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, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 March 31, 1999, 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, 1999
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 25
Item 6 -- Exhibits and Reports on Form 8-K 26
Signatures 27
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31 MARCH 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1998
----------- ----------- -----------
(UNAUDITED) (Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 111,609 $ 143,831 $ 114,616
Interest bearing deposits 1,807 1,712 1,922
Investment securities held to maturity (fair value of $169,517
$185,398 and $174,036, respectively) 164,398 179,359 167,890
Mortgage-backed securities held to maturity (fair value of $22,694
$27,070 and $70,286, respectively) 22,732 27,143 70,567
----------- ----------- -----------
TOTAL SECURITIES HELD TO MATURITY 187,130 206,502 238,457
Investment securities available for sale (amortized cost of $82,365
$103,872 and $137,293, respectively) 83,875 105,491 138,515
Mortgage-backed securities available for sale (amortized cost of $723,463
$679,134 and $632,603, respectively) 726,372 684,680 640,019
----------- ----------- -----------
TOTAL SECURITIES AVAILABLE FOR SALE 810,247 790,171 778,534
Loans and leases 2,152,442 2,177,784 2,003,510
Reserve for credit losses (37,968) (37,016) (35,206)
Unearned discount (5,005) (5,153) (5,067)
----------- ----------- -----------
NET LOANS AND LEASES 2,109,469 2,135,615 1,963,237
Premises and equipment, net 55,881 54,390 52,551
Interest receivable and other assets 62,062 65,858 58,859
----------- ----------- -----------
TOTAL ASSETS $ 3,338,205 $ 3,398,079 $ 3,208,176
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest bearing deposits $ 306,266 $ 369,215 $ 301,834
Interest bearing deposits 2,211,488 2,201,435 2,141,238
----------- ----------- -----------
TOTAL DEPOSITS 2,517,754 2,570,650 2,443,072
Federal funds purchased and repurchase agreements 247,001 221,419 179,669
Other short-term borrowings 104,372 131,794 191,352
Long-term debt 116,865 116,286 55,119
Accrued expenses and other liabilities 41,282 51,568 42,201
----------- ----------- -----------
TOTAL LIABILITIES 3,027,274 3,091,717 2,911,413
Minority interests 907 905 10,059
Redeemable preferred stock, $100 par, 80,000 shares authorized;
71,594 shares issued; and outstanding shares of 20,187,
20,787, and 20,837, respectively 2,019 2,079 2,084
Redeemable class A common stock, 960,000 shares
issued and outstanding 24,640 24,270 22,770
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 278,460 272,696 254,637
Accumulated other comprehensive income 2,286 3,793 4,594
----------- ----------- -----------
TOTAL SHAREHOLDER'S EQUITY 283,365 279,108 261,850
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 3,338,205 $ 3,398,079 $ 3,208,176
=========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases, including fees $ 45,443 $ 43,766 $ 37,962
Securities
Taxable 12,016 12,228 11,543
Tax-exempt 2,630 2,740 2,758
Federal funds sold 131 222 --
Other 27 28 23
-------- -------- --------
Total interest income 60,247 58,984 52,286
-------- -------- --------
INTEREST EXPENSE
Deposits 22,971 24,024 21,590
Federal funds purchased and repurchase agreements 2,421 1,981 1,655
Other short term borrowings 1,634 2,662 1,188
Long term debt 1,502 656 889
-------- -------- --------
Total interest expense 28,529 29,323 25,322
-------- -------- --------
Net interest income 31,718 29,661 26,964
Provision for credit losses 1,690 1,209 858
-------- -------- --------
Net interest income after provision for credit losses 30,028 28,452 26,106
-------- -------- --------
NONINTEREST INCOME
Service charges 4,224 3,976 3,603
Insurance 2,133 1,686 1,664
Trust 1,858 1,742 1,495
Brokerage 1,043 745 643
Gain on sale of loans 1,091 1,112 328
Gain / (loss) on sale of securities 1,774 1,210 (265)
Other 1,548 1,523 1,096
-------- -------- --------
Total noninterest income 13,671 11,994 8,564
-------- -------- --------
NONINTEREST EXPENSE
Salaries and wages 12,779 11,734 10,376
Employee benefits 3,355 3,022 2,927
Occupancy 1,708 1,580 1,482
Furniture and equipment 2,122 1,797 1,668
Data processing fees 1,539 1,497 1,999
FDIC premiums and examination fees 310 300 (84)
Goodwill and other intangibles 442 413 358
Other 6,031 4,776 4,306
-------- -------- --------
Total noninterest expense 28,286 25,119 23,032
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 15,413 15,327 11,638
Income tax expense 5,188 5,325 3,834
-------- -------- --------
NET INCOME $ 10,225 $ 10,002 $ 7,804
======== ======== ========
Per common share amounts:
Net income-basic $ 0.85 $ 0.83 $ 0.65
Dividends paid 0.33 0.33 0.30
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE COMPREHENSIVE RETAINED
CLASS A CLASS B INCOME INCOME EARNINGS TOTAL
------- ------- ------------- ------------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 57 2,562 1,180 230,071 233,870
Comprehensive income
Net income 35,060 35,060 35,060
Other comprehensive income
Change in net unrealized gain (loss) on securities
available for sale, net of $2,655 tax expense 3,982 3,982 3,982
------
Comprehensive income 39,042
======
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)
------- ----- ----- ------- -------
BALANCE, DECEMBER 31, 1997 57 2,562 4,843 249,079 256,541
Comprehensive income
Net income 41,511 41,511 41,511
Other comprehensive income
Change in net unrealized gain (loss) on securities
available for sale, net of $761 tax benefit (1,141) (1,141) (1,141)
------
Comprehensive income 40,370
======
Dividends, $1.32 per share (15,840) (15,840)
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 91 (2,054) (1,963)
------- ----- ----- ------- -------
BALANCE, DECEMBER 31, 1998 57 2,562 3,793 272,696 279,108
Comprehensive income
Net income 10,225 10,225 10,225
Other comprehensive income
Change in net unrealized gain (loss) on securities
available for sale, net of $1,096 tax benefit (1,639) (1,639) (1,639)
------
Comprehensive income 8,586
======
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 132 (501) (369)
------- ----- ----- ------- -------
BALANCE, MARCH 31, 1999 $ 57 2,562 2,286 278,460 283,365
======= ===== ===== ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
INFORMATION SUBSEQUENT TO DECEMBER 31, 1998 IS UNAUDITED.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,225 $ 10,002 $ 7,804
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses 1,690 1,209 858
Depreciation and amortization 2,451 2,033 1,748
Minority interests in earnings of subsidiaries 7 400 340
(Gain) loss on sale of securities (1,774) (1,210) 265
Gain on sale of other real estate owned, net (24) (1) (23)
Other assets and liabilities, net (5,951) (212) (1,356)
Proceeds from sales of other real estate owned 148 286 54
Cash receipts related to loans originated specifically for resale 57,820 48,540 16,450
Cash payments related to loans originated specifically for resale (58,169) (48,774) (16,506)
--------- --------- ---------
Net cash provided by operating activities 6,423 12,273 9,634
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits in other banks, net (95) (36) 180
Purchases of securities available for sale (181,982) (150,065) (103,123)
Purchases of securities held to maturity (18,452) (2,689) (6,525)
Proceeds from maturities of securities available for sale 85,519 38,504 39,859
Proceeds from maturities of securities held to maturity 37,791 35,233 8,524
Proceeds from sales of securities available for sale 75,219 55,027 51,441
Loans and leases, net 24,805 (34,338) 15,460
Acquisition of premises and equipment (3,268) (2,304) (3,015)
--------- --------- ---------
Net cash provided by (used in) investing activities 19,537 (60,668) 2,801
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Noninterest bearing deposits, net (62,949) (42,687) (55,556)
Interest bearing deposits (excluding certificates of deposit), net 3,454 35,694 (2,133)
Certificates of deposits, net 6,599 7,567 16,262
Federal funds purchased and repurchase agreements, net 25,582 12,495 (43,940)
Other short-term borrowings, net (27,422) (6,738) 15,580
Proceeds from issuance of long-term debt 1,428 30,768 2,774
Repayments of long-term debt (849) (5,887) (2,851)
Dividends paid to minority interests (5) (147) (139)
Redeemable preferred stock (60) (60) --
Dividends paid (3,960) (3,960) (3,600)
--------- --------- ---------
Net cash (used in) provided by financing activities (58,182) 27,045 (73,603)
--------- --------- ---------
Net decrease in cash and due from banks (32,222) (21,350) (61,168)
Cash and due from banks
Beginning of period 143,831 135,966 159,832
--------- --------- ---------
End of period $ 111,609 $ 114,616 $ 98,664
========= ========= =========
</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, 1998 and included in its Annual Report on Form 10-K for the
year ended December 31, 1998 filed on March 12, 1999.
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, 1999, the 960,000 class A
shares were generally redeemable at $25.67 per share. Since January 1,
1999 and through March 31, 1999, options to call 18,011.1603 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
2,100 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.
<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 1999 of $8.6 million as compared to the $9.7 million reported for the
first quarter of 1998. 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 $10.2
million for the first quarter of 1999, a 2.2% increase from the $10.0 million
earned in the first quarter of 1998. Contributing positively to earnings in the
first three months of 1999 were a 14.0% or $1.7 million increase in noninterest
income coupled with an increase in net interest income of 6.9% or $2.1 million.
Partially offsetting these positive increases were a 12.6% or $3.2 million
increase in noninterest expense and a $481 thousand increase in the provision
for credit losses.
Return on average assets ("ROA") was 1.25% for the first quarter of 1999,
compared to 1.34% for the same period in 1998. Return on average realized equity
("RORE") was 13.71% for the first quarter of 1999, compared to 14.66% for the
same quarter of 1998. Table I presents a summary of the components affecting the
change in year-to-date return on assets from March 31, 1998 to March 31, 1999.
Shareholder's Equity and Dividends
Shareholder's equity and redeemable class A common stock totaled $308.0 million
at March 31, 1999, representing a book value per share of $25.67, an 8.2%
increase from $23.72 at March 31, 1998. Dividends paid per share of $.33 in the
first quarter of 1999 remained unchanged from each of the four quarters of 1998.
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 $.21 as of March 31,
1999 and increasing the book value per share by $.42 as of March 31, 1998.
Net Interest Income
Tax-equivalent net interest income for the first quarter of 1999 was $33.5
million, an increase of $2.0 million or 6.4% from the first quarter of 1998. The
net interest margin increased from 4.32% in the first quarter of 1998 to 4.33%
in the first quarter of 1999. Table III presents the quarter-to-quarter
comparison of tax-equivalent net interest income and net interest margins.
As presented in Table IV, the net interest margin for the first quarter of 1999
was positively impacted by changes in product mix. Negatively impacting the
margin were changes in interest rate spread and an increase in nonaccrual loans
over the first quarter of 1998.
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 March 31, 1999, the valuation
model indicates that the value of assets would decline 3.7% with a 200 basis
point increase in interest rates. After considering the impact
<PAGE>
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 12.2%.
Nonperforming Assets
Table VI shows the details of nonperforming assets at March 31, 1999, December
31, 1998 and March 31, 1998. Nonperforming assets, which include nonperforming
loans and leases and other real estate owned ("OREO"), were $16.3 million at
March 31, 1999. This total represents an increase of $2.4 million from December
31, 1998 and an increase of $5.8 million from March 31, 1998. Nonperforming
assets as a percentage of total loans, leases and OREO increased to .76% as of
March 31, 1999 from .64% as of December 31, 1998, and from .52% as of March 31,
1998.
Nonperforming loans and leases, which include nonaccrual and restructured loans
and leases, were $15.6 million at March 31, 1999, an increase of $2.4 million
from December 31, 1998 and an increase of $5.7 million from March 31, 1998. The
ratio of nonperforming loans and leases to total loans and leases increased to
.73% at March 31, 1999 from .61% as of December 31, 1998, and .50% at March 31,
1998. The ratio of nonperforming assets and past due loans and leases to total
loans, leases and OREO increased to .94% at March 31, 1999 from .69% at December
31, 1998, and .73% at March 31, 1998. The level of at-risk performing loans and
leases (with an internal loan review rating of either substandard, doubtful or
loss) decreased $20.1 million or 18.0% to $91.7 million at March 31, 1999 from
$111.8 million at March 31, 1998. The ratio of classified loans and leases to
total loans and leases declined to 5.0% on March 31, 1999 from 5.6% on March 31,
1998. Net charge-offs were $740 thousand for the first three months of 1999 as
compared to $256 thousand in the same period in 1998.
OREO, which includes real estate acquired in loan settlements, increased to $651
thousand at March 31, 1999 from $620 thousand at December 31, 1998.
Reserve for Credit Losses
The Company's reserve for credit losses was 243.3% of nonperforming loans and
leases at March 31, 1999 compared to 279.3% at December 31, 1998 and 355.8% at
March 31, 1998. 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 to $38.0 million at March 31, 1999 from
$35.2 million at March 31, 1998. While the loan portfolio increased 7.43%, the
reserve for credit losses increased $2.8 million or 7.95% from March 31, 1998 to
March 31, 1999, causing the reserve to outstanding loans and leases ratio to
increase from 1.76% to 1.77%. Table VII presents the activity in the reserve for
credit losses.
Noninterest Income
As presented in Table VIII, noninterest income was $13.7 million for the first
quarter of 1999 compared to $12.0 million for the first quarter of 1998,
representing a $1.7 million or 14.0% improvement. Contributing to this increase
in operating noninterest income were a $447 thousand increase in insurance
commission income, a $298 thousand increase in brokerage income, and a $248
thousand increase in service charge income.
<PAGE>
Noninterest Expense
As presented in Table IX, noninterest expense increased $3.2 million or 12.6% in
the first quarter of 1999 compared to the first quarter of 1998. Operating
expenses of acquired entities, market expansions, and investment spending
unfavorably impacted the comparison of noninterest expense between the first
quarter of 1999 and 1998.
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 61.18% for the
first three months of 1999 compared to 58.00% for the same period in 1998, as
the increase in recurring noninterest expense of 13.2% more than offset the 6.4%
and 10.3% increases in tax-equivalent net interest income and recurring
noninterest income, respectfully.
Taxes
Comparing the first three months of 1999 to the first three months of 1998, the
Company's effective tax rate decreased from 34.7% to 33.7%.
<PAGE>
Balance Sheet Growth
Assets
Both average total assets and average earning assets increased by 5.9% from the
first three months of 1998 to the first three months of 1999, increasing $185.2
million and $174.7 million, respectively.
Loans and Leases
From the first quarter of 1998 to the first quarter of 1999, average loans and
leases increased $159.0 million or 8.1%. Loan categories supporting this growth
were commercial, commercial real estate, agricultural, and tax exempt, which
increased $82.2 million, $96.8 million, $19.4 million, and $2.7 million,
respectively, while residential real estate and consumer loans decreased by
$26.8 million and $15.3 million, respectively. The Company is not involved in
highly-leveraged transaction lending or lending to foreign countries.
Securities
Average securities increased $20.7 million or 2.1% from the first three months
of 1998 to the first three months of 1999. Taxable securities increased $25.7
million or 3.3%, while tax-exempt securities decreased $5.0 million or 2.4%. The
average maturity of the portfolio was 67 months at March 31, 1999, with an
average yield to maturity on the $997 million portfolio of 6.59%, unrealized
gains of $5.3 million and unrealized losses of $252 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 1999 to the first three months of 1998,
average interest bearing liabilities increased $149.5 million or 5.9%, while
average deposits increased $118.6 million or 4.9%. Average short-term
borrowings, which include federal funds purchased, securities sold under
agreements to repurchase, treasury tax and loan notes, Federal Home Loan Bank
advances, and an unsecured revolving credit facility, decreased $11.2 million or
3.2%. Average long-term debt, which consists primarily of Federal Home Loan Bank
advances, increased $60.7 million or 123.2%.
<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 March 31, 1999, the Company was
100% complete with all Critical Systems, 100% done with all Customer
Assessments, and 75% done with Contingency Planning, which is scheduled to be
completed by 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. The Company
conducted a test of 172 components in October 1998 and found nine non-critical
issue areas. The Company conducted a second test in February 1999 and verified
that these issues were resolved.
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 for the Company 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. Item processing (handling of all checks
and other paper items) is also managed by EDS within the Company's own
facilities in West Saint Paul, Minnesota.
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 has spent $730 thousand for Year 2000 preparedness. These costs were
primarily for software upgrades, infrastructure changes, and testing. The
Company has also spent approximately $3.9 million on a new PC network
infrastructure, due to be completed by June 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 to $100 thousand may be
expended in 1999 for costs associated with Year 2000 issues.
<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 Service Center, 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. This means that a branch
anywhere in the Company's system which can not operate due to power outages
needs only to find a bank of telephones to conduct all core applications. The
Bremer Service Center has a diesel generator which can run the entire building
as long as fuel is available. If this facility still has power issues, all core
application transactions from our branch network will be re-routed through the
Company's South Saint Paul bank; (this re-routing has been tested).
BREMER SERVICE CENTER FAILURE. Bremer Service Center 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 Service Center 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 Saint
Paul, Minnesota. The Company has standby T1 lines in place ready to re-route
bank transactions to EDS.
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. EDS has a "hot site" standing by to
handle all transactions if the main site is down.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998 CHANGE
---------- ---------- ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING RESULTS
Total interest income $ 60,247 $ 58,984 2.1%
Net interest income 31,718 29,661 6.9
Net interest income (1) 33,531 31,527 6.4
Provision for credit losses 1,690 1,209 39.8
Noninterest income 13,671 11,994 14.0
Noninterest expense 28,286 25,119 12.6
Net income 10,225 10,002 2.2
Dividends 3,960 3,960 --
AVERAGE BALANCES
Assets 3,333,083 3,147,870 5.9
Loans and leases 2,125,445 1,966,453 8.1
Securities 998,557 977,890 2.1
Deposits 2,528,519 2,409,899 4.9
Redeemable class A common stock 24,455 22,539 8.5
Shareholder's equity 281,237 259,195 8.5
PERIOD-END BALANCES
Assets 3,338,205 3,208,176 4.1
Loans and leases 2,147,437 1,998,444 7.5
Securities 997,377 1,016,992 (1.9)
Deposits 2,517,754 2,443,072 3.1
Redeemable class A common stock 24,640 22,770 8.2
Shareholder's equity 283,365 261,850 8.2
FINANCIAL RATIOS
Return on assets (2) 1.25% 1.34 (6.7)
Return on realized equity (3)(4) 13.71 14.66 (6.5)
Average equity/assets (3)(4) 9.07 8.79 3.2
Dividend payout 38.73 39.59 (2.2)
Net interest margin (1) 4.33 4.32 0.2
Efficiency ratio 61.18 58.00 5.5
Net charge-offs/average loans and leases 0.14 0.05 180.0
Reserve/period-end loans and leases 1.77 1.76 0.6
PER SHARE OF COMMON STOCK (3)
Net income-basic $ 0.85 $ 0.83 2.2%
Dividends paid 0.33 0.33 --
Book value 25.67 23.72 8.2
Realized book value (4) 25.46 23.30 9.3
</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 I
CHANGES IN RETURN ON ASSETS
1999 vs 1998
------------
Return on assets, prior year 1.34%
----
Increases
Gain on sale of securities 0.06
Minority interest earnings 0.05
Insurance 0.04
Brokerage 0.03
----
Total increases 0.18
----
Decreases
Provision for credit losses 0.05
Salaries and wages 0.04
Professional fees 0.04
Furniture and equipment 0.03
Employee benefits 0.02
Marketing 0.02
Other noninterest expenses, net 0.07
----
Total decreases 0.27
----
Return on assets, current period 1.25%
====
<PAGE>
TABLE II
CAPITAL RATIOS (1)
March 31 December 31 March 31 Regulatory
1999 1998 1998 Minimums
-------- ----------- -------- ----------
Equity to assets (2) 9.15% 8.81 8.72 -
Equity to tangible assets (2) 8.68 8.41 8.63 -
Tier I capital (3) 12.65 12.13 12.80 4.00
Tier I and tier II capital (3) 13.90 13.39 14.06 8.00
Leverage ratio (3) 8.70 8.58 8.81 3.00
(1) Calculations include redeemable class A common stock.
(2) Computed in accordance with generally accepted accounting principles,
excluding 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
- -------
1999
First $ 33,531 4.33%
1998
Fourth 34,196 4.34
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
<PAGE>
TABLE IV
CHANGES IN NET INTEREST INCOME (TEB)
---------------------------
Three Months Ended March 31
1999 vs 1998
---------------------------
(DOLLARS IN THOUSANDS)
Net Net
Interest Interest
Income Margin
-------- --------
CHANGE IN VOLUME
Earning assets $ 3,589
Interest bearing liabilities (1,743)
--------
1,846
CHANGE IN INTEREST RATE SPREAD
Earning assets (2,512) (0.33)%
Interest bearing liabilities 2,162 0.28
-------- ----
(350) (0.05)
CHANGE IN PRODUCT MIX
Earning assets 308 0.04
Interest bearing liabilities 374 0.05
-------- ----
682 0.09
OTHER CHANGES
Nonaccruing loans (141) (0.02)
Yield-related loan fees (34) (0.01)
-------- ----
(175) (0.03)
CHANGE IN NET INTEREST INCOME 2,003 0.01
Net interest income, prior period 31,527 4.32
-------- ----
Net interest income, current period $ 33,530 4.33 %
======== ====
<PAGE>
TABLE V
CHANGES IN NET INTEREST INCOME (TEB)
Three Months Ended March 31
1999 vs 1998
---------------------------------
(IN THOUSANDS)
Volume Yield/Rate(1) Total
------ ------ ------
INCREASE (DECREASE) IN:
INTEREST INCOME
Loans and leases $2,608 (930) 1,678
Taxable securities 721 (933) (212)
Tax-exempt securities 245 (409) (164)
Interest bearing deposits -- -- --
Federal funds sold 13 (104) (91)
Other earning assets 2 (2) --
------ ------ ------
Total 3,589 (2,378) 1,211
INTEREST EXPENSE
Savings deposits 290 (12) 278
Other time deposits 1,138 (2,468) (1,330)
Short-term borrowings 276 (862) (586)
Long-term debt 39 807 846
------ ------ ------
Total 1,743 (2,535) (792)
------ ------ ------
NET INTEREST INCOME $1,846 157 2,003
====== ====== ======
(1) ALL CHANGES IN NET INTEREST INCOME, OTHER THAN THOSE DUE TO VOLUME, HAVE
BEEN ALLOCATED TO YIELD/RATE.
<PAGE>
TABLE VI
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31 MARCH 31
1999 1998 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans and leases $15,550 $13,074 $ 9,032
Restructured loans and leases 56 178 862
------- ------- -------
Total nonperforming loans and leases 15,606 13,252 9,894
Other real estate owned (OREO) 651 620 576
------- ------- -------
Total nonperforming assets $16,257 13,872 10,470
======= ======= =======
Past due loans and leases * $ 3,758 $ 1,142 $ 4,166
======= ======= =======
Nonperforming loans and leases to total loans and leases 0.73% 0.61% 0.50%
Nonperforming assets to total loans, leases and OREO 0.76 0.64 0.52
Nonperforming assets and past due loans and leases* to
total loans, leases and OREO 0.93 0.69 0.73
Reserve to nonperforming loans and leases 243.29 279.32 355.83
Reserve to total loans and leases 1.77 1.70 1.76
</TABLE>
* PAST DUE LOANS AND LEASES INCLUDE ACCRUING LOANS AND LEASES 90 DAYS OR MORE
PAST DUE.
<PAGE>
TABLE VII
RESERVE FOR CREDIT LOSSES
THREE MONTHS ENDED MARCH 31
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Beginning of period $ 37,019 $ 34,253
Charge-offs (1,002) (527)
Recoveries 262 271
-------- --------
Net charge-offs (740) (256)
Provision for credit losses 1,690 1,209
-------- --------
End of period $ 37,969 $ 35,206
======== ========
<PAGE>
TABLE VIII
NONINTEREST INCOME
THREE MONTHS ENDED MARCH 31 INCREASE/(DECREASE)
------------------- -------------------
1999 1998 DOLLAR PERCENT
------- ------- ------- -------
(IN THOUSANDS)
Service charges $ 4,224 $ 3,976 $ 248 6.24%
Insurance 2,133 1,686 447 26.51
Trust 1,858 1,742 116 6.66
Brokerage 1,043 745 298 40.00
Gain on sale of loans 1,091 1,112 (21) (1.89)
Gain on sale of other assets 474 431 43 9.98
Other 1,074 1,092 (18) (1.65)
------- ------- -------
Operating noninterest income 11,897 10,784 1,113 10.32
Gain on sale of securities 1,774 1,210 564 46.61
------- ------- -------
Total $13,671 $11,994 $ 1,677 13.98%
======= ======= =======
<PAGE>
TABLE IX
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 INCREASE/(DECREASE)
--------------------- ---------------------
1999 1998 DOLLAR PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and wages $12,779 $11,734 $ 1,045 8.91%
Employee benefits 3,355 3,022 333 11.02
Occupancy 1,708 1,580 128 8.10
Furniture and equipment 2,122 1,797 325 18.09
Printing, postage and office supplies 1,379 1,288 91 7.07
Marketing 1,100 905 195 21.55
Data processing fees 1,539 1,497 42 2.81
Professional fees 644 302 342 113.25
Other real estate owned 17 21 (4) (19.05)
Minority interest in earnings 7 400 (393) (98.25)
FDIC premiums and examination fees 310 300 10 3.33
Goodwill and other intangibles 442 413 29 7.02
Other 2,884 1,860 1,024 55.05
------- ------- -------
Total $28,286 $25,119 $ 3,167 12.61%
======= ======= =======
</TABLE>
<PAGE>
BFC CORP - EXTERNAL
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
TAX EQUIVALENT BASIS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
March 1999 Actual - YTD March 1998 Actual - YTD
-------------------------------- ------------------------------- --------
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 $ 472,831 $10,098 8.66% $ 390,642 $ 8,941 9.28% 21.04%
Commercial Real Estate 558,690 11,834 8.59 461,865 10,429 9.16 20.96
Agricultural 423,282 9,182 8.80 403,925 9,118 9.15 4.79
Residential Real Estate 373,750 8,020 8.70 400,542 8,602 8.71 (6.69)
Consumer 241,991 5,439 9.12 257,275 5,810 9.16 (5.94)
Tax Exempt 54,902 1,323 9.77 52,204 1,318 10.24 5.17
---------- ------- ---------- -------
TOTAL LOANS AND LEASES 2,125,446 45,896 8.76 1,966,453 44,218 9.12 8.09
Reserve for Credit Losses (37,652) (34,735) 8.40
---------- ----------
NET LOANS AND LEASES 2,087,794 1,931,718 8.08
Mortgage Backed Securities 726,810 10,987 6.13 665,921 10,589 6.45 9.14
Taxable Other 70,001 1,029 5.96 105,197 1,639 6.32 (33.46)
Tax Exempt 201,746 3,990 8.02 206,772 4,154 8.15 (2.43)
---------- ------- ---------- -------
TOTAL SECURITIES 998,557 16,006 6.50 977,890 16,382 6.79 2.11
Total Fed Funds Sold 10,852 131 4.90 15,918 222 5.66 (31.83)
Other earning assets 2,182 27 5.02 2,058 27 5.32 6.03
---------- ------- ---------- -------
TOTAL EARNING ASSETS 3,137,037 62,060 8.02 2,962,319 60,849 8.33 5.90
Total Cash & Due from Banks 107,717 100,103 7.61
Nonearning assets 125,981 120,183 4.82
---------- ----------
TOTAL ASSETS $3,333,083 $3,147,870 5.88
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Non-Interest Bearing Deposits $ 307,021 $ 288,357 6.47
Interest Bearing Deposits
Savings and NOW accounts 287,063 847 1.20 295,875 1,210 1.66 (2.98)
Money Market Checking 159,202 358 0.91 158,634 568 1.45 0.36
Money Market Savings 435,147 3,948 3.68 312,306 3,097 4.02 39.33
Savings Certificates 1,136,561 15,153 5.41 1,176,215 16,660 5.74 (3.37)
Certificates over $100K 203,525 2,665 5.31 178,513 2,489 5.65 14.01
---------- ------- ---------- -------
TOTAL INTEREST BEARING DEPOSITS 2,221,498 22,971 4.19 2,121,543 24,024 4.59 4.71
TOTAL DEPOSITS 2,528,519 2,409,900 4.92
Total Short Term Borrowings 333,648 4,056 4.93 344,811 4,642 5.46 (3.24)
Total Long Term Debt 110,028 1,502 5.54 49,306 656 5.40 123.15
---------- ------- ---------- -------
TOTAL INTEREST BEARING LIABILITIES 2,665,174 28,529 4.34 2,515,660 29,323 4.73 5.94
Other liabilities 52,242 49,979 4.53
TOTAL LIABILITIES 3,024,437 2,853,996 5.97
Minority Interest 906 10,035 (90.97)
Redeemable Preferred Stock 2,049 2,104 (2.61)
Redeemable Class A Common Stock 24,455 22,539 8.50
Shareholder's equity 281,237 259,195 8.50
---------- ----------
TOTAL LIABILITIES AND EQUITY $3,333,083 $3,147,870 5.88
========== ==========
Net Interest Income $33,531 $31,526
======= =======
Gross Spread 3.68% 3.60%
Percent of earning assets
Interest Income 8.02 8.33
Interest Cost 3.69 4.01
----- -----
NET INTEREST MARGIN 4.33% 4.32%
Interest bearing liabilities to earning assets 84.96% 84.92%
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other information.
(a) 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.
<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) During the quarter ended March 31, 1999, the Company filed two Current
Reports on Form 8-K with the Securities and Exchange Commission ("SEC").
No financial statements were filled or required to be filed with these
reports.
On January 29, 1999, the Company filed a Current Report on Form 8-K with
the SEC reporting that on January 25, 1999 (the date of the Report), the
Company and the shareholders of Dean Financial Services, Inc. ("Dean")
entered into a Stock Purchase Agreement under which the Company agreed to
acquire all of the shares of capital stock of Dean. As stated in the
Report, the acquisition is subject to the receipt of various governmental
approvals and other customary closing conditions.
On February 22, 1999, the Company filed a Current Report on Form 8-K with
the SEC reporting that on February 16, 1999 (the date of the Report), the
Company's wholly-owned subsidiary, Bremer Acquisition Corporation ("Bremer
Acquisition"), and Northwest Equity Corp. ("Northwest") entered into an
Agreement and Plan of Merger under which the Company is to acquire
Northwest and its wholly-owned subsidiary, Northwest Savings Bank, in a
merger ("Merger") in which Northwest is to become a wholly-owned
subsidiary of the Company. The Merger is subject to the receipt of
customary regulatory approvals and the approval of the shareholders of
Northwest.
<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 14, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 111,609
<INT-BEARING-DEPOSITS> 1,807
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 810,247
<INVESTMENTS-CARRYING> 187,130
<INVESTMENTS-MARKET> 192,210
<LOANS> 2,147,437
<ALLOWANCE> 37,968
<TOTAL-ASSETS> 3,338,205
<DEPOSITS> 2,517,754
<SHORT-TERM> 351,373
<LIABILITIES-OTHER> 41,282
<LONG-TERM> 116,865
2,019
0
<COMMON> 27,259
<OTHER-SE> 281,653
<TOTAL-LIABILITIES-AND-EQUITY> 3,338,205
<INTEREST-LOAN> 45,443
<INTEREST-INVEST> 14,646
<INTEREST-OTHER> 158
<INTEREST-TOTAL> 60,247
<INTEREST-DEPOSIT> 22,971
<INTEREST-EXPENSE> 28,529
<INTEREST-INCOME-NET> 31,718
<LOAN-LOSSES> 1,690
<SECURITIES-GAINS> 1,774
<EXPENSE-OTHER> 28,286
<INCOME-PRETAX> 15,413
<INCOME-PRE-EXTRAORDINARY> 10,225
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,225
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
<YIELD-ACTUAL> 4.10
<LOANS-NON> 15,550
<LOANS-PAST> 4,003
<LOANS-TROUBLED> 56
<LOANS-PROBLEM> 107,109
<ALLOWANCE-OPEN> 37,019
<CHARGE-OFFS> 1,002
<RECOVERIES> 262
<ALLOWANCE-CLOSE> 37,969
<ALLOWANCE-DOMESTIC> 32,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,969
</TABLE>
