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 June 30, 1999.
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
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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.
- --------------------------------------------------------------------------------
(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 June 30, 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 JUNE 30, 1999
INDEX
PART I -- FINANCIAL INFORMATION Page
----
Item 1 -- Financial Statements 2
Item 2 -- Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
PART II -- OTHER INFORMATION
Item 4 -- Submission of Matters to a vote of Security Holders 27
Item 5 -- Other information 28
Item 6 -- Exhibits and Reports on Form 8-K 28
Signatures 29
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
(DOLLARS IN THOUSANDS) 1999 1998 1998
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 126,960 $ 143,831 $ 123,415
Interest bearing deposits 1,797 1,712 2,167
Investment securities held to maturity (fair value of $166,935
$185,398, and $168,123 respectively) 165,678 179,359 162,016
Mortgage-backed securities held to maturity (fair value of $16,119
$27,070, and $49,942 respectively) 16,176 27,143 50,162
------------ ------------ ------------
TOTAL SECURITIES HELD TO MATURITY 181,854 206,502 212,178
Investment securities available for sale (amortized cost of $85,206
$103,872, and $105,988 respectively) 85,559 105,491 107,155
Mortgage-backed securities available for sale (amortized cost of $766,814
$679,134, and $616,822 respectively) 754,243 684,680 623,951
------------ ------------ ------------
TOTAL SECURITIES AVAILABLE FOR SALE 839,802 790,171 731,106
Loans and leases 2,268,908 2,177,787 2,134,625
Reserve for credit losses (38,107) (37,019) (36,032)
Unearned discount (4,961) (5,153) (5,408)
------------ ------------ ------------
NET LOANS AND LEASES 2,225,840 2,135,615 2,093,185
Premises and equipment, net 56,091 54,390 53,110
Interest receivable and other assets 72,400 65,858 56,848
------------ ------------ ------------
TOTAL ASSETS $ 3,504,744 $ 3,398,079 $ 3,272,009
============ ============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest bearing deposits $ 316,858 $ 369,215 $ 304,402
Interest bearing deposits 2,223,906 2,201,435 2,136,965
------------ ------------ ------------
TOTAL DEPOSITS 2,540,764 2,570,650 2,441,367
Federal funds purchased and repurchase agreements 257,182 221,419 217,094
Other short-term borrowings 184,572 131,794 204,620
Long-term debt 173,677 116,286 65,091
Accrued expenses and other liabilities 43,162 51,568 47,971
------------ ------------ ------------
TOTAL LIABILITIES 3,199,357 3,091,717 2,976,143
Minority interests 891 905 3,453
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 2,018 2,079 2,084
Redeemable class A common stock, 960,000 shares
issued and outstanding 24,198 24,270 23,226
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 282,542 272,696 260,064
Accumulated other comprehensive income/(loss) (6,881) 3,793 4,420
------------ ------------ ------------
TOTAL SHAREHOLDER'S EQUITY 278,280 279,108 267,103
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 3,504,744 $ 3,398,079 $ 3,272,009
============ ============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases, including fees $ 92,566 $ 90,141 $ 78,193
Securities
Taxable 24,613 24,348 24,039
Tax-exempt 5,185 5,479 5,533
Federal funds sold 229 322 --
Other 53 58 50
----------- ----------- -----------
Total interest income 122,646 120,348 107,815
----------- ----------- -----------
INTEREST EXPENSE
Deposits 45,653 48,734 43,543
Federal funds purchased and repurchase agreements 5,075 4,359 3,732
Other short term borrowings 3,688 5,370 3,051
Long term debt 3,489 1,413 1,843
----------- ----------- -----------
Total interest expense 57,905 59,876 52,169
----------- ----------- -----------
Net interest income 64,741 60,472 55,646
Provision for credit losses 4,705 2,462 2,598
----------- ----------- -----------
Net interest income after provision for credit losses 60,036 58,010 53,048
----------- ----------- -----------
NONINTEREST INCOME
Service charges 8,915 8,259 7,544
Insurance 4,228 3,192 3,121
Trust 3,732 3,444 3,011
Brokerage 2,314 1,802 643
Gain on sale of loans 2,012 2,343 849
Gain / (loss) on sale of securities 1,847 1,138 (193)
Other 2,839 3,659 1,890
----------- ----------- -----------
Total noninterest income 25,887 23,837 17,564
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and wages 26,387 24,074 21,515
Employee benefits 6,942 6,137 5,883
Occupancy 3,322 3,075 2,929
Furniture and equipment 4,390 3,650 3,307
Data processing fees 3,408 2,984 3,541
FDIC premiums and examination fees 633 593 50
Goodwill and other intangibles 1,087 845 717
Other 12,131 10,249 8,970
----------- ----------- -----------
Total noninterest expense 58,300 51,607 46,912
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 27,623 30,240 23,700
Income tax expense 9,001 10,380 7,827
----------- ----------- -----------
NET INCOME $ 18,622 $ 19,860 $ 15,873
=========== =========== ===========
Per common share amounts:
Net income-basic $ 1.55 $ 1.66 $ 1.32
Dividends paid 0.66 0.66 0.60
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
------------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INTEREST INCOME
Loans and leases, including fees $ 47,123 $ 46,374 $ 40,231
Securities
Taxable 12,597 12,120 12,496
Tax-exempt 2,555 2,739 2,775
Federal funds sold 98 100 --
Other 25 31 27
----------- ----------- -----------
Total interest income 62,398 61,364 55,529
----------- ----------- -----------
INTEREST EXPENSE
Deposits 22,682 24,710 21,953
Federal funds purchased and repurchase agreements 2,653 2,378 2,077
Other short term borrowings 2,054 2,708 1,863
Long term debt 1,987 757 954
----------- ----------- -----------
Total interest expense 29,376 30,553 26,847
----------- ----------- -----------
Net interest income 33,022 30,811 28,682
Provision for credit losses 3,016 1,253 1,740
----------- ----------- -----------
Net interest income after provision for credit losses 30,006 29,558 26,942
----------- ----------- -----------
NONINTEREST INCOME
Service charges 4,692 4,283 3,941
Insurance 2,094 1,507 1,457
Trust 1,874 1,702 1,516
Brokerage 1,271 1,057 699
Gain on sale of loans 920 1,231 521
Gain / (loss) on sale of securities 73 (72) 72
Other 1,292 2,136 794
----------- ----------- -----------
Total noninterest income 12,216 11,844 9,000
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and wages 13,608 12,340 11,139
Employee benefits 3,587 3,116 2,956
Occupancy 1,614 1,496 1,447
Furniture and equipment 2,268 1,853 1,639
Data processing fees 1,869 1,487 1,542
FDIC premiums and examination fees 323 293 134
Goodwill and other intangibles 645 432 359
Other 6,100 5,471 4,664
----------- ----------- -----------
Total noninterest expense 30,014 26,488 23,880
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 12,208 14,914 12,062
Income tax expense 3,812 5,055 3,993
----------- ----------- -----------
NET INCOME $ 8,396 $ 9,859 $ 8,069
=========== =========== ===========
Per common share amounts:
Net income-basic $ 0.70 $ 0.83 $ 0.67
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
COMMON STOCK OTHER
-------------------- 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 18,622 18,622 18,622
Other comprehensive income
Change in net unrealized gain (loss) on securities
available for sale, net of $7,735 tax benefit (11,603) (11,603) (11,603)
--------
Comprehensive income $ 7,019
========
Dividends, $.66 per share (7,920) (7,920)
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 929 (856) 73
-------- -------- -------- -------- --------
BALANCE, JUNE 30, 1999 $ 57 $ 2,562 $ (6,881) $282,542 $278,280
======== ======== ======== ======== ========
</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>
SIX MONTHS ENDED JUNE 30
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,622 $ 19,860 $ 15,873
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses 4,705 2,462 2,598
Depreciation and amortization 5,194 4,221 3,446
Minority interests in earnings of subsidiaries 15 595 709
(Gain) loss on sale of securities (1,847) (1,138) 193
Gain on sale of other real estate owned, net (86) (17) (24)
Other assets and liabilities, net (8,443) 7,089 542
Proceeds from sales of other real estate owned 270 497 135
Cash receipts related to loans originated specifically for resale 112,253 120,956 44,767
Cash payments related to loans originated specifically for resale (112,776) (121,506) (44,907)
----------- ----------- -----------
Net cash provided by operating activities 17,907 33,019 23,332
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits in other banks, net (85) (281) 45
Purchases of securities available for sale (289,305) (193,122) (241,905)
Purchases of securities held to maturity (25,007) (6,683) (19,885)
Proceeds from maturities of securities available for sale 140,231 116,321 70,017
Proceeds from maturities of securities held to maturity 49,584 65,498 18,655
Proceeds from sales of securities available for sale 81,519 67,179 92,763
Loans and leases, net (94,407) (165,222) (105,799)
Acquisition of premises and equipment (5,344) (4,504) (5,817)
----------- ----------- -----------
Net cash used in investing activities (142,814) (120,814) (191,926)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Noninterest bearing deposits, net (52,357) (40,119) (32,727)
Interest bearing deposits (excluding certificates of deposit), net 33,413 38,687 (8,799)
Certificates of deposits, net (10,942) 301 30,002
Federal funds purchased and repurchase agreements, net 35,763 49,920 8,828
Other short term borrowings, net 52,778 6,530 123,711
Proceeds from issuance of long-term debt 68,501 41,373 13,395
Repayments of long-term debt (11,111) (6,520) (3,127)
Dividends paid to minority interests (29) (6,948) (413)
Redeemable preferred stock (60) (60) --
Dividends paid (7,920) (7,920) (7,200)
----------- ----------- -----------
Net cash provided by financing activities 108,036 75,244 123,670
----------- ----------- -----------
Net decrease in cash and due from banks (16,871) (12,551) (44,924)
Cash and due from banks
Beginning of period 143,831 135,966 159,832
----------- ----------- -----------
End of period $ 126,960 $ 123,415 $ 114,908
=========== =========== ===========
</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 June 30, 1999, the 960,000 class
A shares were generally redeemable at $25.21 per share. Since
January 1, 1999 and through June 30, 1999, options to call
29,593.1876 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/(loss) for the second quarter of 1999 of $(1.6) million as
compared to the $9.7 million reported for the second quarter of
1998. On a year-to-date basis, comprehensive income was $7.0
million, as compared to the $19.4 million earned in the first six
months 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 $8.4 million
for the second quarter of 1999, a 14.8% decrease from the $9.9 million earned in
the second quarter of 1998. On a year-to-date basis, earnings were $18.6
million, down 6.2% from the $19.9 million earned in the first six months of
1998. Contributing positively to earnings in the first six months of 1999 were a
7.1% or $4.3 million increase in net interest income coupled with an increase in
noninterest income of 8.6% or $2.1 million. Offsetting these positive increases
were a 13.0% or $6.7 million increase in noninterest expense and a $2.2 million
increase in the provision for credit losses during the first six months of 1999.
Return on average assets ("ROA") was .98% for the second quarter of 1999,
compared to 1.25% reported for the same period in 1998. For the first six months
of 1999, ROA fell to 1.11% from 1.29% reported in 1998. Return on average
realized equity ("RORE") was 10.94% for the second quarter of 1999, compared to
13.99% 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 June 30,
1998 to June 30, 1999.
Shareholder's Equity and Dividends
Shareholder's equity and redeemable class A common stock totaled $302.5 million
at June 30, 1999, representing a book value per share of $25.21, a 4.2% increase
from $24.19 at June 30, 1998. Dividends paid per share of $.33 in the second
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 decreasing the book value per share by $.62 as of June 30,
1999 and increasing the book value per share by $.40 as of June 30, 1998.
Net Interest Income
Tax-equivalent net interest income for the second quarter of 1999 was $34.8
million, an increase of $2.1 million or 6.4% from the second quarter of 1998.
The net interest margin decreased to 4.30% in the second quarter of 1999 from
4.31% reported in the second quarter of 1998. On a year-to-date basis,
tax-equivalent net interest income was $68.3 million, an increase of $4.1
million or 6.4% over the $64.2 million realized in the first six months 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, the net interest margin for the second quarter of 1999
was negatively impacted by an increase in nonaccrual loans over the second
quarter of 1998. On a year-to-date basis, the negative impact of changes in
interest rate spread and an increase in nonaccrual loans were offset by a
positive change in the product mix.
<PAGE>
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 June 30, 1999, the valuation
model indicates that the value of assets would decline 3.5% 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 10.6%.
Nonperforming Assets
Table VI shows the details of nonperforming assets at June 30, 1999, December
31, 1998 and June 30, 1998. Nonperforming assets, which include nonperforming
loans and leases and other real estate owned ("OREO"), were $17.9 million at
June 30, 1999. This total represents an increase of $4.0 million from December
31, 1998 and an increase of $7.6 million from June 30, 1998. Nonperforming
assets as a percentage of total loans, leases and OREO increased to .79% as of
June 30, 1999 from .64% as of December 31, 1998, and from .48% as of June 30,
1998.
Nonperforming loans and leases, which include nonaccrual and restructured loans
and leases, were $17.3 million at June 30, 1999, an increase of $4.0 million
from December 31, 1998 and an increase of $7.4 million from June 30, 1998. The
ratio of nonperforming loans and leases to total loans and leases increased to
.76% at June 30, 1999 from .61% as of December 31, 1998, and .47% at June 30,
1998. The ratio of nonperforming assets and past due loans and leases to total
loans, leases and OREO increased to .86% at June 30, 1999 from .69% at December
31, 1998, and .74% at June 30, 1998. The level of at-risk performing loans and
leases (with an internal loan review rating of either substandard, doubtful or
loss) decreased $10.6 million or 10.3% to $92.8 million at June 30, 1999 from
$103.4 million at June 30, 1998. The ratio of classified loans and leases to
total loans and leases declined to 4.9% as of June 30, 1999 from 5.3% as of June
30, 1998. Net charge-offs were $3.6 million for the first six months of 1999 as
compared to $683 thousand during the same period in 1998. The two most
significant charge-offs in the second quarter accounted for approximately $1.9
million of the $3.6 million total net charge-offs.
OREO, which includes real estate acquired in loan settlements, increased to $626
thousand at June 30, 1999 from $620 thousand at December 31, 1998 and the $391
thousand at June 30, 1998.
Reserve for Credit Losses
The Company's reserve for credit losses was 220.9% of nonperforming loans and
leases at June 30, 1999 compared to 279.3% at December 31, 1998 and 363.9% at
June 30, 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.
Low commodity prices have adversely affected many of the Company's agricultural
borrowers, most notably in the Red River Valley of western Minnesota and eastern
North Dakota. This was an important factor in Management's decision to record a
credit loss provision of $3.0 million in the second quarter of 1999 compared to
the $1.3 million provision recorded in the second quarter of
<PAGE>
1998. As a result, the reserve for credit losses increased to $38.1 million at
June 30, 1999 from $36.0 million at June 30, 1998. While the loan portfolio
increased 6.3%, the reserve for credit losses increased $2.1 million or 5.8%
from June 30, 1998 to June 30, 1999, causing the reserve to outstanding loans
and leases ratio to decrease to 1.68% on June 30, 1999 from 1.69% reported on
June 30, 1998. Table VII presents the activity in the reserve for credit losses.
Noninterest Income
As presented in Table VIII, noninterest income was $12.2 million for the second
quarter of 1999 compared to $11.8 million for the second quarter of 1998,
representing a $372 thousand or 3.1% improvement. On a year-to-date basis,
noninterest income was $25.9 million compared to $23.8 million in 1998, an
increase of $2.1 million or 8.6%. Contributing to this increase in operating
noninterest income were a $1.0 million increase in insurance commissions, a $656
thousand increase in service charges, and a $512 thousand increase in brokerage
income.
Noninterest Expense
As presented in Table IX, noninterest expense increased $3.5 million or 13.3% in
the second quarter of 1999 compared to the second quarter of 1998. Operating
expenses related to the outsourcing of the internal audit department, item
processing vendor transition, and investment spending in technology unfavorably
impacted the comparison of noninterest expense between the second 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 61.93% for the
first six months of 1999 compared to 58.74% for the same period in 1998, as the
increase in recurring noninterest expenses of 13.4% more than offset the 6.4%
and 11.0% increases in tax-equivalent net interest income and recurring
noninterest income, respectively.
Taxes
Comparing the first six months of 1999 to the first six months of 1998, the
Company's effective tax rate decreased from 34.3% to 32.6% as the result of a
decrease in taxable income.
<PAGE>
Balance Sheet Growth
Assets
Average total assets increased $198.1 million or 6.21% from the first six months
of 1998 to the first six months of 1999, while average earning assets increased
by $189.0 million or 6.30% when comparing the same two periods.
Loans and Leases
In the first six months of 1999, average loans and leases increased $152.6
million or 7.6% when compared to the first six months of 1998. Average loans and
leases in the second quarter of 1999 increased $146.3 million or 7.1% from the
second quarter of 1998.
On a year-to-date basis, the increase in average loan volume in 1999 over 1998
was driven by commercial, commercial real estate, agricultural, and tax exempt
loans, which increased $78.2 million, $97.2 million, $10.7 million, and $1.1
million, respectively, while residential real estate and consumer loans
decreased by $19.4 million and $15.2 million, respectively. The Company is not
involved in highly-leveraged transaction lending or lending to foreign
countries.
Securities
Average securities increased $38.2 million or 3.9% during the first six months
of 1999 from the first six months of 1998. During this same period taxable
securities increased $45.3 million or 5.9%, while tax-exempt securities
decreased $7.1 million or 3.5%. The average maturity of the portfolio was 71
months at June 30, 1999, with an average yield to maturity on the $1 billion
portfolio of 6.57%, unrealized gains of $2.6 million and unrealized losses of
$1.4 million 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 six months of 1999 to the first six months of 1998, average
interest bearing liabilities increased $163.5 million or 6.4%, while average
deposits increased $100.8 million or 4.1%. Average short-term borrowings, which
include federal funds purchased, securities sold under agreements to repurchase,
treasury tax and loan notes, Federal Home Loan Bank advances, and an unsecured
revolving credit facility, decreased $905 thousand or .3%. Average long-term
debt, which consists primarily of Federal Home Loan Bank advances, increased
$83.4 million or 158.5%.
<PAGE>
Impact of the Year 2000 Issue
WHAT IS THE Y2K ISSUE?
The Year 2000 ("Y2K") 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'S READINESS STATEMENT
The Company has a Y2K preparedness strategy in place to anticipate, correct, and
plan for the potential impact the Y2K issue may have on its systems, customers,
and business infrastructure. The Company's definition of Y2K readiness requires
all systems and services to be reasonably assured to function effectively
through all Y2K-related date issues with contingency plans for all medium and
high priority systems.
THE COMPANY'S CURRENT Y2K STATUS
The Company has made Y2K planning a top priority since 1997 and has completed
all four phases of its Y2K preparedness strategy. Even though it is prepared,
the Company strongly feels it is important to continue to be diligent in
managing the Y2K situation. Additional communications to customers and
employees, testing of its contingency plan components, and testing new hardware
or software systems for Y2K compliance remain top priorities. The Company also
acknowledges the Y2K situation will require attention well into the year 2000
and is prepared to address any date-sensitive issues relating to the Y2K issue
beyond January 1, 2000.
At June 30, 1999, the Company had completed all four phases of its Y2K
preparedness strategy and announced it was Y2K prepared. The four phases are
described below:
PHASE ONE: AWARENESS
The Company began phase one of the Y2K project in early 1997. It established a
central committee and a network of affiliate project managers to address Y2K
issues. The Company has sent quarterly updates to executives and Boards of
Directors to keep everyone informed and the project on schedule. Customer
awareness included numerous community-based presentations, statement stuffers,
newsletters, Internet updates, and an information line available through an 800
number. In addition, employee training programs were conducted throughout June
with a follow up course in October.
PHASE TWO: ASSESSMENT
The Company performed extensive testing on its computer systems. This involved
identifying all date-impacted systems and equipment and establishing procedures
for modifying and maintaining those systems and equipment. In addition, the
Company worked closely with vendors and reviewed their compliance status and
plans. Though not specifically related to Y2K, the Company initiated a $5
million company-wide technology upgrade to better improve service to customers.
As a result, more than 1,300 computer systems and 55 networks were enhanced and
are better able to handle Y2K related issues.
<PAGE>
In addition to assessing computer systems and the vendors of those systems, the
Company needed to assess the preparedness of significant customers. This was
completed at the end of 1998. The Company followed nearly 100 systems and
embarked on a methodical review of all mid- and large-sized borrowers and
depositors at the Company.
The Company acted on the results of these reviews, both with systems and
customers. It replaced some systems, upgraded others, and managed all risks of
customers it felt needed to be more attentive to the problems.
PHASE THREE: TESTING
In many ways, testing the Company's systems and equipment was the most important
and comprehensive step. The Company started testing in June 1998 and finished in
March 1999. Because the company-wide technology upgrade was rolled out one
location at a time, a few systems were upgraded after the testing window.
Therefore, the Company feels it will be prudent to go back and test the new
systems again (this will go on for the remainder of 1999 with any new upgrades).
The Company's testing uncovered some problems, but it has addressed them quickly
and thoroughly. As a result, the Company has updated and tested systems that
will work with little or no problems over the century change.
PHASE FOUR: CONTINGENCY
Although the Company is confident its systems have been properly prepared for
Y2K, contingency planning provides the safety net under the few weeks
surrounding the year end. The Company's plans have been designed to help it
through any kind of disruption of business, including Y2K. Additionally, it has
established a "high alert" program to ensure a smooth internal communications
process. The Company has enhanced its customer service area to handle the
anticipated increase in calls. It has a series of "functional recovery plans" in
place which will allow it to manually proceed in case it has isolated problems
in any system. Finally, it has an extensive disaster recovery plan which
includes a full generator at its core service facility, alternative
communication routes to its data processing provider, and plans at every
facility to address interruptions. Testing of the contingency plan will remain a
priority for the rest of the year.
COST OF Y2K TO THE COMPANY
The Company has spent $730 thousand for Y2K preparedness. These costs were
primarily for software upgrades, infrastructure changes, and testing. The
Company has also spent approximately $5 million on a new PC network
infrastructure, some of which is directly related to Y2K issues and some of
which is additional investments in technology. The Company estimates up to an
additional $20 to $100 thousand may be expended in 1999 for costs associated
with Y2K issues.
<PAGE>
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 THREE MONTHS ENDED JUNE 30
------------------------------------- -------------------------------------
1999 1998 CHANGE 1999 1998 CHANGE
---------- ---------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total interest income $ 122,646 $ 120,348 1.9% $ 62,398 $ 61,364 1.7%
Net interest income 64,741 60,472 7.1 33,022 30,811 7.2
Net interest income (1) 68,310 64,212 6.4 34,779 32,686 6.4
Provision for credit losses 4,705 2,462 91.1 3,016 1,253 140.7
Noninterest income 25,887 23,837 8.6 12,216 11,844 3.1
Noninterest expense 58,300 51,607 13.0 30,014 26,488 13.3
Net income 18,622 19,860 (6.2) 8,396 9,859 (14.8)
Dividends 7,920 7,920 -- 3,960 3,960 --
AVERAGE BALANCES
Assets 3,388,623 3,190,509 6.2 3,442,608 3,232,681 6.5
Loans and leases 2,163,308 2,010,707 7.6 2,200,755 2,054,475 7.1
Securities 1,016,266 978,106 3.9 1,033,781 978,320 5.7
Deposits 2,532,046 2,431,295 4.1 2,535,535 2,452,456 3.4
Redeemable class A common stock 24,234 22,767 6.4 24,419 22,998 6.2
Shareholder's equity 278,694 261,812 6.4 280,822 264,457 6.2
PERIOD-END BALANCES
Assets 3,504,744 3,272,009 7.1
Loans and leases 2,263,947 2,129,217 6.3
Securities 1,021,656 943,284 8.3
Deposits 2,540,764 2,441,367 4.1
Redeemable class A common stock 24,198 23,226 4.2
Shareholder's equity 278,280 267,103 4.2
FINANCIAL RATIOS
Return on assets (2) 1.11% 1.29% (14.0) 0.98% 1.25% (21.6)
Return on realized equity (3)(4) 12.33 14.33 (14.0) 10.94 13.99 (21.8)
Average equity/assets (3)(4) 8.99 8.76 2.6 8.94 8.74 2.3
Dividend payout 42.53 39.88 6.6 47.16 40.17 17.4
Net interest margin (1) 4.32 4.31 0.2 4.30 4.31 (0.2)
Efficiency ratio 61.93 58.74 5.4 62.66 59.48 5.3
Net charge-offs/average loans and leases 0.34 0.07 385.7 0.52 0.08 550.0
Reserve/period-end loans and leases 1.68 1.69 (0.6) 1.68 1.69 (0.6)
PER SHARE OF COMMON STOCK (3)
Net income-basic $ 1.55 $ 1.66 (6.2)% $ 0.70 $ 0.83 (14.8)%
Dividends paid 0.66 0.66 -- 0.33 0.33 --
Book value 25.21 24.19 4.2 25.21 24.19 4.2
Realized book value (4) 25.83 23.79 8.6 25.83 23.79 8.6
</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
YEAR-TO-DATE
JUNE 30
1999 VS 1998
------------
Return on assets, prior year 1.29%
------
Increases
Insurance 0.05
Gain on sale of securities 0.04
Minority interest earnings 0.04
Brokerage 0.02
Other service charges 0.01
------
Total increases 0.16
------
Decreases
Provision for credit losses 0.12
Salaries and wages 0.05
Professional fees 0.04
Furniture and equipment 0.03
Employee benefits 0.03
Other noninterest expenses, net 0.07
------
Total decreases 0.34
------
Return on assets, current period 1.11%
======
<PAGE>
TABLE II
CAPITAL RATIOS (1)
JUNE 30 DECEMBER 31 JUNE 30 REGULATORY
1999 1998 1998 MINIMUMS
----------- ----------- ----------- ----------
Equity to assets (2) 8.84% 8.81% 8.73% --%
Tangible equity to assets (2) 8.37 8.41 8.40 --
Tier I capital (3) 12.22 12.13 12.12 4.00
Tier I and tier II capital (3) 13.48 13.39 13.37 8.00
Leverage ratio (3) 8.51 8.58 8.52 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
Second $34,779 4.30%
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)
<TABLE>
<CAPTION>
-------------------------- --------------------------
SIX MONTHS ENDED JUNE 30 THREE MONTHS ENDED JUNE 30
1999 VS 1998 1999 VS 1998
-------------------------- --------------------------
(DOLLARS IN THOUSANDS)
NET NET NET NET
INTEREST INTEREST INTEREST INTEREST
INCOME MARGIN INCOME MARGIN
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CHANGE IN VOLUME
Earning assets $ 7,813 $ 4,203
Interest bearing liabilities (3,834) (2,083)
---------- ----------
3,979 2,120
CHANGE IN INTEREST RATE SPREAD
Earning assets (5,506) (0.35)% (2,982) (0.37)%
Interest bearing liabilities 5,282 0.34 3,108 0.38
---------- ---------- ---------- ----------
(224) (0.01) 126 0.01
CHANGE IN PRODUCT MIX
Earning assets 309 0.02 3 --
Interest bearing liabilities 520 0.03 152 0.02
---------- ---------- ---------- ----------
829 0.05 155 0.02
OTHER CHANGES
Nonaccruing loans (373) (0.02) (225) (0.02)
Yield-related loan fees (116) (0.01) (83) (0.01)
Free Funds -- -- -- (0.01)
---------- ---------- ---------- ----------
(489) (0.03) (308) (0.04)
CHANGE IN NET INTEREST INCOME 4,095 0.01 2,093 (0.01)
Net interest income, prior period 64,214 4.31 32,685 4.31
---------- ---------- ---------- ----------
Net interest income, current period $ 68,309 4.32% $ 34,778 4.30%
========== ========== ========== ==========
</TABLE>
<PAGE>
TABLE V
CHANGES IN NET INTEREST INCOME (TEB)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 VS 1998
-------------------------------------------
(IN THOUSANDS)
VOLUME YIELD/RATE(1) TOTAL
---------- ------------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN:
INTEREST INCOME
Loans and leases $ 5,733 $ (3,333) $ 2,400
Taxable securities 1,533 (1,268) 265
Tax-exempt securities 523 (963) (440)
Federal funds sold 20 (113) (93)
Other earning assets 4 (9) (5)
---------- ---------- ----------
Total 7,813 (5,686) 2,127
INTEREST EXPENSE
Savings deposits 643 (346) 297
Other time deposits 2,477 (5,853) (3,376)
Short-term borrowings 623 (1,588) (965)
Long-term debt 91 1,985 2,076
---------- ---------- ----------
Total 3,834 (5,802) (1,968)
---------- ---------- ----------
NET INTEREST INCOME $ 3,979 $ 116 $ 4,095
========== ========== ==========
</TABLE>
(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>
JUNE 30 DECEMBER 31 JUNE 30
1999 1998 1998
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans and leases $ 17,191 $ 13,077 $ 9,300
Restructured loans and leases 61 178 601
----------- ----------- -----------
Total nonperforming loans and leases 17,252 13,255 9,901
Other real estate owned (OREO) 626 620 391
----------- ----------- -----------
Total nonperforming assets $ 17,878 13,875 10,292
=========== =========== ===========
Past due loans and leases * $ 1,591 $ 1,142 $ 5,438
=========== =========== ===========
Nonperforming loans and leases to total loans and leases 0.76% 0.61% 0.47%
Nonperforming assets to total loans, leases and OREO 0.79 0.64 0.48
Nonperforming assets and past due loans and leases* to
total loans, leases and OREO 0.86 0.69 0.74
Reserve to nonperforming loans and leases 220.88 279.28 363.92
Reserve to total loans and leases 1.68 1.70 1.69
</TABLE>
* PAST DUE LOANS AND LEASES INCLUDE ACCRUING LOANS AND LEASES 90 DAYS OR MORE
PAST DUE.
<PAGE>
TABLE VII
RESERVE FOR CREDIT LOSSES
SIX MONTHS ENDED JUNE 30
--------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Beginning of period $ 37,019 $ 34,253
Charge-offs (4,224) (1,378)
Recoveries 607 695
---------- ----------
Net charge-offs (3,617) (683)
Provision for credit losses 4,705 2,462
========== ==========
End of period $ 38,107 $ 36,032
========== ==========
<PAGE>
TABLE VIII
NONINTEREST INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 INCREASE/(DECREASE)
------------------------- --------------------------
1999 1998 DOLLAR PERCENT
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges $ 8,915 $ 8,259 $ 656 7.94%
Insurance 4,228 3,192 1,036 32.46
Trust 3,732 3,444 288 8.36
Brokerage 2,314 1,802 512 28.41
Gain on sale of loans 2,012 2,343 (331) (14.13)
Gain on sale of other assets 251 560 (309) (55.18)
Other 2,147 1,998 149 7.46
---------- ---------- ----------
Operating noninterest income 23,599 21,598 2,001 9.26
Gain on sale of securities 1,847 1,138 709 62.30
State tax refund 441 1,101 (660) NM
---------- ---------- ----------
Total $ 25,887 $ 23,837 $ 2,050 8.60%
========== ========== ==========
<CAPTION>
THREE MONTHS ENDED JUNE 30 INCREASE/(DECREASE)
-------------------------- --------------------------
1999 1998 DOLLAR PERCENT
---------- ---------- ---------- ----------
(IN THOUSANDS)
Service charges $ 4,692 $ 4,283 409 9.55%
Insurance 2,094 1,507 587 38.95
Trust 1,874 1,702 172 10.11
Brokerage 1,271 1,057 214 20.25
Gain on sale of loans 920 1,231 (311) (25.26)
Gain on sale of other assets 218 130 88 67.69
Other 1,074 905 169 18.67
---------- ---------- ----------
Operating noninterest income 12,143 10,815 1,328 12.28
Gain on sale of securities 73 (72) 145 201.39
State tax refund -- 1,101 (1,101) NM
---------- ---------- ----------
Total $ 12,216 $ 11,844 372 3.14%
========== ========== ==========
</TABLE>
<PAGE>
TABLE IX
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 INCREASE/(DECREASE)
------------------------- --------------------------
1999 1998 DOLLAR PERCENT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and wages $ 26,387 $ 24,074 $ 2,313 9.61%
Employee benefits 6,942 6,137 805 13.12
Occupancy 3,322 3,075 247 8.03
Furniture and equipment 4,390 3,650 740 20.27
Printing, postage and office supplies 2,826 2,589 237 9.15
Marketing 2,261 2,097 164 7.82
Data processing fees 3,408 2,984 424 14.21
Professional fees 1,357 710 647 91.13
Other real estate owned 48 60 (12) (20.00)
Minority interest in earnings 15 595 (580) (97.48)
FDIC premiums and examination fees 633 593 40 6.75
Goodwill and other intangibles 1,087 845 242 28.64
Other 5,624 4,198 1,426 33.97
---------- ---------- ----------
Total $ 58,300 $ 51,607 $ 6,693 12.97%
========== ========== ==========
<CAPTION>
THREE MONTHS ENDED JUNE 30 INCREASE/(DECREASE)
-------------------------- --------------------------
1999 1998 DOLLAR PERCENT
---------- ----------- ---------- ----------
(IN THOUSANDS)
Salaries and wages $ 13,608 $ 12,340 1,268 10.28%
Employee benefits 3,587 3,116 471 15.12
Occupancy 1,614 1,496 118 7.89
Furniture and equipment 2,268 1,853 415 22.40
Printing, postage and office supplies 1,447 1,300 147 11.31
Marketing 1,161 1,192 (31) (2.60)
Data processing fees 1,869 1,487 382 25.69
Professional fees 713 408 305 74.75
Other real estate owned 31 39 (8) (20.51)
Minority interest in earnings 7 194 (187) (96.39)
FDIC premiums and examination fees 323 293 30 10.24
Goodwill and other intangibles 645 432 213 49.31
Other 2,741 2,338 403 17.24
---------- ---------- ----------
Total $ 30,014 $ 26,488 3,526 13.31%
========== ========== ==========
</TABLE>
<PAGE>
BFC CORP - EXTERNAL
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
FOR SIX MONTHS ENDED JUNE 30, 1999 AND 1998
TAX EQUIVALENT BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 1999 Actual - YTD June 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 $ 492,304 $ 21,110 8.65% $ 414,154 $ 18,928 9.22% 18.87%
Commercial Real Estate 567,895 24,223 8.60 470,700 21,407 9.17 20.65
Agricultural 430,325 18,590 8.71 419,655 19,170 9.21 2.54
Residential Real Estate 377,337 16,147 8.63 396,696 17,249 8.77 (4.88)
Consumer 241,407 10,788 9.01 256,557 11,634 9.14 (5.91)
Tax Exempt 54,040 2,594 9.68 52,945 2,664 10.15 2.07
---------- -------- ---------- --------
TOTAL LOANS AND LEASES 2,163,308 93,452 8.71 2,010,707 91,052 9.13 7.59
Reserve for Credit Losses (37,847) (35,175) 7.60
---------- ----------
NET LOANS AND LEASES 2,125,461 1,975,532 7.59
Mortgage Backed Securities 756,974 22,821 6.08 678,934 21,457 6.37 11.49
Taxable Other 60,079 1,792 6.01 92,810 2,892 6.28 (35.27)
Tax Exempt 199,213 7,868 7.96 206,362 8,308 8.12 (3.46)
---------- -------- ---------- --------
TOTAL SECURITIES 1,016,266 32,481 6.45 978,106 32,657 6.73 3.90
Total Fed Funds Sold 10,050 229 4.59 11,782 322 5.51 (14.70)
Other earning assets 2,145 53 4.98 2,150 57 5.35 (0.23)
---------- -------- ---------- --------
TOTAL EARNING ASSETS 3,191,769 126,215 7.97 3,002,745 124,088 8.33 6.30
Total Cash & Due from Banks 110,060 102,427 7.45
Nonearning assets 124,641 120,512 3.43
---------- ----------
TOTAL ASSETS $3,388,623 $3,190,509 6.21
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Non-Interest Bearing Deposits $ 312,539 $ 292,823 6.73
Interest Bearing Deposits
Savings and NOW accounts 281,715 1,616 1.16 292,711 2,331 1.61 (3.76)
Money Market Checking 158,286 720 0.92 157,737 1,119 1.43 0.35
Money Market Savings 440,608 8,010 3.67 327,947 6,599 4.06 34.35
Savings Certificates 1,133,228 29,932 5.33 1,179,800 33,618 5.75 (3.95)
Certificates over $100K 205,669 5,376 5.27 180,277 5,066 5.67 14.08
---------- -------- ---------- --------
TOTAL INTEREST BEARING DEPOSITS 2,219,506 45,654 4.15 2,138,472 48,733 4.60 3.79
TOTAL DEPOSITS 2,532,045 2,431,295 4.14
Total Short Term Borrowings 360,800 8,763 4.90 361,705 9,728 5.42 (0.25)
Total Long Term Debt 135,981 3,489 5.17 52,595 1,413 5.42 158.54
---------- -------- ---------- --------
TOTAL INTEREST BEARING LIABILITIES 2,716,288 57,905 4.30 2,552,772 59,876 4.73 6.41
Other liabilities 53,936 51,494 4.74
TOTAL LIABILITIES 3,082,763 2,897,089 6.41
Minority Interest 898 6,732 (86.66)
Redeemable Preferred Stock 2,034 2,109 (3.56)
Redeemable Class A Common Stock 24,234 22,767 6.44
Shareholder's equity 278,694 261,812 6.45
---------- ----------
TOTAL LIABILITIES AND EQUITY $3,388,623 $3,190,509 6.21
========== ==========
Net Interest Income $ 68,310 $ 64,212
======== ========
Gross Spread 3.68% 3.60%
Percent of earning assets
Interest Income 7.97 8.33
Interest Cost 3.66 4.02
------ ------
NET INTEREST MARGIN 4.32% 4.31%
Interest bearing liabilities to earning assets 85.10% 85.01%
</TABLE>
<PAGE>
BFC CORP - EXTERNAL
AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
FOR THREE MONTHS ENDED JUNE 30, 1999 AND 1998
TAX EQUIVALENT BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
June 1999 Actual - QTD June 1998 Actual - QTD
------------------------------ -------------------------------- --------
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> <S> <C> <C> <C>
Commercial $ 511,562 $11,012 8.63% $ 437,408 $ 9,987 9.16% 16.95%
Commercial Real Estate 577,000 12,389 8.61 479,437 10,978 9.18 20.35
Agricultural 437,291 9,409 8.63 435,213 10,052 9.26 0.48
Residential Real Estate 380,884 8,127 8.56 392,891 8,647 8.83 (3.06)
Consumer 240,830 5,349 8.91 255,848 5,824 9.13 (5.87)
Tax Exempt 53,188 1,271 9.58 53,678 1,346 10.06 (0.91)
----------- ------- ----------- --------
TOTAL LOANS AND LEASES 2,200,755 47,557 8.67 2,054,475 46,834 9.14 7.12
Reserve for Credit Losses (38,040) (35,611) 6.82
----------- -----------
NET LOANS AND LEASES 2,162,715 2,018,864 7.13
Mortgage Backed Securities 786,806 11,834 6.03 691,804 10,867 6.30 13.73
Taxable Other 50,266 763 6.09 80,559 1,253 6.24 (37.60)
Tax Exempt 196,709 3,878 7.91 205,957 4,154 8.09 (4.49)
----------- ------- ----------- --------
TOTAL SECURITIES 1,033,781 16,475 6.39 978,320 16,274 6.67 5.67
Total Fed Funds Sold 8,345 98 4.71 7,692 100 5.21 8.49
Other earning assets 2,108 25 4.76 2,239 31 5.55 (5.85)
----------- ------- ----------- --------
TOTAL EARNING ASSETS 3,244,989 64,155 7.93 3,042,726 63,239 8.34 6.65
Total Cash & Due from Banks 112,378 104,726 7.31
Nonearning assets 123,281 120,840 2.02
----------- -----------
TOTAL ASSETS $ 3,442,608 $ 3,232,681 6.49
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Non-Interest Bearing Deposits $ 317,996 $ 297,241 6.98
Interest Bearing Deposits
Savings and NOW accounts 276,427 769 1.12 289,582 1,122 1.55 (4.54)
Money Market Checking 157,380 362 0.92 156,849 551 1.41 0.34
Money Market Savings 446,009 4,061 3.65 343,417 3,502 4.09 29.87
Savings Certificates 1,129,933 14,779 5.25 1,183,346 16,958 5.75 (4.51)
Certificates over $100K 207,789 2,711 5.23 182,021 2,577 5.68 14.16
----------- ------- ----------- --------
TOTAL INTEREST BEARING DEPOSITS 2,217,538 22,682 4.10 2,155,215 24,710 4.60 2.89
TOTAL DEPOSITS 2,535,534 2,452,456 3.39
Total Short Term Borrowings 386,741 4,708 4.88 378,413 5,086 5.39 2.20
Total Long Term Debt 161,649 1,987 4.93 55,849 757 5.44 189.44
----------- ------- ----------- --------
TOTAL INTEREST BEARING LIABILITIES 2,765,929 29,376 4.26 2,589,477 30,553 4.73 6.81
Other liabilities 50,524 49,638 1.78
TOTAL LIABILITIES 3,134,449 2,936,356 6.75
Minority Interest 899 6,756 (86.69)
Redeemable Preferred Stock 2,019 2,113 (4.45)
Redeemable Class A Common Stock 24,419 22,998 6.18
Shareholder's equity 280,822 264,457 6.19
----------- -----------
TOTAL LIABILITIES AND EQUITY $ 3,442,608 $ 3,232,681 6.49
=========== ===========
Net Interest Income $34,779 $ 32,686
======= ========
Gross Spread 3.67% 3.60%
Percent of earning assets
Interest Income 7.93 8.34
Interest Cost 3.63 4.03
------- ------
NET INTEREST MARGIN 4.30% 4.31%
Interest bearing liabilities to earning assets 85.24% 85.10%
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders.
(a) The Company held its annual meeting on April 21, 1999. At the meeting,
64.76% of the outstanding shares of the Company's class A common stock
was represented in person or by proxy.
(b) The Company solicited proxies for the annual meeting pursuant to
Regulation 14 under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's solicitation.
The first matter to be voted upon was a proposal to fix the number of
directors at not less than four (4) nor more than ten (10). This
proposal was passed as follows: 763,181.5362 votes for, 2,032.9865
votes against, and 11,908.9957 votes withheld.
The second matter voted upon was the election of directors. The
nominees consisted of all directors serving as such at the time of the
annual meeting, and all such nominees were re-elected as directors. The
directors elected consisted of Terry M. Cummings, Stan K. Dardis,
William H. Lipschultz, Charlotte S. Johnson, Daniel Reardon, and
Sherman Winthrop. The votes cast were as follows: 765,272.5164 votes
for all nominees and 11,851.0020 votes to withhold authority for all
nominees.
The final matter voted upon was the ratification of the appointment of
Deloitte & Touche LLP as the Company's independent accountant to audit
the consolidated financial statements of the Company for the year ended
December 31, 1999. The appointment was ratified as follows:
759,166.1829 votes for, 12,877.5055 votes against, and 5,079.8300 votes
withheld.
As to each matter, there were no broker non-votes.
There were no other matters submitted for a vote or voted upon at the
annual meeting.
<PAGE>
Item 5. Other information.
(a) This Quarterly Report on Form 10-Q contains forward-looking statements
that involve inherent risks and uncertainties. Bremer Financial
Corporation cautions readers that a number of important factors could
cause actual results to differ materially from those in the
forward-looking statements. Those factors included fluctuations in
interest rates, inflation, government regulations, technology changes
(including the Year 2000 issue), regulatory delays in approving
acquisitions, and economic conditions and competition in the geographic
and business areas in which the Company conducts its operations.
(b) In a Current Report on Form 8-K filed on January 28, 1999, the Company
reported that it had entered into a Stock Purchase Agreement dated
January 25, 1999 ("Dean Agreement") with the shareholders of Dean
Financial Services, Inc. ("Dean") under which the Company was to
acquire all of the shares of capital stock of Dean. The transactions
described in the Dean Agreement closed on July 8, 1999.
(c) In a Current Report on Form 8-K filed on February 22, 1999, the Company
reported that it had entered into an Agreement and Plan of Merger dated
February 16, 1999 under which Bremer Acquisition Corporation, a
wholly-owned subsidiary of the Company, would acquire Northwest Equity
Corporation ("Northwest") and its wholly owned subsidiary Northwest
Savings Bank, in a merger ("Merger") in which Northwest would become a
wholly-owned subsidiary of the Company. It is now anticipated that due
to unanticipated regulatory delays, the Merger will likely close no
earlier than the first quarter of 2000 rather than in the third quarter
of 1999, as originally reported.
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 June
30, 1999 or during the period from June 30, 1999 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: August 12, 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)
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