANDS) 1998 1997 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans and leases $ 9,032 8,958 10,080
Restructured loans and leases 862 910 410
- -------------------------------------------------------------------------------------------------
Total nonperforming loans and leases 9,894 9,868 10,490
Other real estate owned (OREO) 576 691 660
- -------------------------------------------------------------------------------------------------
Total nonperforming assets $10,470 10,559 11,150
=================================================================================================
Past due loans and leases * $ 4,166 3,573 2,298
=================================================================================================
Nonperforming loans and leases to total loans and leases 0.50% 0.50 0.60
Nonperforming assets to total loans, leases and OREO 0.52 0.54 0.64
Nonperforming assets and past due loans and leases* to
total loans, leases and OREO 0.73 0.72 0.77
Reserve to nonperforming loans and leases 355.83 347.11 296.84
Reserve to total loans and leases 1.76 1.74 1.79
=================================================================================================
</TABLE>
* PAST DUE LOANS AND LEASES INCLUDE ACCRUING LOANS AND LEASES 90 DAYS OR MORE
PAST DUE.
<PAGE>
<TABLE>
<CAPTION>
TABLE VII
RESERVE FOR CREDIT LOSSES
==========================================================================================
Three Months Ended
March 31
------------------------------------
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning of period $34,253 30,482
Charge-offs (527) (490)
Recoveries 271 289
- ------------------------------------------------------------------------------------------
Net charge-offs (256) (201)
Provision for credit losses 1,209 858
- ------------------------------------------------------------------------------------------
End of period $35,206 31,139
==========================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE VIII
NONINTEREST INCOME
========================================================================================
Three Months Ended
March 31 Increase/(Decrease)
- ----------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 Dollar Percent
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service charges $4,001 3,603 398 11.05%
Insurance 1,686 1,664 22 1.32
Trust 1,742 1,495 247 16.52
Brokerage 745 643 102 15.86
Gain on sale of loans 1,112 328 784 239.02
Gain on sale of other assets 431 71 360 507.04
Other 1,092 1,025 67 6.54
- ----------------------------------------------------------------------------------------
Operating noninterest income 10,809 8,829 1,980 22.43
Gain / (loss) on sale of securities 1,210 (265) 1,475 556.60
- ----------------------------------------------------------------------------------------
Total $12,019 8,564 3,455 40.34%
========================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE IX
NONINTEREST EXPENSE
================================================================================================
Three Months Ended
March 31 Increase/(Decrease)
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 Dollar Percent
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and wages $11,734 10,376 1,358 13.09%
Employee benefits 3,022 2,927 95 3.25
Occupancy 1,605 1,482 123 8.30
Furniture and equipment 1,797 1,668 129 7.73
Printing, postage and office supplies 1,288 1,301 (13) (1.00)
Marketing 571 792 (221) (27.90)
Data processing fees 1,497 1,999 (502) (25.11)
Professional fees 302 139 163 117.27
Other real estate owned 21 16 5 31.25
Minority interest in earnings 400 340 60 17.65
FDIC premiums and examination fees 300 (84) 384 457.14
Other 2,607 2,076 531 25.58
- ------------------------------------------------------------------------------------------------
Total $25,144 23,032 2,112 9.17%
================================================================================================
</TABLE>
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FIRST QUARTER 1998 FIRST QUARTER 1997
ASSETS Average Rate/ Average
Loans and Leases (net of unearned discount) Balance Interest Yield Balance
<S> <C> <C> <C> <C>
Commercial $ 390,571 $ 8,941 9.28% $ 335,500
Commercial Real Estate 461,865 10,429 9.16 371,378
Agricultural 403,925 9,118 9.15 358,111
Residential Real Estate 400,542 8,602 8.71 358,998
Consumer 257,275 5,810 9.16 243,095
Tax Exempt 52,204 1,318 10.24 52,508
TOTAL LOANS AND LEASES 1,966,382 44,217 9.12 1,719,590
Reserve for Loan Losses (34,664) (30,766)
NET LOANS AND LEASES 1,931,718 1,688,824
Mortgage Backed Securities 665,921 10,589 6.45 579,567
Taxable Other 105,197 1,639 6.32 146,803
Tax Exempt 206,772 4,154 8.15 206,932
TOTAL SECURITIES 977,890 16,382 6.79 933,301
Total Fed Funds Sold 15,918 222 5.65 0
Other earning assets 2,059 28 5.55 1,688
TOTAL EARNING ASSETS 2,962,248 60,849 8.33 2,654,579
Total Cash & Due from Banks 100,103 94,844
Nonearning assets 120,183 102,921
TOTAL ASSETS $ 3,147,870 $ 2,821,578
LIABILITIES AND STOCKHOLDERS EQUITY
Non-Interest Bearing Deposits $ 288,357 $ 259,608
Interest Bearing Deposits
Savings and NOW accounts 295,875 1,210 1.66 297,177
Money Market Checking 158,634 568 1.45 151,486
Money Market Savings 312,306 3,097 4.02 245,524
Savings Certificates 1,176,215 16,660 5.74 1,116,978
Certificates over $100K 178,513 2,489 5.65 159,437
TOTAL INTEREST BEARING DEPOSITS 2,121,543 24,024 4.59 1,970,602
TOTAL DEPOSITS 2,409,899 2,230,210
Total Short Term Borrowings 344,811 4,642 5.46 224,219
Total Long Term Debt 49,306 656 5.40 62,360
TOTAL INTEREST BEARING LIABILITIES 2,515,660 29,323 4.73 2,257,180
Other liabilities 49,980 37,895
TOTAL LIABILITIES 2,853,996 2,554,684
Minority Interest 10,035 9,384
Redeemable Preferred Stock 2,104 2,155
Redeemable Class A Common Stock 22,539 20,428
Shareholder's equity 259,195 234,927
TOTAL LIABILITIES AND EQUITY $ 3,147,870 $ 2,821,578
Net Interest Income $31,527
Gross Spread 3.60%
Percent of earning assets
Interest Income 8.33
Interest Cost 4.01
NET INTEREST MARGIN 4.32%
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
FIRST
QUARTER
1997
ASSETS Rate/ % Change
Loans and Leases (net of unearned discount) Interest Yield Avg Bal
Commercial $ 7,495 9.06% 16.41%
Commercial Real Estate 8,301 9.06 24.37
Agricultural 8,080 9.15 12.79
Residential Real Estate 7,791 8.80 11.57
Consumer 5,433 9.06 5.83
Tax Exempt 1,308 10.10 (0.58)
TOTAL LOANS AND LEASES 38,408 9.06 14.35
Reserve for Loan Losses 12.67
NET LOANS AND LEASES 14.38
Mortgage Backed Securities 9,234 6.46 14.90
Taxable Other 2,310 6.38 (28.34)
Tax Exempt 4,183 8.20 (0.08)
TOTAL SECURITIES 15,726 6.83 4.78
Total Fed Funds Sold (0) (0.00) NM
Other earning assets 23 5.44 22.00
TOTAL EARNING ASSETS 54,157 8.27 11.59
Total Cash & Due from Banks 5.54
Nonearning assets 16.77
TOTAL ASSETS 11.56
LIABILITIES AND STOCKHOLDERS EQUITY
Non-Interest Bearing Deposits 11.07
Interest Bearing Deposits
Savings and NOW accounts 1,226 1.67 (0.44)
Money Market Checking 584 1.56 4.72
Money Market Savings 1,974 3.26 27.20
Savings Certificates 15,623 5.67 5.30
Certificates over $100K 2,183 5.55 11.97
TOTAL INTEREST BEARING DEPOSITS 21,590 4.44 7.66
TOTAL DEPOSITS 8.06
Total Short Term Borrowings 2,842 5.14 53.78
Total Long Term Debt 890 5.79 (20.93)
TOTAL INTEREST BEARING LIABILITIES 25,322 4.55 11.45
Other liabilities 31.89
TOTAL LIABILITIES 11.72
Minority Interest 6.94
Redeemable Preferred Stock (2.37)
Redeemable Class A Common Stock 10.33
Shareholder's equity 10.33
TOTAL LIABILITIES AND EQUITY 11.56
Net Interest Income $28,834
Gross Spread 3.72%
Percent of earning assets
Interest Income 8.27
Interest Cost 3.87
NET INTEREST MARGIN 4.41%
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other information
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 (a wholly-owned subsidiary of the Company).
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.
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
March 31, 1998 or during the period from March 31, 1998 to the date
of this Quarterly Report on Form 10-Q.
<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: May 15, 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)
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000846616
<NAME> BREMER FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 114,616
<INT-BEARING-DEPOSITS> 1,922
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 778,534
<INVESTMENTS-CARRYING> 238,457
<INVESTMENTS-MARKET> 244,322
<LOANS> 1,998,443
<ALLOWANCE> 35,206
<TOTAL-ASSETS> 3,208,176
<DEPOSITS> 2,443,072
<SHORT-TERM> 371,021
<LIABILITIES-OTHER> 42,201
<LONG-TERM> 55,119
2,084
0
<COMMON> 25,389
<OTHER-SE> 269,290
<TOTAL-LIABILITIES-AND-EQUITY> 3,208,176
<INTEREST-LOAN> 43,766
<INTEREST-INVEST> 14,968
<INTEREST-OTHER> 250
<INTEREST-TOTAL> 58,984
<INTEREST-DEPOSIT> 24,024
<INTEREST-EXPENSE> 29,323
<INTEREST-INCOME-NET> 29,661
<LOAN-LOSSES> 1,209
<SECURITIES-GAINS> 1,210
<EXPENSE-OTHER> 25,144
<INCOME-PRETAX> 15,327
<INCOME-PRE-EXTRAORDINARY> 10,002
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,002
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 4.06
<LOANS-NON> 9,032
<LOANS-PAST> 4,166
<LOANS-TROUBLED> 862
<LOANS-PROBLEM> 111,791
<ALLOWANCE-OPEN> 34,253
<CHARGE-OFFS> 527
<RECOVERIES> 271
<ALLOWANCE-CLOSE> 35,206
<ALLOWANCE-DOMESTIC> 28,376
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,830
</TABLE>
