-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MMBaX+Ltf/SbCbFKa6/jxHakFrjYzjAolBK7ir7egyxzagH8yqlK9Lh19+erzbzJ TJZMmnk5B1UVPArFnA7vHw== 0000897101-00-000226.txt : 20000314 0000897101-00-000226.hdr.sgml : 20000314 ACCESSION NUMBER: 0000897101-00-000226 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BREMER FINANCIAL CORPORATION CENTRAL INDEX KEY: 0000846616 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 410715583 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18342 FILM NUMBER: 567300 BUSINESS ADDRESS: STREET 1: 445 MINNESOTA ST STE 2000 CITY: SAINT PAUL STATE: MN ZIP: 55418 BUSINESS PHONE: 6122277621 MAIL ADDRESS: STREET 1: 445 MINNESOTA STREET STREET 2: SUITE 2000 CITY: ST PAUL STATE: MN ZIP: 55418 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K ----------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 incorporation or organization) Identification No.) 445 MINNESOTA STREET 55101 SUITE 2000, ST. PAUL, MN (Zip Code) (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (651) 227-7621 ----------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE. ----------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Class A Common Stock, no par value ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Based upon the $26.07 per share book value of the shares of class A common stock of the Company as of December 31, 1999, the aggregate value of the Company's shares of class A common stock held by employees and directors as of such date was approximately $25.0 million. As of March 13, 2000, there were 1,200,000 shares of class A common stock and 10,800,000 shares of class B common stock outstanding. ================================================================================ BREMER FINANCIAL CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 INDEX PAGE ---- Documents Incorporate by Reference ........................................ ii Cross Reference Sheet ..................................................... iii PART I Item 1. Business .......................................................... 1 Item 2. Properties ........................................................ 3 Item 3. Legal Proceedings ................................................. 3 Item 4. Submission of Matters to a Vote of Security Holders ............... 3 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ........................................................... 3 Item 6. Selected Financial Data ........................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. 8 Item 8. Financial Statements and Supplementary Data ....................... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................................... 45 PART III Item 10 through Item 13. See "Documents Incorporated by Reference" (Page ii) ......................................... 45 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................................................... 45 Signatures ................................................................ 48 i DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated by reference to the parts indicated of this Annual Report on Form 10-K:
PARTS OF ANNUAL REPORT ON FORM 10-K DOCUMENTS INCORPORATED BY REFERENCE - ----------------------------------- ----------------------------------- PART II Item 5. Market for Registrant's Common Reference is made to the portions described Equity and Related Stockholder herein of the final Prospectus of the Company Matters. dated April 20, 1989 filed with the Securities and Exchange Commission on April 20, 1989. PART III Item 10. Directors and Executive Officers Reference is made to the Registrant's definitive of the Registrant. proxy statement ("Proxy Statement"), which will be filed with the Securities and Exchange Commission ("Commission") within 120 days after December 31, 1999. Item 11. Executive Compensation. Reference is made to the Registrant's Proxy Statement. Item 12. Security Ownership of Certain Reference is made to the Registrant's Proxy Beneficial Owners and Management. Statement. Item 13. Certain Relationships and Related Reference is made to the Registrant's Proxy Transactions. Statement.
(The remainder of this page was intentionally left blank.) ii CROSS REFERENCE SHEET BETWEEN ITEMS IN PART III OF FORM 10-K AND PROXY STATEMENT PURSUANT TO PARAGRAPH G-4 OF GENERAL INSTRUCTIONS TO FORM 10-K
SUBJECT HEADINGS ITEM NUMBER AND CAPTION IN PROXY STATEMENT - ---------------------------------------------------------------- ---------------------- Item 10. Directors and Executive Officers of the Registrant. Election of Directors Item 11. Executive Compensation. Election of Directors Item 12. Security Ownership of Certain Beneficial Owners and Management. Principal Stockholders Item 13. Certain Relationships and Related Transactions. Election of Directors
(The remainder of this page was intentionally left blank.) iii PART I. Certain statements in this Annual Report on Form 10-K and in the documents incorporated by reference herein constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended ("Exchange Act"). For this purpose, any statements contained herein or incorporated herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. ITEM 1. BUSINESS. GENERAL Bremer Financial Corporation (the "Company") is a privately-held regional financial services company headquartered in St. Paul, Minnesota, and incorporated under Minnesota law on December 7, 1943. As of March 13, 2000, the Company owned at least 99.8% of the total outstanding capital stock of its 14 subsidiary banks (collectively, "Subsidiary Banks"). As a bank holding company, the Company is subject to the federal Bank Holding Company Act of 1956, as amended ("Holding Company Act"), and to regulation and supervision by the Federal Reserve System (including the Board of Governors of the Federal Reserve System). The Subsidiary Banks are located in Minnesota, Wisconsin and North Dakota and have a total of 100 offices throughout these states. The Subsidiary Banks draw most of their deposits from and make substantially all of their loans within the states of Minnesota, Wisconsin and North Dakota and have no foreign loans. At December 31, 1999, the Company and its subsidiaries (including the Subsidiary Banks) had consolidated assets of approximately $3.9 billion and consolidated deposits of approximately $2.9 billion. The Subsidiary Banks ranged in size from $65.2 million to $707.1 million in total assets and from $59.4 million to $483.7 million in total deposits as of December 31, 1999. See the portion of this Form 10-K, Item 1. entitled "Business Developments in 1999." The Company also owns several financial services subsidiaries. It owns all of the outstanding capital stock of Bremer Trust, National Association ("Bremer Trust"), which provides trust and other fiduciary services to most of the Minnesota Subsidiary Banks' communities; Bremer Insurance Agencies, Inc. ("Bremer Insurance Agencies"), which provides insurance agency services to the Subsidiary Banks' communities; Bremer Financial Services, Inc. ("Bremer Financial"), which provides management and support services to the Company and its subsidiaries; Bremer Business Finance Corporation ("BBFC"), which provides asset-based lending and leasing services; and Bremer Services, Inc. ("Bremer Services"), which provides operations and support services to the Subsidiary Banks. The Company also owns a controlling portion of the capital stock of Bremer First American Life Insurance Company, which is engaged in the underwriting and reinsurance of credit life and health insurance sold in conjunction with the extension of credit by the Subsidiary Banks. Consumer investment products and services are available at the Subsidiary Banks through INVEST Financial Corporation of Tampa, Florida ("INVEST"). The Company and its Subsidiary Banks have entered into a fully disclosed agreement with INVEST whereby the Company and its subsidiaries deliver investment services to its customers through a network of Subsidiary Banks' offices and receive a portion of the commissions earned by the investment representatives. The operations of the financial services subsidiaries, while an integral part of the Company's ability to deliver a full range of financial services, taken as a whole, are not significant enough to meet the requirements of additional segment reporting. The Otto Bremer Foundation (the "Foundation") owns 20% of the outstanding shares of the Company's class A common stock and 100% of the outstanding shares of its class B common stock, for a total of 92% of the outstanding shares of the Company's capital stock, consisting only of the class A and class B common stock. Accordingly, the Foundation is, and is subject to regulation as, a bank holding company within the meaning of the Holding Company Act. COMPETITION The banking business is highly competitive. As the financial service industry expands, the scope of potential competition for the Subsidiary Banks also expands. The Subsidiary Banks compete with other 1 commercial banks, savings and loan associations, and credit unions for loans and deposits, with money market funds for deposits, and with brokerage firms for investment products and services. Consumer and commercial finance companies, department stores, mortgage banks and insurance companies are also important competitors for various types of loans. Some of these entities and institutions are not subject to the same regulatory restrictions as the Company and the Subsidiary Banks. In addition, competition has intensified as local institutions become part of larger national associations as a result of amendments to interstate banking laws. Management believes that each Subsidiary Bank will be able to continue to compete successfully in its community. Management further believes that the Company's emphasis on local management and the ability of the Subsidiary Banks to make decisions close to the marketplace, the Subsidiary Banks' community commitment and involvement, and the commitment to a strong sales culture and to providing quality banking services, are factors that should allow the Subsidiary Banks to continue to maintain and improve their competitive position. TRADEMARKS In 1998, in conjunction with the Company's legal name changes of its Subsidiary Banks and other subsidiaries, the Company modified its stylized "Bremer Eagle" symbol and registered it with the United States Patent and Trademark Office. As part of this modification, the Company also registered a stylized version of the word "Bremer" for use in identifying and advertising a common identity among the Company's affiliates. These trademarks are used by substantially all of the Company's affiliates, including the Subsidiary Banks. The Company has registered no other trademarks, patents or copyrights. While management believes that a trademark is useful in identifying and advertising a common identity among the Company's affiliates, it also believes that the "Bremer Eagle" symbol, the "Bremer" name, or any other trademark, patent or copyright, or the registration thereof, is not material to the business of the Company or its subsidiaries. BUSINESS DEVELOPMENTS IN 1999 In February 1999, the Company expanded its operations in Fergus Falls, Minnesota, with the addition of a new branch facility to complement its existing supermarket location in that community. On February 16, 1999, the Company signed a definitive agreement to purchase Northwest Equity Corp. of Amery, Wisconsin, and its subsidiary, Northwest Savings Bank. The closing of this acquisition, which had been held up by delays in the regulatory approval process, is expected in the first quarter of 2000. Northwest Savings Bank has assets of approximately $95 million with three locations in Amery, New Richmond, and Siren, Wisconsin. In March 1999, the Company began operations in a Business Banking Center located on the 21st floor of the North Central Life tower in downtown St. Paul, Minnesota. On July 8, 1999, the Company acquired Dean Financial Services, Inc. ("Dean"). Dean was a privately-held bank holding company with approximately $300 million in assets with four charter banks serving 11 locations in Minnesota. During the latter half of 1999, Dean was merged into the Company and the four separate charter banks of Dean were merged into previously existing charter banks of the Company. On July 31, 1999, the Company sold substantially all of the assets of Premium Finance Corporation ("PFC") located in Eau Claire, Wisconsin. PFC was engaged in the business of financing customer insurance premiums and had assets of approximately $1 million. In December 1999, the Company redeemed the remaining $1.6 million of redeemable preferred stock which had been issued by Dunn County Bankshares, Inc. ("DCBI") in connection with a September 1994 acquisition of operations in Menomonie, Wisconsin. Subsequent to this stock redemption, DCBI was merged into the Company. EMPLOYEES As of March 13, 2000, the Company and its subsidiaries (including the Subsidiary Banks) had a total of 1,520 full-time equivalent positions. The Company and each of its subsidiaries considers its relations with employees to be good. None of the Company's employees is a member of a collective bargaining unit. 2 ITEM 2. PROPERTIES. The Company leases its principal offices at 445 Minnesota Street, Suite 2000, St. Paul, Minnesota 55101, which consist of approximately 25,000 square feet of space. Management believes that these facilities will be sufficient for the Company's needs in the foreseeable future. Substantially all of the Subsidiary Bank offices and branches are owned, with the primary exception of those located in leased retail space in downtown St. Paul, Minnesota, and leased space in supermarkets. The facilities are all well maintained and range in size from 391 square feet to 52,280 square feet. Certain properties of the Subsidiary Banks may be subject to pledges or mortgages. However, the amount of long-term debt secured by mortgages on the Subsidiary Banks' properties is not material. See Notes F and H in the Notes to Consolidated Financial Statements of the Company set forth in Item 8 of Part II of this Form 10-K. ITEM 3. LEGAL PROCEEDINGS. The Company and certain of its Subsidiary Banks are involved in legal actions in various stages of litigation and investigation. After reviewing all actions, pending or threatened, involving the Company and such Subsidiary Banks, management believes that such legal actions, whether pending or threatened, constitute ordinary routine litigation incidental to the business of the Company and the Subsidiary Banks and that the ultimate resolution of these matters should not materially affect the Company's consolidated financial position or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted during the fourth quarter of the year ended December 31, 1999 to a vote of the Company's security holders, through the solicitation of proxies or otherwise. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION There is no established trading market for the shares of the Company's class A common stock. To the best of the Company's knowledge, during the period from May 18, 1989 (the closing date of the registered initial public offering of the Company's class A common stock) through and including February 22, 2000, a majority of the purchases and sales of shares of the class A common stock have consisted of transfers effected upon the exercise of the options described in the portions of the Company's Prospectus dated April 20, 1989 ("Prospectus") entitled "Description of Capital Stock -- Description of Class A Common Stock -- Restrictions on Transfer" on page 62 of the Prospectus and "Description of Capital Stock -- Description of Class A Common Stock First Call Option to Company" on page 64 of the Prospectus (which portions are hereby incorporated by reference pursuant to Rule 12b-23 under the Securities Exchange Act of 1934). The Company is not obligated to purchase any shares of class A common stock from a holder upon the exercise of a put option if the purchase price paid for the shares subject to the put option, when added to the purchase price paid for all previous purchases of class A common stock during the preceding twelve-month period, would exceed 10% of the Company's net worth as of the date of such purchase. As of December 31, 1999, the Company's net worth, including redeemable class A common stock, was $312.9 million and 10% of the Company's net worth and redeemable class A common stock was $31.3 million. During the period from January 1, 1999 and through and including February 22, 2000, the Company did not directly purchase any shares of class A common stock but assigned to its Employee Stock Ownership Plan ("ESOP") and the Bremer Banks Profit Sharing Plus Plan ("Profit Sharing Plan") its options to purchase a total of 87,553.7448 shares. The ESOP and the Profit Sharing Plan purchased these shares and then transferred them to employees of the Company and its subsidiaries through the ESOP and the Profit Sharing Plan. In addition, 2,645 shares of class A common stock were transferred directly between individuals at various times throughout the year. To the best of the Company's knowledge, 3 these were the only transfers of shares of class A common stock effected during the period from January 1, 1999 through and including February 22, 2000. The sales price of the shares of class A common stock in such transactions ranged from $25.21 to $36.85 per share. These prices were equal to either the per share book value of the class A common stock as shown in the Company's consolidated balance sheet dated as of the last day of the immediately preceding fiscal quarter or, and only with respect to shares transferred that had been held for employees in the ESOP, the per share fair market values of $36.85, $36.00, and $35.25 as of June 30, 1998, December 31, 1998, and June 30, 1999, respectively, as determined by an independent appraiser. At December 31, 1999, the most recent date for which a per share book value for the class A common stock is available, such value was $26.07. To the best of the Company's knowledge, no brokers are used to sell the shares of class A common stock, and there are no market makers for the class A common stock. HOLDERS As of February 22, 2000, there were approximately 1,200 holders of record of the shares of class A common stock. DIVIDENDS The Subsidiary Banks' ability to pay dividends to the Company and the Company's ability to pay dividends to holders of the class A common stock are restricted and limited. The restrictions on payments of dividends are also described in Note O of the Company's Notes to Consolidated Financial Statements set forth in Item 8 of this Form 10-K. Each of the Subsidiary Banks is subject to extensive regulation regarding the payment of dividends and other matters. All Subsidiary Banks are nationally chartered and are regulated by the Office of the Comptroller of the Currency ("Comptroller"). In addition, because the deposits of the Company's Subsidiary Banks are insured up to the applicable limit (currently $100,000) by the Federal Deposit Insurance Corporation ("FDIC"), all of the Subsidiary Banks are subject to regulation by the FDIC. The Company and the Foundation, as bank holding companies, are regulated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). DIVIDENDS FROM SUBSIDIARY BANKS. A substantial portion of the Company's cash flow and income is derived from dividends paid to it by the Subsidiary Banks, and restrictions on the payment of such dividends could affect the payment of dividends by the Company. With regard to the Subsidiary Banks, and in addition to the statutory prohibition against the withdrawal of any portion of a national bank's capital and certain statutory limitations on the payment of dividends, the approval of the Comptroller is required for the payment of any dividend by any national bank if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfer to surplus. The Comptroller also has issued a banking circular emphasizing that the level of cash dividends should bear a direct correlation to the level of a national bank's current and expected earnings stream, the bank's need to maintain an adequate capital base, and other factors. In addition to the foregoing limitations, the appropriate federal banking agency could take the position that it has the power to prohibit a national bank from paying dividends if, in its view, such payments would constitute unsafe or unsound banking practices. The payment of dividends by any national bank also is affected by the requirements to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Comptroller. The Comptroller has issued capital adequacy regulations for national banks subject to the Comptroller's primary supervision. These regulations provide for a minimum tier 1 capital to total assets (leverage) ratio of 3.00% for the most highly-rated banks and a minimum total capital to risk-weighted assets (total capital) ratio of 8.00%. These guidelines and regulations further provide that capital adequacy is to be considered on a case-by-case basis in view of various qualitative factors that affect a bank's overall financial condition. Most banking organizations are expected to maintain a leverage ratio of 100 to 200 basis points above this minimum depending on their financial condition. The Subsidiary Banks are in compliance with the Comptroller's minimum capital guidelines. See the discussion of the capital 4 adequacy guidelines set forth in the portion of Part II of this Form 10-K entitled "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Capital Management." The above regulations and restrictions on dividends paid by the Subsidiary Banks may limit the Company's ability to obtain funds from such dividends for its cash needs, including funds for payment of operating expenses and for the payment of dividends on the class A and class B common stock, as well as funds necessary to facilitate acquisitions. However, because of the capital positions of the Subsidiary Banks, the Company has been able to obtain dividends sufficient to meet its cash flow needs. As of December 31, 1999, the Subsidiary Banks had retained earnings of $45.2 million which were available for distribution to the Company as dividends in 2000 subject to regulatory and administrative restrictions. Of this amount, approximately $34.8 million was available for distribution without obtaining the prior approval of the appropriate bank regulator. In 1998 and 1999, the Subsidiary Banks paid total dividends to the Company of $32.7 million and $29.0 million, respectively. Of the fourteen banks that were Subsidiary Banks in 1998 and 1999, thirteen paid dividends in 1998 and twelve paid dividends in 1999. Of the Subsidiary Banks that paid dividends in 1998 and/or 1999, the range of dividend payouts (dividends paid divided by net income) was 49.3% to 100.9% in 1998 and 22.7% to 114.0% in 1999. Under the ESOP, and at the option of the ESOP's Administrator, cash dividends declared on the shares of class A common stock held by the ESOP will be allocated to the ESOP participants. To the extent that cash dividends declared on the class A common stock held by the ESOP are distributed to the participants (whether directly or indirectly), the dividends will be deductible to the Company. Any dividends paid in the form of class A common stock with respect to shares allocated to the individual participants' accounts will be allocated to such accounts. Under the Profit Sharing Plan, all cash dividends paid on the class A common stock are allocated to the accounts of the participants holding shares of the class A common stock in their profit sharing accounts. All such proceeds are available to the participants for investment under the Profit Sharing Plan in accordance with the terms and conditions of the Profit Sharing Plan. All dividends paid in the form of class A common stock will be allocated to the account of the participant in which the shares are held. In no event will dividends paid on the class A common stock held by the participants' accounts within the Profit Sharing Plan be forfeited or otherwise allocated and held by the trustees of the Profit Sharing Plan. DIVIDENDS FROM COMPANY. The payment of dividends by the Company, as a bank holding company, is limited by, among other things, the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Federal Reserve Board. These guidelines are substantially similar to those promulgated by the Comptroller with respect to national banks, which are discussed above. The payment of dividends by a bank holding company also is subject to the general limitation that the Federal Reserve Board could take the position that it has the power to prohibit the bank holding company from paying dividends if, in its view, such payments would constitute an unsafe or unsound practice. The Company declared and paid dividends to the Foundation and all other holders of its class A common stock of $15.8 million in both 1998 and 1999. In 1998 and 1999, $3.96 million of dividends were paid in each of the four quarters. The dividend yield, which consists of dividends paid during the year divided by shareholder's equity as of the last day of the preceding year, was 5.7% and 5.2% for the years ended December 31, 1998 and 1999, respectively. MARKET RISK Market risk is the risk of loss due to adverse changes in market prices and rates. The management of this risk is an integral part of the Company's financial objectives. Interest rate risk is the risk that changing interest rates will adversely affect net interest income and balance sheet valuations due to differences in the repricing and maturity characteristics of assets and liabilities. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. 5 Responsibility for management of the Company's overall interest rate risk rests with the asset/liability committee ("ALCO"). ALCO is responsible for the development of appropriate risk management policies and for the monitoring of asset/liability activities to insure that they are conducted within established risk parameters. The tools used to measure interest rate risk include gap analysis, simulation of future net 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. In each case, the cash flows are discounted by a market interest rate chosen to reflect as closely as possible the characteristics of the given asset or liability as obtained from independent broker quotations and other public sources as of December 31, 1999. The impact on valuations is then calculated for a 200 basis point rate shock. The rate shock is an instantaneous change in market rates across the yield curve. Significant assumptions required in the use of the valuation model include estimates regarding prepayment activity and the behavior of non-maturity deposits in various interest rate environments. The model does not reflect actions that ALCO could initiate in response to a change in interest rates. The valuation model indicates that the value of assets would decline approximately 4% 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 rates would be a decrease of approximately 13%. This is within the Company's maximum risk limit of 15% for this risk measure. (The remainder of this page was intentionally left blank.) 6 ITEM 6. SELECTED FINANCIAL DATA BREMER FINANCIAL CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
1999 CHANGE 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- ---------- OPERATING RESULTS (in thousands) Total interest income ..................... $ 263,975 7.5% $ 245,525 226,550 210,703 199,781 Net interest income ....................... 139,053 12.0 124,101 116,581 108,193 100,645 Net interest income (1) ................... 146,370 11.2 131,678 124,169 115,862 107,898 Provision for credit losses ............... 8,321 49.4 5,570 4,746 2,756 1,780 Noninterest income ........................ 52,887 3.2 51,270 38,681 33,842 27,892 Noninterest expense ....................... 122,365 14.3 107,013 98,255 92,325 87,296 Net income ................................ 40,111 (3.4) 41,511 35,060 31,817 27,136 Dividends ................................. 15,840 -- 15,840 14,400 12,600 9,600 AVERAGE BALANCES (in thousands) Assets .................................... 3,584,491 10.4 3,248,180 2,986,600 2,817,062 2,647,758 Loans and leases .......................... 2,315,105 11.1 2,084,462 1,838,218 1,687,900 1,545,693 Securities ................................ 1,043,801 9.3 954,994 963,806 959,278 944,113 Deposits .................................. 2,679,937 9.1 2,456,827 2,300,311 2,211,280 2,113,070 Redeemable class A common stock ........... 24,650 6.2 23,205 21,322 19,686 17,672 Shareholder's equity ...................... 283,477 6.2 266,862 245,206 226,388 203,222 PERIOD-END BALANCES (in thousands) Assets .................................... 3,851,485 13.3 3,398,079 3,173,701 2,925,651 2,812,232 Loans and leases .......................... 2,542,897 17.0 2,172,631 1,964,127 1,756,146 1,627,013 Securities ................................ 1,038,372 4.2 996,673 992,249 935,774 984,768 Deposits .................................. 2,850,692 10.9 2,570,650 2,442,498 2,283,446 2,242,307 Redeemable class A common stock ........... 25,029 3.1 24,270 22,308 20,337 19,035 Shareholder's equity ...................... 287,847 3.1 279,108 256,541 233,870 218,906 FINANCIAL RATIOS Return on average assets (2) .............. 1.12% -- 1.30% 1.22 1.18 1.07 Return on average realized equity (3)(4) ............................ 12.88 -- 14.55 13.32 13.08 12.06 Average equity to average assets (3)(4) ............................ 8.69 -- 8.79 8.81 8.64 8.50 Tangible equity to assets (3)(4) .......... 7.40 -- 8.41 8.50 8.58 8.24 Dividend payout ........................... 39.49 -- 38.16 41.07 39.60 35.38 Net interest margin (1) ................... 4.34 -- 4.31 4.43 4.37 4.33 Efficiency ratio .......................... 60.62 -- 59.09 58.43 59.87 63.03 Net charge-offs to average loans and leases ................................... 0.24 -- 0.13 0.09 0.03 0.08 Reserve for credit losses to loans and leases ................................... 1.65 -- 1.70 1.74 1.74 1.74 PER SHARE OF COMMON STOCK (3) Net income-basic .......................... $ 3.34 (3.4) $ 3.46 2.92 2.65 2.26 Dividends paid ............................ 1.32 -- 1.32 1.20 1.05 0.80 Book value ................................ 26.07 3.1 25.28 23.24 21.18 19.83 Realized book value (4) ................... 26.96 8.1 24.94 22.80 21.08 19.47
- ------------------ (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. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HIGHLIGHTS EARNINGS. The Company reported net income of $40.1 million for the year ended December 31, 1999, a $1.4 million or 3.4% decrease from the $41.5 million earned in 1998. Basic earnings per share were $3.34 in 1999 compared to $3.46 in 1998. Return on realized equity was 12.88% in 1999, as compared to the 14.55% return in 1998. Return on average assets was 1.12% in 1999, versus 1.30% in 1998. To facilitate comparisons, net interest income and net interest margin in the accompanying discussion and tables have been adjusted to show tax-exempt income, such as interest on municipal securities, loans, and leases on a tax-equivalent basis. Table I presents a comparative summary of operating data for 1995 through 1999. Table II presents the major components affecting the changes in return on assets for 1999. TABLE I SUMMARY INCOME STATEMENT (TAX-EQUIVALENT BASIS)
1999 CHANGE 1998 1997 1996 1995 -------- --------- --------- ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Interest income ....................... $263,975 7.5% $ 245,525 226,550 210,703 199,781 Taxable-equivalent adjustment ......... 7,317 (3.4) 7,577 7,588 7,669 7,253 -------- --------- ------- ------- ------- Interest income -- taxable-equivalent .................. 271,292 7.2 253,102 234,138 218,372 207,034 Interest expense ...................... 124,922 2.9 121,424 109,969 102,510 99,136 -------- --------- ------- ------- ------- Net interest income -- taxable-equivalent .................. 146,370 11.2 131,678 124,169 115,862 107,898 Provision for credit losses ........... 8,321 49.4 5,570 4,746 2,756 1,780 -------- --------- ------- ------- ------- Net funds function ................... 138,049 9.5 126,108 119,423 113,106 106,118 Noninterest income .................... 52,887 3.2 51,270 38,681 33,842 27,892 -------- --------- ------- ------- ------- Adjusted gross income ................ 190,936 7.6 177,378 158,104 146,948 134,010 Noninterest expense ................... 122,365 14.3 107,013 98,255 92,325 87,296 -------- --------- ------- ------- ------- Income before taxes .................. 68,571 (2.5) 70,365 59,849 54,623 46,714 Income taxes .......................... 21,143 (0.6) 21,277 17,201 15,137 12,325 Taxable-equivalent adjustment ......... 7,317 (3.4) 7,577 7,588 7,669 7,253 -------- --------- ------- ------- ------- Net income ........................... $ 40,111 (3.4)% $ 41,511 35,060 31,817 27,136 ======== ========= ======= ======= ======= Earnings per share -- basic ........... $ 3.34 (3.4)% $ 3.46 2.92 2.65 2.26 Dividends paid per share .............. $ 1.32 --% $ 1.32 1.20 1.05 0.80
8 TABLE II CHANGES IN RETURN ON ASSETS
1999 VS 1998 ------------ Return on assets, prior year ............................................. 1.30% Increases Provision for income taxes .............................................. 0.09 Insurance ............................................................... 0.04 Net interest income (TEB) ............................................... 0.03 Minority interest in earnings ........................................... 0.02 Service charges ......................................................... 0.02 Brokerage & Trust Income ................................................ 0.02 Gain on sale of securities .............................................. 0.01 ---- Total increases ........................................................ 0.23 ---- Decreases 1998 State tax refund ................................................... 0.14 Fees on loans and leases ................................................ 0.07 Provision for credit losses ............................................. 0.06 Employee benefits ....................................................... 0.03 Professional fees ....................................................... 0.03 Amortization of goodwill ................................................ 0.03 Data processing fees .................................................... 0.02 Furniture and equipment ................................................. 0.02 Other noninterest expense, net .......................................... 0.01 ---- Total decreases ........................................................ 0.41 ---- Return on assets, current year ........................................... 1.12% ====
EQUITY OF SHAREHOLDERS. Shareholder's equity and redeemable class A common stock totaled $312.9 million at December 31, 1999. Book value per share increased from $25.28 at December 31, 1998 to $26.07 at December 31, 1999, while dividends paid per share remained at $1.32. The 1999 dividends paid of $15.8 million represented 5.2% of the equity of shareholders at December 31, 1998 and 39.5% of 1999 net income. Realized book value per share, which excludes the impact of the net unrealized gain or loss on securities available for sale, increased from $24.94 at December 31, 1998 to $26.96 at December 31, 1999. INCOME STATEMENT ANALYSIS NET INTEREST INCOME. The most significant component of the Company's earnings is net interest income, which is the difference between interest earned on assets and interest paid on liabilities. Net interest margin measures the effectiveness of generating net interest income on earning assets and is calculated by dividing net interest income by earning assets. Table III sets forth certain information regarding changes in net interest income (tax-equivalent basis, "TEB"), by volume and rate, of the Company for the periods indicated. 9 TABLE III CHANGES IN NET INTEREST INCOME (TEB)
1999 VS 1998 1998 VS 1997 ----------------------------------- ----------------------------------- VOLUME YIELD/RATE* TOTAL VOLUME YIELD/RATE* TOTAL -------- ----------- -------- -------- ----------- -------- (IN THOUSANDS) Increase (decrease) in: Interest income Loans and leases ................. $ 19,748 (5,726) 14,022 14,975 6,101 21,076 Taxable securities ............... 4,883 88 4,971 4,397 (6,967) (2,570) Tax-exempt securities ............ 1,750 (2,433) (683) 1,515 (1,755) (240) Federal funds sold ............... 73 (199) (126) -- 701 701 Other earning assets ............. 13 (7) 6 12 (16) (4) -------- -------- -------- -------- -------- -------- Total ........................... 26,467 (8,277) 18,190 20,899 (1,936) 18,963 -------- -------- -------- -------- -------- -------- Interest expense Savings deposits ................. 2,269 227 2,496 1,484 2,894 4,378 Other time deposits .............. 8,561 (12,281) (3,720) 6,857 (3,970) 2,887 Short-term borrowings ............ 2,161 (2,228) (67) 1,511 1,605 3,116 Long-term debt ................... 474 4,315 4,789 296 777 1,073 -------- -------- -------- -------- -------- -------- Total ........................... 13,465 (9,967) 3,498 10,148 1,306 11,454 -------- -------- -------- -------- -------- -------- Net interest income ................. $ 13,002 1,690 14,692 10,751 (3,242) 7,509 ======== ======== ======== ======== ======== ========
- ------------------ *All changes in net interest income, other than those due to volume, have been allocated to yield/rate. Tax-equivalent net interest income for 1999 was $146.4 million, an increase of $14.7 million or 11.2% from 1998. The increase in net interest income resulted primarily from a $319.4 million or 10.5% increase in average earning assets, driven by average loan growth of $230.6 million or 11.1%. A slight increase in the net interest margin, from 4.31% in 1998 to 4.34% in 1999, also contributed to the increase in net interest income. The increase in net interest margin was primarily due to an increased spread between the yield on earning assets and the cost of interest bearing liabilities during 1999. While the yield on earning assets decreased 25 basis points from 1998 to 1999, the cost of interest bearing liabilities decreased by 34 basis points. An increased emphasis on money market savings accounts, which increased by 35% in 1999, and a reduced emphasis on more costly savings certificates, contributed to the margin improvement. PROVISION FOR CREDIT LOSSES. The provision for credit losses was $8.3 million in 1999, compared to $5.6 million in 1998 and $4.7 million in 1997. Net charge-offs for 1999, 1998, and 1997 were $5.6 million, $2.8 million, and $1.7 million, respectively. The provision for credit losses reflects the costs associated with the risks inherent in the loan and lease portfolio, taking into consideration an evaluation of economic conditions, changes in the size, composition, and risk profile of the loan portfolio, net charge-offs, and the level of nonperforming and other problem loans and leases. From December 31, 1998 to December 31, 1999, nonperforming loans and leases increased $3.4 million to $16.7 million. The quality of the loan portfolio, as measured by the ratio of classified loans and leases to total loans and leases, reflected moderate improvement from 5.0% at December 31, 1998 to 4.5% at December 31, 1999, despite continued high levels of classified assets in the Company's agricultural portfolio. The improvement reflects a continuation of strong business conditions in the Company's other markets, resulting in lower levels of classified commercial and business credit. The Company's agricultural portfolio is influenced by industry factors such as commodity prices and market conditions in certain markets that caused below-normal production for several years. Crop production results for 1999 are in general more favorable and to some extent mitigate the effect of low commodity prices. The reserve to outstanding loans and leases decreased slightly in 1999 to 1.65% of loans, and the reserve to nonperforming loans and leases decreased from 279% to 252%. The reserve to outstanding loans and leases ratio remains above average when compared to similar institutions. A complete discussion of asset quality and credit management can be found in the Corporate Risk Profile section of Item 7 in this Form 10-K. 10 NONINTEREST INCOME. Noninterest income was $52.9 million in 1999 compared to $51.3 million in 1998, representing a $1.6 million or 3.2% increase. Contributing to this increase in noninterest income were strong growth in service charge income of $2.4 million or 14.1% and insurance commissions of $2.3 million or 29.7%. Also contributing to the increase in noninterest income was an increase in trust revenue of $994 thousand or 14.2%. Excluding the state tax refund recorded in 1998, full year noninterest income increased $6.1 million or 13.0%. Table IV presents the components of noninterest income. TABLE IV NONINTEREST INCOME
1999 CHANGE 1998 1997 1996 1995 ------- ------ ------- ------- ------- ------- (IN THOUSANDS) Service charges ........................... $19,434 14.1% $17,037 15,787 12,837 11,047 Insurance ................................. 10,125 29.7 7,804 7,503 7,082 5,503 Trust ..................................... 7,984 14.2 6,990 6,265 5,332 4,784 Brokerage ................................. 4,533 20.8 3,752 2,935 2,531 1,243 Gain on sale of loans ..................... 3,380 (32.1) 4,977 2,550 2,138 1,302 Gain on sale of other assets .............. 1,142 18.2 966 183 135 709 Gain (loss) on sale of securities ......... 1,853 43.0 1,296 (125) 147 304 State tax refund .......................... -- NM 4,476 -- -- -- Other ..................................... 4,436 11.7 3,972 3,583 3,640 3,000 ------- ------- ------- ------- ------- Total ................................... $52,887 3.2% $51,270 38,681 33,842 27,892 ======= ======= ======= ======= =======
NONINTEREST EXPENSE. Noninterest expense increased $15.4 million or 14.3% from 1998 to 1999. The following table summarizes the components of noninterest expense from 1995 to 1999. TABLE V NONINTEREST EXPENSE
1999 CHANGE 1998 1997 1996 1995 -------- ------ -------- -------- -------- -------- (IN THOUSANDS) Salaries and wages ........................ $ 54,164 9.9% $ 49,287 44,912 40,676 37,325 Employee benefits ......................... 14,901 18.5 12,572 11,690 10,739 10,878 Occupancy ................................. 6,921 12.9 6,128 6,005 5,756 5,433 Furniture and equipment ................... 9,170 20.3 7,621 6,819 6,294 5,216 Printing, postage and office supplies ..... 5,916 7.8 5,487 5,189 4,802 4,584 Marketing ................................. 4,760 0.1 4,756 3,609 3,306 3,041 Data processing fees ...................... 7,465 23.5 6,046 6,513 7,428 7,153 Professional fees ......................... 3,031 69.7 1,786 868 1,407 1,258 Other real estate owned ................... 104 14.3 91 149 56 84 Minority interest in earnings ............. 41 (94.5) 747 1,486 1,400 1,277 FDIC premiums and examination fees ........ 1,297 12.1 1,157 555 1,075 2,901 Goodwill and other intangibles ............ 2,831 65.5 1,711 1,499 1,351 1,152 Other ..................................... 11,764 22.2 9,624 8,961 8,035 6,994 -------- -------- -------- -------- -------- Total .................................... $122,365 14.3% $107,013 98,255 92,325 87,296 ======== ======== ======== ======== ========
Personnel costs, which accounted for 56.4% of noninterest expense, increased $7.2 million or 11.6%. Approximately $1.6 million of this increase in salaries and benefits was related to banks acquired during 1999. Excluding these costs, personnel costs would have increased $5.6 million or 9.1%. Excluding personnel costs, noninterest expense increased $8.1 million or 18.0%. Approximately $2.8 million of this increase was due to banks acquired in 1999. Furniture and equipment expenses 11 increased by $1.5 million in 1999 as the Company completed a significant upgrade to its technology infrastructure and expanded into new markets. Also contributing to the increase in noninterest expense was a $1.4 million increase in data processing fees as the Company changed item processing vendors during the year and integrated the data processing of acquired offices. Professional fees increased by $1.2 million, primarily due to the outsourcing of the internal audit function. The expense associated with goodwill and other intangibles increased by $1.1 million. 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 increased slightly from 59.1% in 1998 to 60.6% in 1999. This increase was due to growth in recurring noninterest expense of 14.3% which was only partially offset by increases of 12.0% in recurring noninterest income and 11.2% in tax-equivalent net interest income. The Company will continue its strategic focus to operate with an efficiency ratio below 60%. The efficiency ratio was under 60% during the third and fourth quarters of 1999. INCOME TAXES. Income tax expense, which consists of provisions for federal and state income taxes, was $21.1 million for 1999, representing a decrease of $134 thousand from 1998. The Company's effective tax rate increased from 33.9% in 1998 to 34.5% in 1999 due to a decline in the level of tax-exempt income in 1999. For further discussion and detail on the Company's income taxes, refer to Notes A and M to the Consolidated Financial Statements found in the portion of Part II of this Form 10-K entitled "Item 8. Financial Statements and Supplementary Data." CORPORATE RISK PROFILE MANAGEMENT OF RISK. Managing risk is an essential part of the operation of a banking organization. When risk is undertaken, the Company expects a return commensurate with the risk. If the risk profile is lowered, expectations of returns also are reduced. By effectively managing and balancing the many risks involved in its business, the Company believes consistent growth in earnings will occur. The most prominent risks facing the Company are credit risk, interest rate risk, and liquidity risk. Credit risk involves the risk of either not collecting interest when it is due or not receiving the principal balance of a loan or investment when it matures. Credit risk is the most significant risk the Company must manage. Interest rate risk is the risk to net interest income caused by differences in the repricing and maturing characteristics of assets and liabilities. Liquidity risk is the risk that the Company will not be able to fund its obligations and is largely a function of how effectively the Company manages its other risks. The Company has established policies, procedures, and constraint levels to enable it to contain, accurately measure, monitor, and have senior management regularly review the Company's total risk position. CREDIT RISK MANAGEMENT. The Company manages asset quality and controls credit risk through standardized lending policies and procedures and an internal loan review system. The Company, through its corporate credit administration department and independent loan review department in cooperation with the Subsidiary Banks, has developed a credit philosophy aimed at minimizing credit risk by emphasizing the importance of a strong credit management process. This process is essentially aimed at managing credit risk from the initial request through the life of the loan. LOAN AND LEASE PORTFOLIO REVIEW. One of the ways the Company manages its credit risk is by maintaining a loan and lease portfolio that is well diversified by industry, size, and loan type. Portfolio diversity among subsidiary banks further benefits the Company's credit risk posture. As a result, concentrations and risks in any single category are acceptable, as indicated in Table VI summarizing the composition of the portfolio. 12 TABLE VI LOAN AND LEASE PORTFOLIO
DECEMBER 31 ------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------ ------------------ ------------------ ------------------ ------------------ AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- (IN THOUSANDS) Commercial and other ...... $ 596,680 23.39% $ 475,556 21.83% $ 387,048 19.66% $ 346,602 19.68% $ 331,641 20.34% Commercial real estate .... 648,029 25.41 501,205 23.01 419,063 21.28 340,621 19.35 313,287 19.21 Construction ............. 70,869 2.78 59,913 2.75 36,518 1.85 30,039 1.71 31,952 1.96 Agricultural .............. 433,357 16.99 444,784 20.42 409,875 20.82 378,399 21.50 350,786 21.51 Residential real estate ... 450,812 17.68 376,652 17.30 387,549 19.68 351,946 20.00 322,296 19.77 Construction ............. 15,274 0.60 13,397 0.62 12,609 0.64 11,904 0.68 11,511 0.71 Consumer .................. 275,320 10.80 250,803 11.52 263,469 13.38 247,511 14.06 221,727 13.60 Tax-exempt ................ 59,815 2.35 55,477 2.55 52,954 2.69 53,078 3.02 47,297 2.90 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total .................... $2,550,156 100.00% $2,177,787 100.00% $1,969,085 100.00% $1,760,100 100.00% $1,630,497 100.00% ========== ====== ========== ====== ========== ====== ========== ====== ========== ======
The Company's loan portfolio increased $372.4 million to $2.6 billion at December 31, 1999, from $2.2 billion at December 31, 1998. Growth occurred in all major portfolio segments except agricultural loans, which declined by $11 million during the year. This is consistent with the Company's strategy that places reduced emphasis on agriculture in the future relative to the portfolio as a whole. The commercial real estate and commercial portfolios accounted for the majority of the growth, with increases of $158 million and $121 million, respectively. In recent years, the composition of the Company's portfolio has reflected a slight shift away from retail toward business-related credit. The Company's loan portfolio consists of 71% business purpose loans at December 31, 1999 and 1998, compared to 66% at December 31, 1997. The trend in portfolio mix is primarily due to increased commercial and commercial real estate opportunities in the markets served. The Company continues to seek credit opportunities of all loan types, and to maintain a balance within its portfolio of consumer and residential real estate and business and agricultural loans. During 1999, the Company's asset-based lending and leasing subsidiary, Bremer Business Finance Corporation ("BBFC"), generated replacement business and maintained its asset size at approximately $62 million. BBFC's primary function is to develop opportunities in the Company's markets and make available to Company customers an additional level and type of service not available in Subsidiary Banks. For the Company's agricultural customers, 1999 was generally an average to above average production year. Improved crop conditions help mitigate the negative effect of continuing low commodity prices. The Company's agricultural customers and agricultural based communities are diversified in geographic areas and in types of agricultural production. The largest concentration is sugar beet production in the Red River Valley of North Dakota and Minnesota. During 1999, the Company has tightened its standards in underwriting agricultural loans. Additionally, some customer producer credits are strengthened through government sponsored credit enhancements. Agricultural loans declined $11 million during 1999. The Company's commercial real estate loans continue to consist primarily of loans to business customers who occupy the property or use it for income production. The commercial real estate loan portfolio experienced growth of $158 million or 28% during 1999, reflecting continued strong business loan demand. NET LOAN CHARGE-OFFS. Net loan charge-offs increased to $5.6 million in 1999 from $2.8 million in 1998 and $1.7 million in 1997. Correspondingly, net charge-offs as a percentage of loans increased to .24% in 1999 from .13%. in 1998 and .09% in 1997. The increase in net charge-offs can be attributed to increased net charge-offs in the agricultural and commercial portfolios. Two individual charge-offs of approximately $750,000 and $1 million are included in total net charge-offs for 1999. Table VIII includes a summary of the charge-offs by loan category for the past five years. NONPERFORMING ASSETS. Nonperforming assets include nonaccrual loans, restructured loans, and other real estate acquired in loan settlements. The accrual of interest on loans is suspended when the 13 credit becomes 90 days or more past due, unless the loan is fully secured and in the process of collection. Payments received are typically applied to principal and not recorded as income. Restructured loans continue to accrue interest, but include concessions in terms which have been made as a result of deterioration in the borrower's financial condition. Table VII summarizes the nonperforming assets as of December 31 for the past five years. TABLE VII NON-PERFORMING ASSETS AT DECEMBER 31
1999 CHANGE 1998 1997 1996 1995 -------- ------ -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Nonaccrual loans and leases ................ $ 16,608 27.0% $ 13,077 8,958 10,830 8,392 Restructured loans and leases .............. 48 (73.0) 178 910 414 634 -------- -------- -------- -------- -------- Total nonperforming loans and leases ............................... 16,656 25.7 13,255 9,868 11,244 9,026 Other real estate owned (OREO) ............. 527 (15.0) 620 691 240 380 -------- -------- -------- -------- -------- Total nonperforming assets ................ $ 17,183 23.8% $ 13,875 10,559 11,484 9,406 ======== ======== ======== ======== ======== Past due loans and leases* ................. $ 4,753 316.2% $ 1,142 3,573 2,205 2,504 ======== ======== ======== ======== ======== Nonperforming loans and leases to total loans and leases .................... 0.65% -- 0.61% 0.50 0.64 0.55 Nonperforming assets to total loans, leases and OREO ........................... 0.68 -- 0.64 0.54 0.65 0.58 Nonperforming assets and past due loans and leases* to total loans, leases and OREO ........................... 0.86 -- 0.69 0.72 0.78 0.73 Reserve to nonperforming loans and leases ................................ 251.53 -- 279.27 347.11 271.10 313.02 Reserve to total loans and leases .......... 1.65 -- 1.70 1.74 1.74 1.74 Reserve for Credit Losses Beginning of year ......................... $ 37,019 8.1% $ 34,253 30,482 28,253 26,946 Charge-offs ............................... (7,064) 78.0 (3,968) (2,759) (2,230) (2,834) Recoveries ................................ 1,439 23.6 1,164 1,026 1,703 1,610 -------- -------- -------- -------- -------- Net charge-offs .......................... (5,625) 100.6 (2,804) (1,733) (527) (1,224) Provision for credit losses ............... 8,321 49.4 5,570 4,746 2,756 1,780 Reserve related to acquired assets ........ 2,180 NM -- 758 -- 751 -------- -------- -------- -------- -------- End of year ................................ $ 41,895 13.2% $ 37,019 34,253 30,482 28,253 ======== ======== ======== ======== ========
- ------------------ *Past due loans and leases include accruing loans and leases 90 days or more past due. Nonperforming assets were $17.2 million at December 31, 1999, compared to $13.9 million at December 31, 1998 and $10.6 million at December 31, 1997. Correspondingly, nonperforming assets as a percentage of total loans, leases, and other real estate owned increased to .68% in 1999 from .64% in 1998 and .54% in 1997. Nonperforming loans and leases, including nonaccrual and restructured loans, totaled $16.7 million or .65% of total loans and leases at December 31, 1999, compared to $13.3 million or .61% of total loans and leases at December 31, 1998, and $9.9 million or .50% of total loans and leases at December 31, 1997. The increase in nonperforming loans and leases is primarily within the Company's agricultural portfolio. Approximately 51% of the nonperforming loans are agricultural loans at December 31, 1999. RESERVE FOR CREDIT LOSSES. The purpose of the reserve for credit losses is to provide for loan and lease losses inherent in the Company's loan portfolio. Management evaluates the allowance each quarter to determine that it is adequate to cover inherent losses. The evaluation of the overall allowance is based on continuing assessment of problem loans, economic conditions, recent loss experience, and other 14 factors. Table VIII summarizes the activity in the reserve for loan losses along with the loan loss reserve allocation from 1995 through 1999. The reserve for credit losses was $41.9 million, or 1.65% of loans at December 31, 1999, compared to $37.0 million, or 1.70% of loans at December 31, 1998. The reserve to nonperforming loans decreased to 252% at December 31, 1999 from 279% at December 31, 1998. Management believes the reserve is adequate to cover the risks inherent in the portfolio. Management has allocated the allowance to sectors based on relative risk characteristics of the loan portfolio. Commercial allocations are based on a quarterly review of individual loans outstanding and binding commitments to lend, including standby letters of credit. An analysis of the migration of commercial loans and actual loss experience throughout the business cycle is also conducted to assess reserves allocated to credits with similar risk characteristics. Consumer allocations are based on an analysis of product mix, credit scoring and risk composition of the portfolio, fraud loss and bankruptcy experiences, and historical and expected delinquency and charge-off statistics for each homogenous category or group of loans. (The remainder of this page was intentionally left blank.) 15 TABLE VIII RESERVE FOR CREDIT LOSSES
DECEMBER 31 ---------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Beginning of year ............................... $ 37,019 34,253 30,482 28,253 26,946 Charge-offs Commercial and other ........................... 1,270 820 604 480 532 Commercial real estate ......................... 1,445 152 427 117 381 Construction .................................. -- 25 2 -- -- Agricultural ................................... 2,138 835 288 489 375 Residential real estate ........................ 351 328 100 47 170 Construction .................................. -- -- -- -- 10 Consumer ....................................... 1,860 1,808 1,338 1,097 835 Tax-exempt ..................................... -- -- -- -- 531 ---------- ---------- ---------- ---------- ---------- Total ......................................... 7,064 3,968 2,759 2,230 2,834 ---------- ---------- ---------- ---------- ---------- Recoveries Commercial and other ........................... 351 218 379 911 352 Commercial real estate ......................... 152 322 173 194 389 Construction .................................. -- -- 10 -- -- Agricultural ................................... 355 102 65 159 232 Residential real estate ........................ 36 30 104 58 313 Construction .................................. -- -- -- -- 10 Consumer ....................................... 545 492 295 381 280 Tax-exempt ..................................... -- -- -- -- 34 ---------- ---------- ---------- ---------- ---------- Total ......................................... 1,439 1,164 1,026 1,703 1,610 ---------- ---------- ---------- ---------- ---------- Net charge-offs ................................. 5,625 2,804 1,733 527 1,224 Provision for credit losses ..................... 8,321 5,570 4,746 2,756 1,780 Reserve related to acquired assets .............. 2,180 -- 758 -- 751 ---------- ---------- ---------- ---------- ---------- End of year ..................................... $ 41,895 37,019 34,253 30,482 28,253 ========== ========== ========== ========== ========== Average loans and leases ........................ $2,315,105 2,084,462 1,838,218 1,687,900 1,545,693 Net charge-offs/average loans and leases ........ 0.24% 0.13 0.09 0.03 0.08 ALLOCATION OF RESERVE FOR CREDIT LOSSES Commercial and other ............................ $ 10,200 8,300 7,700 6,800 5,500 Commercial real estate .......................... 9,200 10,100 9,300 7,500 7,500 Agricultural .................................... 11,900 8,200 7,000 6,400 5,500 Residential real estate ......................... 1,900 2,700 2,400 2,200 2,100 Consumer ........................................ 2,300 1,500 1,700 1,500 1,200 Tax-exempt ...................................... 600 300 300 300 400 ---------- ---------- ---------- ---------- ---------- Total allocated ................................ 36,100 31,100 28,400 24,700 22,200 Unallocated ..................................... 5,795 5,919 5,853 5,782 6,053 ---------- ---------- ---------- ---------- ---------- Total .......................................... $ 41,895 37,019 34,253 30,482 28,253 ========== ========== ========== ========== ========== Reserve to total loans and leases ............... 1.65% 1.70% 1.74 1.74 1.74
INTEREST RATE RISK MANAGEMENT. Interest rate risk is the risk that changing interest rates will adversely affect net income and balance sheet valuations. The objective of interest rate risk management is to control this risk exposure. The responsibility for this process rests with the Company's asset/liability committee ("ALCO"). ALCO establishes appropriate risk management policies and monitors asset liability activities to minimize Company-wide exposure to adverse interest rate trends. The tools used to measure interest rate risk include gap analysis, simulation of future net income, and a valuation model which measures the sensitivity of balance sheet valuations to changes in interest rates. 16 A discussion of the valuation model can be found in the "Market Risk" section of Item 5 in this Form 10-K. Table IX summarizes the Company's repricing gap for various time intervals. TABLE IX INTEREST RATE SENSITIVITY AT DECEMBER 31, 1999
REPRICING OR MATURING --------------------------------------------------------------------- WITHIN 3-12 1-5 OVER 5 3 MONTHS MONTHS YEARS YEARS TOTAL ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) INTEREST SENSITIVE ASSETS Loans and leases ...................... $ 934,397 447,899 1,001,514 117,192 2,501,002 Securities ............................ 330,787 124,414 224,839 358,332 1,038,372 Other assets .......................... 150,293 -- -- 161,818 312,111 ---------- ---------- ---------- ---------- ---------- Total ................................ 1,415,477 572,313 1,226,353 637,342 3,851,485 ---------- ---------- ---------- ---------- ---------- INTEREST SENSITIVE LIABILITIES Noninterest bearing deposits .......... 158,461 39,161 208,856 -- 406,478 Interest bearing deposits ............. 822,794 819,507 801,539 374 2,444,214 Short-term borrowings ................. 375,467 48,615 2,603 -- 426,685 Long-term debt ........................ 159 15,899 107,876 91,898 215,832 Other liabilities and shareholder's equity ................. -- -- -- 358,276 358,276 ---------- ---------- ---------- ---------- ---------- Total ................................ 1,356,881 923,182 1,120,874 450,548 3,851,485 ---------- ---------- ---------- ---------- ---------- REPRICING GAP .......................... $ 58,596 (350,869) 105,479 186,794 -- ========== ========== ========== ========== ========== CUMULATIVE REPRICING GAP ............... $ 58,596 (292,273) (186,794) -- ========== ========== ========== ========== CUMULATIVE GAP TO TOTAL ASSETS ......... 1.52% (7.59) (4.85) --
As indicated in Table IX above, asset and liability repricing is well balanced as of December 31, 1999. The repricing gaps are well within the Company's risk tolerances, which limit the maximum 90-day and one-year gaps to 15% of total assets. The Company also uses simulation modeling of future net income as a risk management tool. Simulation modeling results indicate that net income would not change by more than 2% over the next year with a 300 basis point change in the level of rates. The projected change in net interest income is well within the current policy limit which requires that the change in net income over the next 12 months not exceed 15%. LIQUIDITY MANAGEMENT. The objective of liquidity management is to ensure the continuous availability of funds to meet the commitments of the Company. ALCO is responsible for managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving the Company's financial objectives. ALCO meets regularly to review funding capacity, current and forecasted loan demand, investment opportunities, and liquidity positions as outlined in the Company's asset/ liability policy. With this information, ALCO guides changes in the balance sheet structure to provide for adequate ongoing liquidity. Several factors provide a favorable liquidity position for the Company. The first is the ability to acquire and retain funds in the Company's local markets. This in-market funding provides a historically stable source of funding and represented approximately 86% of total liabilities during 1999. The Company's available for sale securities portfolio is a secondary source of liquidity because of its readily marketable nature and predictable stream of maturities, as approximately 11% of the portfolio matures within 2000. While the Company prefers to fund its balance sheet with in-market funding sources, another source of liquidity is the Company's ready access to regional and national wholesale funding markets, including federal funds purchased, Federal Home Loan Bank ("FHLB") advances, and brokered deposits. As of December 31, 1999, the Company also had available a $90 million unsecured credit facility which is used primarily to provide funding availability for non-bank activities. 17 CAPITAL MANAGEMENT. The Company's capital position provides a degree of safety and soundness and a foundation for future growth. The capital position of the Company and the Subsidiary Banks reflects management's commitment to maintain ratios above the regulatory minimums. TABLE X CAPITAL RATIOS (1)(2) REGULATORY 1999 1998 REQUIREMENT ------- ------- ----------- Equity to assets ................... 8.40% 8.81 -- Tangible equity to assets .......... 7.40 8.41 -- Tier I capital ..................... 10.42 12.13 4.00 Tier I and tier II capital ......... 11.67 13.39 8.00 Leverage ratio ..................... 7.48 8.58 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. The Company's Tier I capital ratio at December 31, 1999 was 10.42%, its total risk-adjusted capital ratio (Tier I plus Tier II) was 11.67%, and its Tier I leverage ratio was 7.48%. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required the establishment of a capital-based supervisory system of prompt corrective action for all depository institutions. The Federal Reserve Board's implementation of FDICIA defines "well-capitalized" institutions as those whose Tier I Capital ratio equals or exceeds 6%, total risk-based capital ratio equals or exceeds 10%, and leverage ratio equals or exceeds 5%. The Company's Subsidiary Banks ratios in each of these categories met or exceeded the "well-capitalized" ratios as of December 31, 1999. IMPACT OF INFLATION. The assets and liabilities of a financial institution are primarily monetary in nature. Because banks generally have an excess of monetary assets over monetary liabilities, inflation, in theory, will cause a loss of purchasing power in the value of shareholder's equity. Other sections of this financial review provide the information necessary for an understanding of the Company's ability to react to changing interest rates. BALANCE SHEET ANALYSIS Table XII on pages 20 and 21 sets forth for the periods indicated the average balance sheets and related yields and rates on earning assets and interest bearing liabilities. SOURCES OF FUNDS The Company's balance sheet strength rests in its strong capital position and its share of the deposit base in the communities served. The Company relies on three major sources of funding: total deposits, short-term borrowings, and equity capital. The diversity and supply of this funding base enable the Company to replace maturing liabilities and finance asset growth on an ongoing basis. TOTAL DEPOSITS. Average total deposits increased $223.1 million or 9.1% in 1999. Within total deposits, money market savings accounts had the strongest growth, increasing $122.8 million or 35.2%, while certificates over $100,000 increased $27.2 million or 14.8%, noninterest bearing deposits increased $42.4 million or 13.9%, savings and NOW accounts increased $13.9 million or 4.8%, money market checking accounts increased $7.2 million or 4.6%, and savings certificates increased $9.5 million or .8%. 18 The table below sets forth the amount and maturity of time deposits that had balances of more than $100,000 at December 31, 1999. TABLE XI MATURITY OF TIME DEPOSITS OVER $100,000 DECEMBER 31 -------------------- 1999 1998 -------- ------- (IN THOUSANDS) Within 3 months ............................... $ 69,618 62,791 3 - 6 months .................................. 49,878 49,207 6 - 12 months ................................. 71,972 54,925 After 12 months ............................... 41,577 45,615 -------- ------- Total ........................................ $233,045 212,538 ======== ======= SHORT-TERM BORROWINGS. Average short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase, treasury tax and loan notes, FHLB advances with maturities of one year or less, and advances under an unsecured revolving credit facility, increased 6.3% from $367.6 million in 1998 to $390.7 million in 1999. This increase can be attributed to increases in the Company's use of securities sold under agreements to repurchase and the revolving credit facility. Average earning assets increased by $319.4 million in 1999. This increase was $96.3 million more than the increase in average total deposits of $223.1 million in 1999. Only $23.1 million of the additional funding needed came from short-term borrowings. Most of the additional funding needed was provided by an increase in long-term debt. LONG-TERM DEBT. Average long-term debt, which includes senior notes, FHLB advances with maturities of greater than one year, and installment promissory notes, increased $83.7 million or 114.5%. The Company issued $65 million in senior notes in a private placement transaction in November 1999. (The remainder of this page was intentionally left blank.) 19 TABLE XII CONSOLIDATED AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
1999 1998 ------------------------------ ----------------------------- AVERAGE RATE/ AVERAGE RATE/ BALANCE INTEREST YIELD BALANCE INTEREST YIELD (DOLLARS IN THOUSANDS) ---------- -------- ----- ---------- -------- ----- ASSETS Loans and leases (net of unearned discount)* Commercial and other ................................... $ 534,954 $ 47,208 8.82% $ 431,459 $ 39,417 9.14% Commercial real estate ................................. 609,345 52,647 8.64 501,802 45,277 9.02 Agricultural ........................................... 447,715 39,295 8.78 446,859 40,610 9.09 Residential real estate ................................ 414,510 35,737 8.62 394,944 34,758 8.80 Consumer ............................................... 251,499 22,584 8.98 254,685 23,285 9.14 Tax-exempt ............................................. 57,082 5,394 9.45 54,713 5,497 10.05 ---------- -------- ---------- -------- TOTAL LOANS AND LEASES ............................... 2,315,105 202,865 8.76 2,084,462 188,844 9.06 Reserve for credit losses .............................. (39,471) (35,870) ---------- ---------- NET LOANS AND LEASES ................................. 2,275,634 2,048,592 Securities Mortgage-backed ........................................ 742,299 45,618 6.15 670,505 41,935 6.25 Other taxable .......................................... 100,663 6,051 6.01 77,582 4,763 6.14 Tax-exempt ............................................. 200,839 16,050 7.99 206,907 16,733 8.09 ---------- -------- ---------- -------- TOTAL SECURITIES ..................................... 1,043,801 67,719 6.49 954,994 63,431 6.64 Federal funds sold ..................................... 11,853 575 4.85 12,312 701 5.69 Other earning assets ................................... 2,711 132 4.87 2,341 126 5.38 ---------- -------- ---------- -------- TOTAL EARNING ASSETS** ............................... 3,373,470 271,291 8.04 3,054,109 253,102 8.29 Cash and due from banks ................................. 119,695 107,585 Nonearning assets ....................................... 130,797 122,356 ---------- ---------- TOTAL ASSETS ......................................... $3,584,491 $3,248,180 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest bearing deposits ............................ $ 347,384 $ 304,990 Interest bearing deposits Savings and NOW accounts ............................... 304,182 3,640 1.20 290,260 4,424 1.52 Money market checking .................................. 163,636 1,493 0.91 156,421 2,079 1.33 Money market savings ................................... 472,000 17,819 3.78 349,190 13,953 4.00 Savings certificates ................................... 1,181,422 62,191 5.26 1,171,896 66,835 5.70 Certificates over $100,000 ............................. 211,313 11,293 5.34 184,070 10,369 5.63 ---------- -------- ---------- -------- TOTAL INTEREST BEARING DEPOSITS ...................... 2,332,553 96,436 4.13 2,151,837 97,660 4.54 TOTAL DEPOSITS ....................................... 2,679,937 2,456,827 Short-term borrowings ................................... 390,650 19,421 4.97 367,580 19,488 5.30 Long-term debt .......................................... 156,706 9,065 5.78 73,047 4,276 5.85 ---------- -------- ---------- -------- TOTAL INTEREST BEARING LIABILITIES ................... 2,879,909 124,922 4.34 2,592,464 121,424 4.68 Other liabilities ....................................... 46,391 53,105 ---------- ---------- TOTAL LIABILITIES .................................... 3,273,684 2,950,559 Minority interest ....................................... 909 5,458 Redeemable preferred stock .............................. 1,771 2,096 Redeemable class A common stock ......................... 24,650 23,205 Shareholder's equity .................................... 283,477 266,862 ---------- ---------- TOTAL LIABILITIES AND EQUITY ......................... $3,584,491 $3,248,180 ========== ========== Net interest income ..................................... $146,369 $131,678 ======== ======== Gross spread ............................................ 3.70% 3.60% Percent of earning assets Interest income ........................................ 8.04 8.29 Interest cost .......................................... 3.70 3.98 ------- ----- NET INTEREST MARGIN .................................. 4.34% 4.31% Interest bearing liabilities to earning assets ......... 85.37% 84.88% Profitability Net income ............................................. $ 40,111 $ 41,511 Return on average assets ............................... 1.12% 1.30% Leverage ............................................... 11.52X 11.38X Return on average realized equity ...................... 12.88% 14.55%
- ----------------- INTEREST AND RATES ARE REALIZED ON A FULLY TAXABLE EQUIVALENT BASIS USING A 35% TAX RATE. *LOAN AND LEASE AMOUNTS INCLUDE NONACCRUAL LOANS AND LEASES. **BEFORE DEDUCTING THE RESERVE FOR CREDIT LOSSES. 20
1997 1996 1995 AVERAGE BALANCE - ---------------------------- ---------------------------- ---------------------------- --------------------- AVERAGE RATE/ AVERAGE RATE/ AVERAGE RATE/ 1999 VS FIVE-YEAR BALANCE INTEREST YIELD BALANCE INTEREST YIELD BALANCE INTEREST YIELD 1998 GROWTH RATE - ---------- -------- ----- ---------- -------- ----- ---------- -------- ----- ------- ----------- $ 360,777 $ 33,298 9.23% $ 341,793 $ 31,265 9.15% $ 314,949 $ 30,096 9.56% 23.99% 14.61% 398,825 36,319 9.11 354,614 32,262 9.10 328,163 30,542 9.31 21.43 15.57 394,868 36,542 9.25 361,401 33,461 9.26 330,422 31,615 9.57 0.19 10.70 380,689 33,461 8.79 346,875 30,211 8.71 318,447 27,638 8.68 4.95 8.41 251,305 22,860 9.10 232,168 21,244 9.15 205,766 18,706 9.09 (1.25) 7.75 51,754 5,287 10.22 51,049 5,391 10.56 47,946 4,825 10.06 4.33 4.68 - ---------- -------- ---------- -------- ---------- -------- 1,838,218 167,767 9.13 1,687,900 153,834 9.11 1,545,693 143,422 9.28 11.06 11.71 (32,618) (29,689) (27,858) 10.04 6.63 - ---------- ---------- ---------- 1,805,600 1,658,211 1,517,835 11.08 11.81 620,552 40,610 6.54 577,758 36,538 6.32 528,288 33,883 6.41 10.71 8.68 134,440 8,654 6.44 173,084 10,759 6.22 218,163 13,211 6.06 29.75 (14.65) 208,814 16,976 8.13 208,436 17,112 8.21 197,662 16,444 8.32 (2.93) 1.99 - ---------- -------- ---------- -------- ---------- -------- 963,806 66,240 6.87 959,278 64,409 6.71 944,113 63,538 6.73 9.30 3.15 -- -- -- -- -- -- -- -- -- N/M N/M 1,829 131 7.16 2,356 129 5.48 1,029 74 7.19 15.81 19.77 - ---------- -------- ---------- -------- ---------- -------- 2,803,853 234,138 8.35 2,649,534 218,372 8.24 2,490,835 207,034 8.31 10.46 8.67 101,990 94,912 69,625 11.26 13.29 113,375 102,305 115,156 6.90 6.72 - ---------- ---------- ---------- $2,986,600 $2,817,062 $2,647,758 10.35 8.75 ========== ========== ========== $ 284,710 $ 276,948 $ 257,888 13.90 7.46 301,932 5,112 1.69 257,166 4,331 1.68 255,104 5,160 2.02 4.80 3.19 153,777 2,352 1.53 176,078 2,964 1.68 172,994 3,507 2.03 4.61 0.88 254,326 8,616 3.39 243,208 7,731 3.18 241,417 8,343 3.46 35.17 11.75 1,138,167 64,933 5.71 1,102,819 62,671 5.68 1,035,354 59,461 5.74 0.81 5.92 167,399 9,398 5.61 155,061 8,549 5.51 150,313 8,401 5.59 14.80 19.38 - ---------- -------- ---------- -------- ---------- -------- 2,015,601 90,411 4.49 1,934,332 86,246 4.46 1,855,182 84,872 4.57 8.40 7.03 2,300,311 2,211,280 2,113,070 9.08 7.08 304,384 16,356 5.37 282,813 14,850 5.25 229,935 12,678 5.51 6.28 14.42 53,486 3,202 5.99 22,178 1,414 6.38 23,306 1,586 6.81 114.53 77.82 - ---------- -------- ---------- -------- ---------- -------- 2,373,471 109,969 4.63 2,239,323 102,510 4.58 2,108,423 99,136 4.70 11.09 9.03 50,082 43,357 47,179 (12.64) 9.22 - ---------- ---------- ---------- 2,708,263 2,559,628 2,413,490 10.95 8.86 9,665 9,216 8,676 (83.35) (36.11) 2,144 2,144 4,698 (15.51) N/M 21,322 19,686 17,672 6.23 8.56 245,206 226,388 203,222 6.23 8.56 - ---------- ---------- ---------- $2,986,600 $2,817,062 $2,647,758 10.35 8.75 ========== ========== ========== $124,169 $115,862 $107,898 ======== ======== ======== 3.72% 3.66% 3.61% 8.35 8.24 8.31 3.92 3.87 3.98 ----- ----- ----- 4.43% 4.37% 4.33% 84.65% 84.52% 84.65% $ 35,060 $ 31,817 $ 27,136 1.22% 1.18% 1.07% 11.12X 11.35X 11.74X 13.32% 13.08% 12.06%
21 USES OF FUNDS Between 1998 and 1999, average total assets increased $336.3 million or 10.4%, and average earning assets increased $319.4 million or 10.5%. Strong loan growth, which the Company has been experiencing since 1994, increased loans as a percent of average earning assets from 68.3% in 1998 to 68.6% in 1999, while securities decreased from 31.3% to 30.9%. LOAN AND LEASE PORTFOLIO. The increase in average loans and leases from 1998 to 1999 was $230.6 million as loan demand remained strong in most of the Company's markets. Commercial real estate loans led the loan growth in 1999, increasing $107.5 million or 21%. Of the remaining loan categories, commercial loans increased $103.5 million, residential real estate loans increased $19.6 million, and tax exempt loans increased $2.4 million. Consumer loans decreased by $3.2 million. The following table summarizes the amount and maturity of the loan and lease portfolio as of December 31, 1999. TABLE XIII MATURITY OF LOANS AND LEASES
WITHIN 1-5 AFTER 5 1 YEAR YEARS YEARS TOTAL ---------- ----------- ---------- ---------- (IN THOUSANDS) Commercial and other ................... $306,249 260,119 30,313 596,681 Commercial real estate ................. 147,397 374,909 126,320 648,626 Construction .......................... 20,382 29,243 20,646 70,271 Agricultural ........................... 189,346 182,900 61,111 433,357 Residential real estate ................ 50,816 221,537 178,458 450,811 Construction .......................... 14,566 503 206 15,275 Consumer ............................... 104,008 168,034 3,278 275,320 Tax-exempt ............................. 14,234 24,985 20,596 59,815 -------- ---------- ------- --------- Total ................................. $846,998 1,262,230 440,928 2,550,156 ======== ========== ======= ========= Loans and leases maturing after one year Fixed interest rate ................... $ 869,806 224,187 1,093,993 Variable interest rate ................ 392,424 216,741 609,165 ---------- ------- --------- Total ................................. $1,262,230 440,928 1,703,158 ========== ======= =========
SECURITIES. Average total securities increased $88.8 million or 9.3% from 1998 to 1999, with mortgage-backed and other taxable securities increasing $94.9 million or 12.7%. The decrease in tax-exempt securities was $6.1 million or 2.9%. Mortgage-backed securities represented 71.1% of total securities during 1999 compared to 70.2% in 1998. One of the risks with these types of securities is that their maturity is dependent upon the rate of prepayment of the underlying mortgages. This variability creates interest rate risk, which is continuously monitored to assess the impact on the Company. While the Company believes the yield on these securities adequately compensates for the risks unique to this type of investment, it is the Company's position to acquire securities that carry limited risk of loss due to prepayment. The table below sets forth the maturities of the Company's investment and mortgage-backed securities to include projected principal payments of mortgage-backed securities at December 31, 1999 and the weighted average yields of such securities. 22 TABLE XIV MATURITY OF INVESTMENT AND MORTGAGE-BACKED SECURITIES
AMORTIZED COST ---------------------------------------------------------------------------------------------------------- WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS AFTER 10 YEARS TOTAL ------------------ ------------------ ------------------ ------------------ ------------------ AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- (IN THOUSANDS) Governments and agencies ............ $ 7,089 6.20% $ 11,072 6.36% $ 48,339 6.23% $ 54,165 6.40% $ 120,665 6.32% State and political subdivisions ........ 11,270 7.79 60,794 8.19 60,800 7.63 55,634 7.52 188,498 7.79 Mortgage-backed securities .......... 101,425 6.58 273,979 6.59 183,884 6.58 136,171 6.60 695,459 6.59 Equity securities .... -- -- -- -- -- -- 48,263 7.66 48,263 7.66 Other securities ..... 62 7.59 62 6.92 109 6.92 2,744 6.45 2,977 6.50 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total .............. $ 119,846 6.67% $ 345,907 6.86% $ 293,132 6.74% $ 296,977 6.91% $1,055,862 6.82% ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
The average maturity of the portfolio was 73 months at December 31, 1999, with an average tax-equivalent yield to maturity on the $1.06 billion portfolio of 6.82%, unrealized gains of $3.3 million and unrealized losses of $21.7 million. This compares to an average maturity of 41 months at December 31, 1998, and an average tax-equivalent yield to maturity of 6.64%, unrealized gains of $14.3 million, and unrealized losses of $1.2 million. At December 31, 1999, the market value of the Company's securities was $1,037.4 million or $18.5 million under its amortized cost. This compares to a market value of $1,002.6 million or $13.1 million over amortized cost at December 31, 1998. In accordance with FAS 115, the available for sale securities are recorded at market value. For further discussion and detail on the Company's securities portfolio, refer to Note C to the Consolidated Financial Statements. ANALYSIS OF 1998 COMPARED WITH 1997 The following analysis compares 1998 consolidated financial results with 1997 results. EARNINGS. Net income was $41.5 million or $3.46 basic earnings per share in 1998 compared to $35.1 million or $2.92 basic earnings per share in 1997. Return on realized equity was 14.55% in 1998, as compared to the 13.32% return in 1997. Return on average assets was 1.30% in 1998, versus 1.22% in 1997. NET INTEREST INCOME. Tax-equivalent net interest income for 1998 was $131.7 million, an increase of $7.5 million or 6.0% from 1997. The increase in net interest income resulted from a $250.3 million or 8.9% increase in average earning assets, driven by average loan growth of $246.2 million or 13.4%. Offsetting the increase in earning assets was a decrease in the net interest margin, which declined 12 basis points from 4.43% in 1997 to 4.31% in 1998. The decrease in net interest margin was primarily due to a reduced spread in rates during 1998, as yields on earning assets decreased 6 basis points and costs on interest bearing liabilities increased 5 basis points. The interest bearing liabilities costs and net interest margin were impacted significantly by increased rates paid on money market savings products. Contributing positively to net interest margin, but not enough to offset the reduced yields on earning assets and increased cost on interest bearing liabilities, were a more favorable product mix of both earning assets and interest bearing liabilities and an increase in yield-related loan fees. PROVISION FOR CREDIT LOSSES. From December 31, 1997 to December 31, 1998, nonperforming loans and leases increased $3.4 million to $13.3 million. Meanwhile, the quality of the loan portfolio, as measured by the ratio of classified loans and leases to total loans and leases, reflected improvement from 5.8% at December 31, 1997 to 5.0% at December 31, 1998, despite continued stress on the Company's agricultural portfolio. The reserve to outstanding loans and leases decreased slightly in 1998 to 1.70%, and the reserve to nonperforming loans and leases decreased from 347% to 279%. 23 NONINTEREST INCOME. Noninterest income was $51.3 million in 1998 compared to $38.7 million in 1997, representing a $12.6 million or 32.5% increase. Contributing to this increase in noninterest income were strong growth in service charge income of $1.3 million or 7.9% and in brokerage commissions of $817 thousand or 27.8%. Also contributing to the increase in noninterest income was an increase in trust revenue of $725 thousand or 11.6% and in gain on the sale of other assets of $783 thousand. The gain on sale of other assets is primarily attributable to insurance proceeds received from the damages sustained to bank facilities in 1997 from the flooding in the Red River Valley area of North Dakota and Minnesota and gains on the sale of OREO property. Gains on loans sold in the secondary market increased $2.4 million or 95.2% as the volume of real estate mortgage financing increased in 1998 driven by a more favorable interest rate environment. In addition, the Company posted an increase of $1.4 million of investment securities gains and recorded a non-recurring state tax refund of nearly $4.5 million, including interest. The state tax refund reflects a refund of state income taxes paid to the state of Minnesota from 1980 through 1983. NONINTEREST EXPENSE. Noninterest expense increased $8.8 million or 8.9% from 1997 to 1998. Personnel costs, which accounted for 57.8% of noninterest expense, increased $5.3 million or 9.3%, as salaries and wages increased 9.7%, reflecting tight labor markets. Affecting the increase in personnel costs in 1998 was an increase of approximately $947 thousand in salaries and benefits relating to acquisitions and expansion into new markets. Excluding these costs, personnel costs would have increased $4.3 million or 7.8%. Excluding personnel costs, noninterest expense increased $3.5 million or 8.4%. Contributing to this increase was a $1.1 million increase in marketing expenses, which is primarily attributable to the Company's strategic initiative in promoting the legal name change of its Subsidiary Banks and other subsidiaries. Also contributing to the increase in noninterest expense was a $918 thousand increase in professional fees driven primarily by an increase in consulting fees associated with improving key business processes and implementing the Company's efforts in relationship management. In addition, furniture and equipment expense increased $802 thousand due to the depreciation expense associated with the upgrading of technology throughout the Company and expansion into new markets, and FDIC premiums and examination fees increased $602 thousand, which is primarily attributable to a one-time reduction in examination fees experienced in 1997. INCOME TAXES. Income tax expense, which consists of provisions for federal and state income taxes, was $21.3 million for 1998, representing an increase of $4.1 million from 1997. Comparing 1998 to 1997, the Company's effective tax rate also increased, from 32.9% to 33.9%, reflecting the impact of proportionately more taxable than tax-exempt income in 1998. YEAR 2000 ISSUE The Company's Year 2000 computer testing and contingency planning was successful, as the Company has experienced no problems with systems or customers' accounts as the date changed from 1999 to 2000. The work done to prepare for the potential disruption caused by the Year 2000 issue will be beneficial to the Company's future, as the Company has developed strong contingency plans, a high-alert communications plan, thorough testing procedures, and a unified approach to potential problems. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 --------------------------- 1999 1998 ----------- ----------- (IN THOUSANDS) ASSETS Cash and due from banks ............................................... $ 145,407 143,831 Interest bearing deposits ............................................. 4,886 1,712 Investment securities held to maturity (fair value of $170,788 and $185,398, respectively) .............................................. 171,720 179,359 Mortgage-backed securities held to maturity (fair value of $6,769 and $27,070, respectively) .................................... 6,810 27,143 ----------- ----------- TOTAL SECURITIES HELD TO MATURITY ................................... 178,530 206,502 Investment securities available for sale (amortized cost of $188,683 and $103,872, respectively) .......................................... 187,857 105,491 Mortgage-backed securities available for sale (amortized cost of $688,649 and $679,134, respectively) ................................. 671,985 684,680 ----------- ----------- TOTAL SECURITIES AVAILABLE FOR SALE ................................. 859,842 790,171 Loans and leases ...................................................... 2,550,156 2,177,787 Reserve for credit losses ............................................ (41,895) (37,019) Unearned discount .................................................... (7,259) (5,153) ----------- ----------- NET LOANS AND LEASES ................................................ 2,501,002 2,135,615 Premises and equipment, net ........................................... 59,821 54,390 Interest receivable and other assets .................................. 101,997 65,858 ----------- ----------- TOTAL ASSETS ........................................................ $ 3,851,485 3,398,079 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest bearing deposits .......................................... $ 406,478 369,215 Interest bearing deposits ............................................. 2,444,214 2,201,435 ----------- ----------- TOTAL DEPOSITS ...................................................... 2,850,692 2,570,650 Federal funds purchased and repurchase agreements ..................... 300,737 221,419 Other short-term borrowings ........................................... 125,948 131,794 Long-term debt ........................................................ 215,832 116,286 Accrued expenses and other liabilities ................................ 44,486 51,568 ----------- ----------- TOTAL LIABILITIES ................................................... 3,537,695 3,091,717 Minority interests .................................................... 914 905 Redeemable preferred stock ............................................ -- 2,079 Redeemable class A common stock, 960,000 shares issued and outstanding ............................................... 25,029 24,270 Shareholder's equity Common stock Class A, no par, 12,000,000 shares authorized; 240,000 shares issued and outstanding ........................................... 57 57 Class B, no par, 10,800,000 shares authorized, issued and outstanding ........................................... 2,562 2,562 Retained earnings ..................................................... 295,026 272,696 Accumulated other comprehensive income ................................ (9,798) 3,793 ----------- ----------- TOTAL SHAREHOLDER'S EQUITY .......................................... 287,847 279,108 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .......................... $ 3,851,485 3,398,079 =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 25 BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 -------------------------------- 1999 1998 1997 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INTEREST INCOME Loans and leases, including fees ............................ $201,022 186,963 165,958 Securities Taxable .................................................... 51,669 46,698 49,264 Tax-exempt ................................................. 10,577 11,036 11,197 Federal funds sold .......................................... 575 701 -- Other ....................................................... 132 127 131 -------- -------- -------- Total interest income .................................... 263,975 245,525 226,550 -------- -------- -------- INTEREST EXPENSE Deposits .................................................... 96,436 97,660 90,410 Federal funds purchased and repurchase agreements ........... 11,175 9,836 6,843 Other short-term borrowings ................................. 8,246 9,652 9,514 Long-term debt .............................................. 9,065 4,276 3,202 -------- -------- -------- Total interest expense ................................... 124,922 121,424 109,969 -------- -------- -------- Net interest income ........................................ 139,053 124,101 116,581 Provision for credit losses ................................. 8,321 5,570 4,746 -------- -------- -------- Net interest income after provision for credit losses ...... 130,732 118,531 111,835 -------- -------- -------- NONINTEREST INCOME Service charges ............................................. 19,434 17,037 15,787 Insurance ................................................... 10,125 7,804 7,503 Trust ....................................................... 7,984 6,990 6,265 Brokerage ................................................... 4,533 3,752 2,935 Gain on sale of loans ....................................... 3,380 4,977 2,550 Gain (loss) on sale of securities ........................... 1,853 1,296 (125) State tax refund ............................................ -- 4,476 -- Other ....................................................... 5,578 4,938 3,766 -------- -------- -------- Total noninterest income ................................. 52,887 51,270 38,681 -------- -------- -------- NONINTEREST EXPENSE Salaries and wages .......................................... 54,164 49,287 44,912 Employee benefits ........................................... 14,901 12,572 11,690 Occupancy ................................................... 6,921 6,128 6,005 Furniture and equipment ..................................... 9,170 7,621 6,819 Data processing fees ........................................ 7,465 6,046 6,513 FDIC premiums and examination fees .......................... 1,297 1,157 555 Goodwill and other intangibles .............................. 2,831 1,711 1,499 Other ....................................................... 25,616 22,491 20,262 -------- -------- -------- Total noninterest expense ................................ 122,365 107,013 98,255 -------- -------- -------- INCOME BEFORE INCOME TAX EXPENSE ............................. 61,254 62,788 52,261 Income tax expense .......................................... 21,143 21,277 17,201 -------- -------- -------- NET INCOME ................................................... $ 40,111 41,511 35,060 ======== ======== ======== Per common share amounts: Net income-basic ........................................... $ 3.34 3.46 2.92 Dividends paid ............................................. $ 1.32 1.32 1.20
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 26 BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
ACCUMULATED COMMON STOCK OTHER ------------------- COMPREHENSIVE COMPREHENSIVE RETAINED CLASS A CLASS B INCOME INCOME EARNINGS TOTAL --------- --------- ------------- ------------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 ............................. 40,111 40,111 40,111 Other comprehensive income Change in net unrealized gain (loss) on securities available for sale, net of $9,849 tax benefit ...... (14,774) (14,774) (14,774) ------- Comprehensive income ................... 25,337 ======= 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 ................... 1,183 (1,941) (758) --- ----- ------- ------- ------- BALANCE, DECEMBER 31, 1999 ............... $57 2,562 (9,798) 295,026 287,847 === ===== ======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 27 BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------------- 1999 1998 1997 --------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income ..................................................... $ 40,111 41,511 35,060 Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses ................................... 8,321 5,570 4,746 Depreciation and amortization ................................. 11,001 9,081 7,159 Deferred income taxes ......................................... 5,091 2,283 279 Minority interests in earnings of subsidiaries ................ 41 747 1,486 (Gain) loss on sale of securities ............................. (1,853) (1,296) 125 Gain on sale of other real estate owned, net .................. (405) (242) (42) Other assets and liabilities, net ............................. 6,005 1,656 (425) Proceeds from sales of other real estate owned ................ 919 862 643 Cash receipts related to loans originated specifically for resale ...................................... 185,448 289,472 139,003 Cash payments related to loans originated specifically for resale ...................................... (186,259) (290,493) (139,388) --------- --------- --------- Net cash provided by operating activities ................... 68,420 59,151 48,646 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Deposits in other banks, net ................................... (3,174) 174 (108) Purchases of securities available for sale ..................... (394,091) (359,454) (292,205) Purchases of securities held to maturity ....................... (41,168) (34,381) (28,549) Proceeds from maturities of securities available for sale ...... 215,050 221,601 114,696 Proceeds from maturities of securities held to maturity ........ 62,793 99,379 41,560 Proceeds from sales of securities available for sale ........... 92,302 67,179 132,230 Loans and leases, net .......................................... (372,897) (210,289) (169,560) Acquisition of minority interests .............................. -- (12,149) (31) Acquisitions, net of cash acquired ............................. (47,789) -- (8,203) Acquisition of premises and equipment .......................... (12,979) (9,264) (11,418) --------- --------- --------- Net cash used by investing activities ....................... (501,953) (237,204) (221,588) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Noninterest bearing deposits, net .............................. 37,263 24,694 5,843 Interest bearing deposits (excluding certificates of deposit), net .............................................. 171,488 125,907 66,386 Certificates of deposits, net .................................. 71,291 (22,449) 33,894 Federal funds purchased and repurchase agreements, net ......... 79,318 54,245 (19,607) Other short-term borrowings, net ............................... (5,846) (66,296) 110,021 Proceeds from issuance of long-term debt ....................... 142,432 97,298 10,609 Repayments of long-term debt ................................... (42,886) (11,250) (42,760) Dividends paid to minority interests ........................... (32) (326) (910) Redeemable preferred stock ..................................... (2,079) (65) -- Dividends paid ................................................. (15,840) (15,840) (14,400) --------- --------- --------- Net cash provided by financing activities ................... 435,109 185,918 149,076 --------- --------- --------- Net increase (decrease) in cash and due from banks .......... 1,576 7,865 (23,866) Cash and due from banks Beginning of year ............................................. 143,831 135,966 159,832 --------- --------- --------- End of year ................................................... $ 145,407 143,831 135,966 ========= ========= ========= Supplemental disclosures of cash flow information Cash paid during the year for interest ......................... $ 125,666 121,198 106,367 Cash paid during the year for income taxes ..................... 17,534 19,079 16,451
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A: ACCOUNTING POLICIES NATURE OF BUSINESS -- Bremer Financial Corporation (the "Company") is a privately-held regional financial services company headquartered in St. Paul, Minnesota. The Company is a majority owner of 14 subsidiary banks ("Subsidiary Banks") which draw most of their deposits from and make substantially all of their loans within the states of Minnesota, North Dakota, and Wisconsin and is operated as a single segment. Additionally, the Company provides asset-based lending and leasing, trust and insurance services to its customers through wholly-owned nonbanking subsidiaries and investment services through a third party relationship. The accounting and reporting policies of the Company and its subsidiaries conform to generally accepted accounting principles and general practices within the financial services industry. The more significant accounting policies are summarized below: CONSOLIDATION -- The consolidated financial statements include the accounts of the Company (a bank holding company majority owned by the Otto Bremer Foundation) and all Subsidiary Banks and financial service subsidiaries in which the Company has a majority interest. All significant intercompany accounts and transactions have been eliminated. CASH FLOWS -- For purposes of this statement, the Company has defined cash equivalents as cash and due from banks. During the years ended December 31, 1999, 1998, and 1997, the Company received real estate valued at $725,000, $776,000, and $835,000, respectively, in satisfaction of outstanding loan balances. INVESTMENT AND MORTGAGE-BACKED SECURITIES -- HELD TO MATURITY SECURITIES consist of debt securities which the Company has the intent and ability to hold to maturity and are valued at amortized historical cost. Under certain circumstances (including the deterioration of the issuer's creditworthiness or a change in tax law or statutory or regulatory requirements), securities held to maturity may be sold or transferred to another portfolio. AVAILABLE FOR SALE SECURITIES consist of debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity or changes in the availability or yield of alternative investments. These securities are valued at current market value with the resulting unrealized holding gains and losses excluded from earnings and reported, net of tax and minority interest effects and the resultant allocation to redeemable class A common stock, as a separate component of shareholder's equity until realized. Gains or losses on these securities are computed based on the adjusted cost of the specific securities sold. The Company does not engage in trading activities. LOANS AND LEASES -- Interest income is accrued on loan and lease balances based on the principal amount outstanding. Loans and leases are reviewed regularly by management and placed on nonaccrual status when the collection of interest or principal is unlikely. The accrual of interest on loans and leases is suspended when the credit becomes 90 days or more past due, unless the loan or lease is fully secured and in the process of collection. Thereafter, no interest is recognized as income unless received in cash or until such time the borrower demonstrates the ability to pay interest and principal. Certain net loan and commitment fees are deferred and amortized over the life of the related loan or commitment as an adjustment of yield. RESERVE FOR CREDIT LOSSES -- Management determines the adequacy of the reserve based upon a number of factors, including credit loss experience and a continuous review of the loan and lease portfolio. Being an estimate, the reserve is subject to change through evaluation of the loan and lease composition, economic conditions, and the economic prospects of borrowers. Under the Company's credit policies and practices, all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans and leases, plus certain other loans and leases identified by the Company, meet the definition of impaired loans under Statements of Financial 29 Accounting Standard ("FAS") Nos. 114 and 118. Impaired loans as defined by FAS 114 and 118 exclude certain large groups of smaller balance homogeneous loans, such as consumer loans and residential real estate loans. Under these statements, loan impairment is required to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on accelerated methods based on estimated useful lives. OTHER REAL ESTATE -- Other real estate owned, which is included in other assets, represents properties acquired through foreclosure and other proceedings recorded at the lower of the amount of the loan satisfied or fair value. Any write-down to fair value at the time of foreclosure is charged to the reserve for credit losses. Property is appraised periodically to ensure that the recorded amount is supported by the current fair value. Market write-downs, operating expenses and losses on sales are charged to other expenses. Income, including gains on sales, is credited to other income. INTANGIBLE ASSETS -- Intangible assets consist primarily of goodwill. The remaining unamortized balances at December 31, 1999 and 1998 were approximately $43,606,000 and $16,545,000, respectively, which are amortized over either a 15 year or 25 year period. INCOME TAXES -- Bremer Financial Corporation and subsidiaries file a consolidated federal tax return. Deferred taxes are recorded to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end. Such differences are primarily related to the differences between providing for credit losses for financial reporting purposes while deducting charged-off loans and leases for tax purposes. STATE INCOME TAX REFUND -- In 1998, the Company recorded a non-recurring state tax refund of nearly $4.5 million, including interest, as a component of noninterest income. The state tax refund reflects a refund of state income taxes paid to the state of Minnesota from 1980 through 1983. COMPREHENSIVE INCOME -- In 1998, the Company adopted FAS No. 130, "Reporting Comprehensive Income." 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. ACCOUNTING FOR DERIVATIVES -- In June 1998, the Financial Accounting Standards Board issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for fiscal years beginning after June 15, 2000. The Company has not yet evaluated the full impact of adoption. ESTIMATES -- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans and leases. EARNINGS PER SHARE CALCULATIONS -- Basic earnings per common share have been computed using 12,000,000 common shares for all periods. The Company does not have any dilutive securities. See Note O. RECLASSIFICATIONS -- Certain amounts have been reclassified to provide consistent presentation among the various accounting periods shown. The reclassifications have no effect on previously reported net income or total shareholder's equity. 30 NOTE B: RESTRICTIONS ON CASH AND DUE FROM BANKS The Subsidiary Banks are required to maintain average reserve balances in accordance with the Federal Reserve Bank requirements. The amount of those reserve balances was approximately $28,363,000 and $22,305,000 as of December 31, 1999 and 1998, respectively. NOTE C: INVESTMENT AND MORTGAGE-BACKED SECURITIES At December 31, 1999 and 1998, investment and mortgage-backed securities with an amortized cost of $818,305,000 and $703,857,000, respectively, were pledged as collateral to secure public deposits and for other purposes. The amortized cost and estimated fair value by maturity at December 31, 1999, are shown below (contractual maturity or, with mortgage-backed securities, projected principal payments are used):
HELD TO MATURITY AVAILABLE FOR SALE ---------------------- -------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ------- --------- ------- (IN THOUSANDS) Within 1 year .......... $ 8,102 8,156 40,679 40,300 1 - 5 years ............ 65,921 66,444 110,332 108,646 5 - 10 years ........... 62,322 62,127 189,774 186,697 After 10 years ......... 42,185 40,830 536,547 524,199 -------- ------- ------- ------- Total ................. $178,530 177,557 877,332 859,842 ======== ======= ======= =======
The amortized cost and fair value of investment and mortgage-backed securities available for sale as of December 31 consisted of the following:
1999 1998 --------------------------------------------- --------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------- ---------- ---------- ------- --------- ---------- ---------- ------- (IN THOUSANDS) Governments ............ $ 9,679 20 25 9,674 12,742 207 3 12,946 Government agencies 100,500 384 282 100,602 -- -- -- -- State and political subdivisions .......... 27,264 108 593 26,779 34,925 902 -- 35,827 Corporate bonds ........ -- -- -- -- 8,602 -- 14 8,588 Mortgage-backed securities ............ 688,649 1,320 17,983 671,986 679,134 6,619 1,074 684,680 Equity securities ...... 48,190 8 295 47,903 43,625 480 -- 44,105 Other .................. 3,050 19 171 2,898 3,978 49 1 4,025 -------- ----- ------ ------- ------- ----- ----- ------- Total ................. $877,332 1,859 19,349 859,842 783,006 8,257 1,092 790,171 ======== ===== ====== ======= ======= ===== ===== =======
Proceeds from sales of investments and mortgage-backed securities were $83,444,000, $67,179,000, and $132,230,000 for 1999, 1998, and 1997, respectively. Gross gains of $1,866,000, $1,563,000, and $391,000 and gross losses of $21,000, $267,000, and $516,000 were realized on those sales for 1999, 1998, and 1997, respectively. 31 A summary of amortized cost and fair value of investment and mortgage-backed securities held to maturity at December 31 consisted of the following:
1999 1998 --------------------------------------------- --------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------- ---------- ---------- ------- --------- ---------- ---------- ------- (IN THOUSANDS) Government agencies $ 10,486 -- 313 10,173 10,478 135 -- 10,613 State and political subdivisions ......... 161,234 1,421 2,040 160,615 148,306 5,894 16 154,184 Mortgage-backed securities ........... 6,810 -- 41 6,769 27,143 3 76 27,070 Other ................. -- -- -- -- 20,575 26 -- 20,601 -------- ----- ----- ------- ------- ----- ---- ------- Total ................ $178,530 1,421 2,394 177,557 206,502 6,058 92 212,468 ======== ===== ===== ======= ======= ===== ==== =======
State and political subdivision investments largely involve governmental entities within the Company's market area. NOTE D: LOANS AND LEASES The Company is engaged in lending activities with borrowers in a wide variety of industries. Lending is concentrated in the areas in which its Subsidiary Banks are located. Loans and leases at December 31 consisted of the following:
1999 1998 ---------- --------- (IN THOUSANDS) Commercial and other ..................... $ 596,680 475,556 Commercial real estate ................... 648,029 501,205 Construction ............................ 70,869 59,913 Agricultural ............................. 433,357 444,784 Residential real estate .................. 450,812 376,652 Construction ............................ 15,274 13,397 Consumer ................................. 275,320 250,803 Tax-exempt ............................... 59,815 55,477 ---------- --------- Total ................................... $2,550,156 2,177,787 ========== =========
Impaired loans and leases were $16,656,000 and $13,252,000 at December 31, 1999 and 1998, respectively. Impaired loans and leases include nonaccrual and restructured loans and leases. Restructured loans and leases are those for which the terms (principal and/or interest) have been modified as a result of the inability of the borrower to meet the original terms of the loan or lease. The reserve for credit losses included approximately $2,692,000 and $1,725,000 relating to impaired loans and leases at December 31, 1999 and 1998, respectively. The effect of nonaccrual and restructured loans and leases on interest income for each of the three years ended December 31 was as follows:
1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Interest income As originally contracted ............ $2,254 1,708 794 As recognized ....................... (770) (324) (276) ------ ----- ---- Reduction of interest income ......... $1,484 1,384 518 ====== ===== ====
Other nonperforming assets, consisting of other real estate owned, amounted to $527,000 and $620,000 at December 31, 1999 and 1998, respectively. 32 Loans totaling $283,140,000 and $244,851,000 had been pledged to secure Federal Home Loan Bank (FHLB) advances at December 31, 1999 and 1998, respectively. Acceptable collateral is defined by the FHLB and consists primarily of residential real estate mortgages. The Company and its subsidiaries have granted loans to the officers and directors (the "Group") of significant subsidiaries. The aggregate dollar amount of loans to the Group was $17,605,000 and $19,431,000 at December 31, 1999 and 1998, respectively. During 1999, $65,997,000 of new loans were made, repayments totaled $68,144,000, and changes in the composition of the Group or their associations increased loans outstanding by $321,000. These loans were made at the prevailing market interest rates. NOTE E: RESERVE FOR CREDIT LOSSES Changes in the reserve for credit losses are as follows:
1999 1998 1997 ---------- ---------- --------- (IN THOUSANDS) Beginning of year ........................... $ 37,019 34,253 30,482 Charge-offs ................................ (7,064) (3,968) (2,759) Recoveries ................................. 1,439 1,164 1,026 -------- ------ ------ Net charge-offs ........................... (5,625) (2,804) (1,733) Provision for credit losses ................ 8,321 5,570 4,746 Reserve related to acquired assets ......... 2,180 -- 758 -------- ------ ------ End of year ................................. $ 41,895 37,019 34,253 ======== ====== ======
NOTE F: PREMISES AND EQUIPMENT Premises and equipment at December 31 consisted of the following:
1999 1998 ---------- --------- (IN THOUSANDS) Land ........................................................ $ 7,787 7,430 Buildings and improvements .................................. 65,583 58,113 Furniture and equipment ..................................... 48,372 44,814 -------- ------- Total premises and equipment ............................... 121,742 110,357 Less: accumulated depreciation and amortization 61,921 55,967 -------- ------- Premises and equipment, net ................................. $ 59,821 54,390 ======== =======
NOTE G: SHORT-TERM BORROWINGS Short-term borrowings consist of federal funds and repurchase agreements (which generally mature within one to sixty days of the transaction date), treasury tax and loan notes (which generally mature within one to thirty days), FHLB advances (which mature within one year), and advances under an unsecured revolving credit facility. The size of the credit facility available at December 31, 1999, is $90 million, of which $74 million was unused. The facility contains covenants which require the Company to maintain certain levels of capitalization. 33 Information related to short-term borrowings for the two years ended December 31 is provided below:
FEDERAL FUNDS FEDERAL HOME TREASURY REVOLVING AND REPURCHASE LOAN BANK TAX AND LOAN CREDIT AGREEMENTS BORROWINGS NOTES FACILITY -------------- ------------ ------------ --------- (DOLLARS IN THOUSANDS) Balance at December 31 1998 ........................................... $221,419 89,500 9,294 33,000 1999 ........................................... 300,737 107,000 2,948 16,000 Weighted average interest rate at December 31 1998 ........................................... 4.96% 5.22 4.62 6.52 1999 ........................................... 5.41 5.67 5.25 6.74 Maximum amount outstanding at any month end 1998 ........................................... $288,312 178,658 15,167 35,000 1999 ........................................... 300,737 156,755 12,461 99,000 Average amount outstanding during the year 1998 ........................................... $196,731 139,520 8,587 22,742 1999 ........................................... 246,666 84,556 3,553 55,875 Weighted average interest cost during the year 1998 ........................................... 5.00% 5.55 4.76 6.55 1999 ........................................... 4.53 5.47 4.65 6.23
NOTE H: LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:
1999 1998 --------- --------- (IN THOUSANDS) Senior notes .............................. $ 65,000 -- Federal Home Loan Bank borrowings ......... 147,587 111,318 Installment promissory notes .............. 3,245 4,968 -------- ------- Total .................................... $215,832 116,286 ======== =======
The $65 million of senior notes are unsecured and are made up of two tranches. The $46 million first tranche bears an interest rate of 8.27% and matures on November 1, 2004, while the remaining $19 million second tranche bears an interest rate of 8.47% and matures on November 1, 2006. These senior notes include covenants which require the Company to maintain certain levels of capitalization. The FHLB borrowings bear interest at rates ranging from 4.97% to 7.83%, with maturity dates from 2000 through 2013, and are secured by certain loans and investment securities. The installment promissory notes bear interest at rates ranging from 6.94% to 8.53%, paid predominantly in annual installments through 2007. Maturities of long-term debt outstanding at December 31, 1999, were as follows:
(IN THOUSANDS) 2000 ....................................................... $ 16,058 2001 ....................................................... 1,813 2002 ....................................................... 18,804 2003 ....................................................... 2,623 2004 ....................................................... 70,636 Beyond 2004 ................................................ 105,898 -------- Total ..................................................... $215,832 ========
At December 31, 1999, $71 million of the FHLB borrowings due in years beyond 2004 were subject to call prior to maturity at the option of the FHLB. Of this amount, $14 million is callable in 2001 and $57 million is callable in 2003. 34 NOTE I: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Most of the Company's assets and liabilities are considered financial instruments as defined in FAS 107. Many of the Company's financial instruments, however, lack an available trading market which is characterized by an exchange transaction of the instrument by a willing buyer and seller. It is also the Company's general practice and intent to hold most of its financial instruments to maturity and not engage in trading activities. Therefore, significant estimations and present value calculations were utilized by the Company for purposes of this disclosure. The use of different market assumptions and/or estimation methodologies may have a material effect on these estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to the Company as of December 31, 1999 and 1998. Although the Company is not aware of any factors that would significantly affect the estimated fair value amounts, these amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 1999 and, therefore, current estimates of fair value may differ from the amounts presented. As of December 31, carrying amounts and estimated fair values were:
1999 1998 ------------------------ ------------------------ ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- --------- --------- ---------- (IN THOUSANDS) ASSETS Cash and due from banks ................ $ 145,407 145,407 143,831 143,831 Interest bearing deposits .............. 4,886 4,886 1,712 1,712 Securities held to maturity ............ 178,530 177,557 206,502 212,468 Securities available for sale .......... 859,842 859,842 790,171 790,171 Loans and leases ....................... 2,501,002 2,481,897 2,135,615 2,163,881 LIABILITIES Demand deposits ........................ 1,426,005 1,426,006 1,235,095 1,235,095 Time deposits .......................... 1,424,687 1,418,486 1,335,555 1,339,780 Short-term borrowings .................. 426,685 426,698 353,213 353,213 Long-term debt ......................... 215,832 208,365 116,286 120,549
CASH AND DUE FROM BANKS AND INTEREST BEARING DEPOSITS -- The carrying value for these financial instruments approximates fair value due to the relatively short period of time between the origination of the instruments and their expected realization. SECURITIES -- Fair values of these financial instruments were estimated using quoted market prices, when available. If quoted market prices were not available, fair value was estimated using market prices for similar assets. As required by FAS 115, securities available for sale are carried at fair market value. LOANS AND LEASES -- The fair value of loans (net of unearned discount) and leases is estimated by discounting the future cash flows using the current rates at which similar loans or leases would be made to qualified borrowers and for the same remaining maturities, adjusted by a related portion of the reserve for credit losses. DEPOSITS -- The estimated fair value of deposits with no stated maturity, such as noninterest bearing savings and money-market checking accounts, is the amount payable on demand. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS -- Due to the short term nature of repricing and maturities of these instruments, fair value is considered carrying value. LONG-TERM DEBT -- For fixed rate debt, the fair value is determined by discounting future cash flows at current rates for debt with similar remaining maturities and call features. For variable rate debt, fair value approximates carrying value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS -- The estimated fair value of these instruments, such as loan commitments and standby letters of credit, approximates their off-balance sheet carrying value due to repricing ability and other terms of the contracts. 35 NOTE J: EMPLOYEE BENEFIT PLANS PENSION PLAN -- The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on age, years of service, and the employee's highest average compensation during 60 consecutive months of the last 120 months of employment. In recent years, the Company's funding policy is to contribute annually an amount approaching the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide for benefits attributed to service to date and for those expected to be earned in the future. OTHER POSTRETIREMENT BENEFITS -- The Company provides certain retiree health care benefits relating primarily to medical insurance co-payments to retired employees between the ages of 55 and 65. In accordance with FAS No. 106 as amended by FAS No. 132, "Employers' Accounting for Postretirement Benefits Other than Pensions," the Company accrues the cost of these benefits during the employees' active service. The cost of these programs are as follows:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------- ------------------------------- 1999 1998 1997 1999 1998 1997 ------- ------- ------- ------- ------- ------- NET PENSION COST Service cost ................................... $ 1,674 1,408 1,118 $ 152 157 130 Interest cost .................................. 2,178 1,937 1,715 146 171 158 Expected return on plan assets ................. (2,629) (2,439) (1,842) -- -- -- Net (gain) recognition ......................... -- -- -- (72) (47) (63) Prior service cost amortization ................ 173 130 130 (6) (6) (6) Loss due to special termination benefits ....... 352 -- -- -- -- -- ------- ------- ------- ------- ------- ------- Net pension cost .............................. $ 1,748 1,036 1,121 $ 220 275 219 ======= ======= ======= ======= ======= =======
Contributions to the pension plan are intended to provide for benefits attributed to service to date and for those expected to be earned in the future. Benefits under FAS No. 106 are funded on a pay-as-you-go-basis. The following tables set forth the plans' funded status (based on a valuation date of September 30), along with a description of how the status changed during the past two years and the amount recognized on the Company's balance sheet at December 31. The funded status of the plans is equal to the fair value of plan assets less the benefit obligation at end of year. 36
OTHER POST- PENSION BENEFITS RETIREMENT BENEFITS --------------------- --------------------- 1999 1998 1999 1998 -------- -------- -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at end of prior year ................... $ 30,134 25,637 $ 2,072 2,256 Service cost .............................................. 1,674 1,408 152 157 Interest cost ............................................. 2,179 1,937 146 171 Amendments ................................................ 817 -- -- -- Actuarial (gain)/loss ..................................... (4,172) 1,800 (501) (676) Benefits paid ............................................. (920) (648) 194 164 -------- -------- -------- -------- Benefit obligation at end of year ......................... $ 29,712 30,134 $ 2,063 2,072 ======== ======== ======== ======== CHANGE IN PLAN ASSETS Fair value of plan assets at September 30, prior year ..... $ 28,173 26,098 $ -- -- Actual return on plan assets .............................. 5,400 939 -- -- Employer contribution ..................................... 2,147 1,784 194 164 Benefits paid ............................................. (920) (648) (194) (164) -------- -------- -------- -------- Fair value of plan assets at September 30, current year ... $ 34,800 28,173 $ -- -- ======== ======== ======== ======== FUNDED STATUS OF PLANS Funded status of plans .................................... $ 5,088 (1,962) $ (2,063) (2,072) Unrecognized net (gain)/loss .............................. (5,905) 1,038 (1,341) (1,300) Unrecognized prior service costs .......................... 760 467 (122) (127) Contributions between September 30 and December 31 ........ 3,565 1,610 -- -- -------- -------- -------- -------- Prepaid benefit asset/(accrued benefit liability) ........ $ 3,508 1,153 $ (3,526) (3,499) ======== ======== ======== ========
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation and the expected long-term rates of return on assets are as follows:
OTHER POST- PENSION BENEFITS RETIREMENT BENEFITS ---------------------------------- ---------------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- WEIGHTED AVERAGE ASSUMPTIONS Discount rate .......................... 7.75% 6.75% 7.25% 7.75% 6.75% 7.25% Expected return on plan assets ......... 10.00% 9.00% 9.00% N/A N/A N/A Rate of compensation increase .......... 4.25% 4.25% 4.50% N/A N/A N/A
For purposes of the 1999 postretirement benefits measurements, the Company has assumed a health-care cost trend rate of between 5.30% and 5.80%. The health-care trend rate assumption has a significant effect on the amounts reported. A one (1) percentage point change in the health-care trend rate would have the following effects on 1999 service and interest cost on the accumulated postretirement benefit obligation at December 31, 1999:
ONE (1) PERCENTAGE POINT ------------------------ INCREASE DECREASE ----------- ---------- Effect on service and interest cost components of net periodic cost ....................... $ 41 (36) Effect on accumulated postretirement benefit obligation ................................... 233 (202)
OTHER POSTEMPLOYMENT BENEFITS -- The Company accounts for postemployment benefits in accordance with FAS No. 112, "Employer's Accounting for Postemployment Benefits," adopted in 1994. PROFIT SHARING PLAN -- The profit sharing plan is a defined contribution plan with contributions made by the Company. The profit sharing plan is noncontributory at the employee level, except for the employees' option to contribute under a 401(k) savings plan available as part of the profit sharing plan. Contributions are calculated using a formula based primarily upon the Company's earnings. The expense for 1999, 1998, and 1997 was approximately $2,795,000, $2,465,000 and $2,264,000, respectively. 37 EMPLOYEE STOCK OWNERSHIP PLAN -- The ESOP is a defined contribution plan covering substantially all employees, with contributions made exclusively by the Company on a discretionary year-by-year basis. The expense for 1999, 1998, and 1997 was approximately $100,000, $250,000 and $350,000, respectively. NOTE K: OTHER NONINTEREST INCOME Other noninterest income at December 31 consisted of the following: 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Fees on loans ................................. $2,841 2,944 2,452 Other ......................................... 2,737 1,994 1,314 ------ ------ ------ Total ....................................... $5,578 4,938 3,766 ====== ====== ====== NOTE L: OTHER NONINTEREST EXPENSE Other noninterest expense at December 31 consisted of the following: 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Printing, postage and office supplies ......... $ 5,916 5,487 5,189 Marketing ..................................... 4,760 4,756 3,609 Other real estate owned ....................... 104 91 149 Other ......................................... 14,836 12,157 11,315 ------- ------- ------- Total ....................................... $25,616 22,491 20,262 ======= ======= ======= NOTE M: INCOME TAXES The components of the provision for income taxes at December 31 were as follows: 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Current Federal ...................................... $12,306 14,713 12,941 State ........................................ 3,746 4,281 3,981 Deferred ...................................... 5,091 2,283 279 ------- ------- ------- Total ....................................... $21,143 21,277 17,201 ======= ======= ======= 38 A reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate at December 31 was as follows:
1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Tax at statutory rate ....................................... $ 21,440 21,976 18,291 Plus state income tax, net of federal tax benefits .......... 3,153 3,083 2,588 -------- -------- -------- 24,593 25,059 20,879 Less tax effect of: Interest on state and political subdivision securities ..... 2,939 2,972 2,955 Other tax-exempt interest .................................. 1,259 1,483 1,471 Goodwill Amortization ...................................... (753) (330) (260) Minority interest in earnings .............................. (14) (262) (520) Other ...................................................... 19 (81) 32 -------- -------- -------- 3,450 3,782 3,678 -------- -------- -------- Income tax expense .......................................... $ 21,143 21,277 17,201 ======== ======== ========
The following table sets forth the temporary differences comprising the net deferred taxes included with interest receivable and other assets on the consolidated balance sheet at December 31:
1999 1998 -------- -------- (IN THOUSANDS) Deferred tax assets Provision for credit losses .............................................. $ 16,490 14,804 Employee compensation and benefits accruals .............................. 1,293 1,872 Deferred income .......................................................... 960 813 Unrealized loss on securities available for sale ......................... 6,994 -- Other .................................................................... 40 55 -------- -------- Total .................................................................. 25,777 17,544 ======== ======== Deferred tax liabilities Deferred expense ......................................................... 1,577 1,900 Depreciation ............................................................. 12,017 6,767 Unrealized gains on securities available for sale ........................ -- 2,859 Other .................................................................... 39 261 -------- -------- Total .................................................................. 13,633 11,787 -------- -------- Net deferred tax assets .................................................. $ 12,144 5,757 ======== ========
NOTE N: COMMITMENTS AND CONTINGENCIES The Company utilizes various off-balance sheet instruments to satisfy the financing needs of customers. These instruments represent contractual obligations of the Company to provide funding, within a specified time period, to a customer. The following represents the outstanding obligations at December 31:
1999 1998 -------- -------- (IN THOUSANDS) Standby letters of credit ................................................. $ 29,697 27,217 Loan commitments .......................................................... 589,860 489,347
Standby letters of credit represent a conditional commitment to satisfy an obligation to a third party, generally to support public and private borrowing arrangements, on behalf of the customer. Loan commitments represent contractual agreements to provide funding to customers over a specified time period as long as there is no violation of any condition of the contract. These loans generally will take the form of operating lines. 39 The Company's potential exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. The credit risk associated with letters of credit and loan commitments is substantially the same as extending credit in the form of a loan; therefore, the same credit policies apply in evaluating potential letters of credit or loan commitments. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management's credit evaluation. The type of collateral held varies, but includes accounts receivable, inventory, and productive assets. Under substantially noncancelable contracts, the Company is obligated to pay approximately $4.5 million in annual data processing and item processing fees through February 2004 and March 2006, respectively. The costs under the item processing contract are calculated in accordance with a volume-based fee schedule, which is subject to change annually. The Company is routinely involved in legal actions which are incidental to the business of the Company. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or operations. The Company issued redeemable preferred stock of Dunn County Bankshares, Inc. ("DCBI") in connection with the acquisition of DCBI's operations in Menomonie, Wisconsin on September 1, 1994. On December 31, 1998 there were 80,000 shares authorized, 71,594 shares issued, and 20,787 shares outstanding of the $100 par redeemable preferred stock. All of the outstanding stock was redeemed in late 1999. NOTE O: COMMON STOCK The Company has authorized 12,000,000 shares of class A common stock and 10,800,000 shares of class B common stock. The shares of class A common stock have full rights to vote on all matters properly before the Company's shareholders, including the election of the Company's directors. The class B common stock, all of which is held by the Otto Bremer Foundation, is non-voting except with respect to certain extraordinary corporate transactions, upon which the holders would have the right to vote on an equivalent per share basis with the holders of class A common stock. Each share of class B common stock is convertible into one share of class A common stock upon the occurrence of the following events: (i) at the affirmative election of a third party or entity, upon the transfer of class B common stock from the Otto Bremer Foundation to any third party or entity, or (ii) at the affirmative election of the holder of class B common stock, if cash dividends have not been paid on class A and class B common stock with respect to any year in an amount equal to at least 5% of the Company's net book value as of the last day of the immediately preceding year. The Company has reserved 10,800,000 shares of class A common stock in the event of conversion of the class B common stock. At December 31, 1999 and 1998, 960,000 shares of redeemable class A common stock were issued and outstanding. With the exception of shares held in the Company's ESOP, these shares were subject to redemption at a price of $26.07 and $25.28 per share, respectively, which approximated book value. Shares held in the Company's ESOP were redeemed at a price of $35.25 and $36.85 per share, respectively, as determined by an independent appraiser. These shares are owned by employees and Directors of the Company and its subsidiaries and the employee benefit plans of the Company. These holders of class A common stock have the right to require the Company to purchase their shares under certain circumstances. The shares have been classified as redeemable class A common stock subject to redemption at a price, which approximates book value. It is the Company's intent that these 960,000 shares will continue to be held by employees, directors, and employee benefit plans of the Company or its subsidiaries and not be directly repurchased by the Company or the Otto Bremer Foundation. Certain restrictions exist regarding the extent to which banks may transfer funds to the Company in the form of dividends. Federal law prevents the Company and its non-bank subsidiaries from borrowing from the Subsidiary Banks unless the loans are secured by specified U.S. obligations. Further, the secured loans that may be made by Subsidiary Banks are generally limited in amount to 10% of the Subsidiary Bank's equity if made to the Company or any individual affiliate and 20% of the Subsidiary 40 Bank's equity if made to all affiliates and the Company in the aggregate. At December 31, 1999, 1998 and 1997, no Subsidiary Banks had extended credit to the Company. Payment of dividends to the Company by its Subsidiary Banks is subject to various limitations by bank regulators, which includes maintenance of certain minimum capital ratios. As of December 31, 1999, $45,160,000 of retained earnings of the Subsidiary Banks was available for distribution to the Company as dividends subject to these limitations. Approximately $34,769,000 was available for distribution without obtaining the prior approval of the appropriate bank regulator. NOTE P: REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Qualitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below and as defined in the regulations) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 1999, that the Company meets all capital adequacy requirements to which it is subject. The Company's actual capital amounts and ratios as of December 31 are also presented below.
FOR CAPITAL ACTUAL ADEQUACY PURPOSES -------------------- -------------------- AMOUNT RATIO AMOUNT RATIO ---------- ------- ---------- ------- AS OF DECEMBER 31, 1999: TOTAL CAPITAL (TO RISK WEIGHTED ASSETS) .......... $315,100 11.67% $216,029 8.00% TIER I CAPITAL (TO RISK WEIGHTED ASSETS) ......... 281,244 10.42 108,015 4.00 TIER I CAPITAL (TO AVERAGE ASSETS) ............... 281,244 7.48 112,784 3.00 As of December 31, 1998: Total Capital (to Risk Weighted Assets) .......... 313,708 13.39% 187,475 8.00 Tier I Capital (to Risk Weighted Assets) ......... 284,319 12.13 93,738 4.00 Tier I Capital (to Average Assets) ............... 284,319 8.58 99,359 3.00
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA") required the establishment of a capital-based supervisory system of prompt corrective action for all depository institutions. The Federal Reserve Board's implementation of FDICIA defines "well-capitalized" institutions as those whose Tier I Capital ratio equals or exceeds 6%, total risk-based capital ratio equals or exceeds 10%, and leverage ratio equals or exceeds 5%. The Company's Subsidiary Banks ratios in each of these categories met or exceeded the "well-capitalized" ratios as of December 31, 1999. 41 NOTE Q: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS: BALANCE SHEETS
DECEMBER 31 -------------------- 1999 1998 -------- -------- (IN THOUSANDS) ASSETS Cash and cash equivalents ................................................. $ 49 100 Investment in and advances to: Bank subsidiaries ........................................................ 320,468 270,670 Non-bank subsidiaries .................................................... 74,923 68,516 Other assets .............................................................. 4,576 2,591 -------- -------- Total assets ........................................................... $400,016 341,877 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Short-term borrowings ..................................................... $ 16,000 33,000 Long-term debt ............................................................ 68,176 3,599 Accrued expenses and other liabilities .................................... 2,964 1,900 Redeemable class A common stock ........................................... 25,029 24,270 Shareholder's equity ...................................................... 287,847 279,108 -------- -------- Total liabilities and shareholder's equity ............................. $400,016 341,877 ======== ========
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 ----------------------------- 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) INCOME Dividends from: Bank subsidiaries ............................................... $29,049 31,873 40,174 Non-bank subsidiaries ........................................... 1,230 600 950 Interest from subsidiaries ....................................... 4,288 3,060 863 Other interest income ............................................ -- -- 405 Gain on sale of securities ....................................... -- -- 54 Other income ..................................................... 354 353 274 ------- ------- ------- Total income ................................................... 34,921 35,886 42,720 EXPENSES Interest expense: Short-term borrowings ........................................... 3,479 1,489 154 Long-term debt .................................................. 1,149 305 339 Salaries and benefits ............................................ 1,505 685 1,083 Operating expense paid to subsidiaries ........................... 1,008 1,083 1,148 Other operating expenses ......................................... 1,184 538 679 ------- ------- ------- Total expenses .................................................. 8,325 4,100 3,403 ------- ------- ------- Income before income tax benefit ................................ 26,596 31,786 39,317 Income tax benefit ............................................... 1,341 208 1,181 ------- ------- ------- Income of parent company only ................................... 27,937 31,994 40,498 Equity in undistributed earnings (losses) of subsidiaries ........ 12,174 9,517 (5,438) ------- ------- ------- NET INCOME ........................................................ $40,111 41,511 35,060 ======= ======= =======
42 NOTE Q: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS (CONTINUED): STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ---------------------------------- 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................................ $ 40,111 41,511 35,060 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed (earnings) losses of subsidiaries ........ (12,174) (9,517) 5,438 Gain on sale of securities ....................................... -- -- (54) Depreciation and amortization ..................................... 858 490 496 Other, net ........................................................ (1,357) (303) 727 -------- -------- -------- Net cash provided by operating activities ........................ 27,438 32,181 41,667 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in and advances to subsidiaries, net ................... (59,226) (42,887) (57,094) Purchases of securities, net ...................................... -- -- (18,644) Proceeds from maturities of securities ............................ -- -- 23,075 Proceeds from sales of securities ................................. -- -- 17,842 -------- -------- -------- Net cash used by investing activities ............................ (59,226) (42,887) (34,821) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net ........................................ (17,000) 27,000 6,000 Proceeds of long-term debt ........................................ 65,000 -- Repayments of long-term debt ...................................... (423) (424) (424) Dividends paid .................................................... (15,840) (15,840) (14,400) -------- -------- -------- Net cash provided (used) by financing activities ................. 31,737 10,736 (8,824) -------- -------- -------- (Decrease) increase in cash and cash equivalents ................... (51) 30 (1,978) Cash and cash equivalents Beginning of year ................................................. 100 70 2,048 -------- -------- -------- End of year ....................................................... $ 49 100 70 ======== ======== ========
(The remainder of this page was intentionally left blank.) 43 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF BREMER FINANCIAL CORPORATION We have audited the accompanying consolidated balance sheets of Bremer Financial Corporation and subsidiaries (the Company), a subsidiary of the Otto Bremer Foundation, as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bremer Financial Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP January 25, 2000 Minneapolis, Minnesota 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No event requiring disclosure pursuant to this Item 9 has occurred during the two years ended December 31, 1999. PART III. Items 10 through 13 of the Form 10-K are omitted because the Company will file before April 30, 2000 a definitive Proxy Statement (the "Proxy Statement") conforming to Schedule 14A involving the election of directors. The information required by Items 10, 11, 12 and 13 of Part III of the Form 10-K are hereby incorporated by reference to such Proxy Statement. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) The following financial statements of Bremer Financial Corporation are part of this document under Item 8. Financial Statements and Supplementary Data: Consolidated Balance Sheets -- December 31, 1999 and December 31, 1998 Consolidated Statements of Income -- Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Shareholder's Equity -- Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows -- Years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements Independent Auditors' Report (2) Financial statement schedules are omitted as they are not applicable, not required, or the required information is included in the financial statements or notes thereto. (3) The following exhibits are filed as a part of this report: 10.1 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation. 10.2 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation. 10.3 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Community Banking Director. 10.4 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Financial Services Director. 10.5 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, and Chief Information Officer. 10.6 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for other Senior Management Positions. 21 Subsidiaries of the Company. 27 Financial Data Schedule. 45 The following exhibits are incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1998: 10.7 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, Chief Information Officer, Human Resources Director, and Operations Director. 10.8 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Group Presidents. 10.9 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation. 10.10 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation. The following exhibits are incorporated by reference to Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1997: 10.11 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Director, Operations & Technology; Retail Banking Services Director; Chief Information Officer; Chief Financial Officer, Chief Credit Officer, and Human Resources Director. 10.12 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Group Presidents. 10.13 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for Chief Operating Officer. 10.14 Bremer Financial Corporation 1997 Executive Annual Incentive Compensation Plan for President and CEO. The following exhibits are incorporated by reference to Exhibits 3.1, 28.7, and 28.8, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1989: 3.1 Bylaws of the Company in effect on the date hereof. 99.1 The portion of the final Prospectus of the Company dated April 20, 1989 ("Prospectus"), which was filed with the SEC on April 20, 1989, entitled "Description of Capital Stock Description of Class A Common Stock -- Restrictions on Transfer." 99.2 The portion of the Prospectus entitled "Description of Capital Stock -- Description of Class A Common Stock -- First Call Option to Company" on page 64 of the Prospectus. 46 The following exhibits are incorporated by reference to Exhibits 3.1, 10.12, 10.13, 10.14, 10.15, and 10.16, respectively, to the Company's Registration Statement on Form S-1 filed with the SEC on February 10, 1989: 3.2 Restated Articles of Incorporation of the Company in effect on the date hereof. 10.15 Bremer Financial Corporation Employee Stock Ownership Plan and Trust Agreement. 10.16 Bremer Banks Profit Sharing Plus Plan, as amended and restated effective January 1, 1986, and Amendment No. 1 thereto. 10.17 Bremer Banks Profit Sharing Plus Trust Agreement dated October 1, 1986 and Amendment No. 1 thereto. 10.18 Bremer Banks Retirement Plan as effective April 1, 1985. 10.19 Bremer Banks Retirement Plan Trust Agreement (as revised and restated effective January 1, 1976). The following exhibits are incorporated by reference to Exhibits 4.1, 4.2, and 28.1, respectively, to the Company's Amendment No. 1 to Registration Statement on Form S-1 filed with the SEC on March 29, 1989: 4.1 Specimen of Stock Certificate evidencing Class A Common Stock. 4.2 Specimen of Stock Certificate evidencing Class B Common Stock. 99.3 Otto Bremer Foundation Trust Instrument dated May 22, 1944. (b) The Company filed no Current Reports on Form 8-K during the fourth quarter of 1999, which ended December 31, 1999. A copy of this Form 10-K and exhibits herein can be obtained by writing Robert B. Buck, Senior Vice President and Chief Financial Officer, Bremer Financial Corporation, 445 Minnesota Street, Suite 2000, St. Paul, MN 55101. 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 13, 2000. Bremer Financial Corporation By /S/ STAN K. DARDIS -------------------------------------------- Stan K. Dardis ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant on March 13, 2000 in the capacities indicated. /S/ STAN K. DARDIS -------------------------------------------- Stan K. Dardis ITS PRESIDENT AND CHIEF EXECUTIVE OFFICER AND DIRECTOR /S/ TERRY M. CUMMINGS -------------------------------------------- Terry M. Cummings CHAIRMAN OF THE BOARD AND DIRECTOR /S/ WILLIAM H. LIPSCHULTZ -------------------------------------------- William H. Lipschultz VICE PRESIDENT AND DIRECTOR /S/ CHARLOTTE S. JOHNSON -------------------------------------------- Charlotte S. Johnson VICE PRESIDENT AND DIRECTOR /S/ SHERMAN WINTHROP -------------------------------------------- Sherman Winthrop DIRECTOR /S/ DANIEL C. REARDON -------------------------------------------- Daniel C. Reardon VICE PRESIDENT AND DIRECTOR /S/ ROBERT B. BUCK -------------------------------------------- Robert B. Buck SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) /S/ STUART F. BRADT -------------------------------------------- Stuart F. Bradt CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) 48 INDEX TO EXHIBITS Description of Exhibits Page 10.1 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation. 10.2 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation. 10.3 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Community Banking Director. 10.4 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Financial Services Director. 10.5 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, and Chief Information Officer. 10.6 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for other Senior Management Positions. 21 Subsidiaries of the Company. 27 Financial Data Schedule. EX-10.1 2 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN EXHIBIT 10.1 BREMER FINANCIAL CORPORATION 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN Chairman of the Board of Bremer Financial Corporation Contained herein is a detailed outline of the Executive Annual Incentive Compensation Plan which has been designed for the Chairman of the Board of Directors of Bremer Financial Corporation ("Chairman"). A. Purpose 1) To provide an annual incentive award to the Chairman for the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well-being. B. Eligibility 1) The Chairman is the participant in this plan. C. Plan Year 1) The Executive Annual Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the Bremer Financial Corporation Board of Directors ("Board") to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, an award will be approved. 2) Award payments will be made in the first quarter following the end of defined incentive plan year. E. Potential Awards 1) The maximum potential award, stated as a percentage of base salary, will be 70%. F. Performance Measures and Determination of Award 1) 100% of the incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award -------------- ---------------- Below 13.34 -0- 13.34 33.3% of Max (Threshold) 23.31% 13.92 Plan 39.61% 14.03 66.6% of Max 46.42% 15.00 Maximum 70.00% 2) Modifier: Compliance Ratings To ensure that there is appropriate system wide focus on regulatory compliance issues, incentive awards calculated under this plan may be reduced by up to 25% if the Bremer banks selected for compliance examinations by the OCC during the second half of 1999 do not receive satisfactory compliance ratings. G. Administration 1) The plan shall be subject to the approval of the Board which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Award may be deferred. H. Administrative Procedures 1) Addition to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so s/he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- If the eligible participant terminates during the plan year, the incentive award will be handled as follows: - Voluntary resignation -- no incentive award. - Involuntary termination for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval by the Board. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- Eligible employees who have a change in position during a plan year will have their incentive award calculated under both plan award levels and prorated by the months of service at each level. Both calculations will be based on the salary effective on December 31 of the incentive plan year. 4) Interpolation -- When actual performance falls above threshold and between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent and/or certain performance goals are not met, the Board has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The Board has the authority to determine and approve all such exceptions. I. Amendment and termination 1) The Board may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. CALCULATION OF EXECUTIVE INCENTIVE AWARD Plan Year 1999 Chairman of the Board of Directors of Bremer Financial Corporation - -------------------------------- -------------------------------------------- NAME TITLE Percentage of Salary To Be Awarded ------------- F-1 - Corporate RORE - -------------------- Corporate RORE ______% ______________% Total Award Earned as % of Salary ______________% - --------------------------------- X December 31, 1999 Salary $ = 1999 INCENTIVE AWARD $ Compliance Rating Modifier (up to 25% reduction) ($_____________) = 1999 NET INCENTIVE AWARD $ Approved: - -------------------------- -------------------------------------------------- Date Board of Directors of Bremer Financial Corporation EX-10.2 3 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN EXHIBIT 10.2 BREMER FINANCIAL CORPORATION 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN President and CEO of Bremer Financial Corporation Contained herein is a detailed outline of the Executive Annual Incentive Compensation Plan which has been designed for the President and CEO of Bremer Financial Corporation ("CEO"). A. Purpose 1) To provide an annual incentive award to the CEO for the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well-being. B. Eligibility 1) The CEO is the participant in this plan. C. Plan Year 1) The Executive Annual Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the Chairman of the Board Directors of Bremer Financial Corporation ("Chairman") to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, an award will be approved. 2) Award payments will be made in the first quarter following the end of defined incentive plan year. E. Potential Awards 1) The maximum potential award, stated as a percentage of base salary, will be 70%. F. Performance Measures and Determination of Award 1) Corporate RORE 75% of the incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award -------------- ---------------- Below 13.34 -0- 13.34 33.3% of max (Threshold) 17.48% 13.92 Plan 29.71% 14.03 66.6% of max 34.97% 15.00 Maximum 52.50% 2) Work Plan Objectives 25% of the incentive award will be based on achievement of work plan objectives. The work plan objectives should be submitted to the Chairman of the Board of Bremer Financial Corporation for approval. The maximum percentage award for achieving work plan objectives is 17.5% of base salary. 3) Modifier: Compliance Rating To ensure that there is appropriate system wide focus on regulatory compliance issues, incentive awards calculated under this plan may be reduced by up to 25% if the Bremer banks selected for compliance examinations by the OCC during the second half of 1999 do not receive satisfactory compliance ratings. G. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation ("Board") which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Award may be deferred. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so s/he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- If the eligible participant terminates during the plan year, the incentive award will be handled as follows: - Voluntary resignation -- no incentive award. - Involuntary termination for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval the Chairman. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- If the eligible participant has a change in position during a plan year, the incentive award will be calculated under both plan award levels and prorated by the months of service at each level. Both calculations will be based on the salary effective on December 31 of the incentive plan year. 4) Interpolation -- When actual performance falls above threshold and between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent, the Chairman has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The Chairman has the authority to determine and approve all such exceptions. I. Amendment and termination 1) The Board may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. CALCULATION OF EXECUTIVE INCENTIVE AWARD Plan Year 1999 President and CEO of Bremer Financial Corporation - ---------------------------- ------------------------------------------------- NAME TITLE Percentage of Salary To Be Awarded ------------- F-1 - Corporate RORE - -------------------- Corporate RORE ______% ______________% (75% of total award) Work Plan Objectives Achievement Level ______ ______________% (25% of total award) ATTACH A DESCRIPTION OF WORK PLAN OBJECTIVES AND HOW THEY WILL BE MEASURED. Total Award Earned as % of Salary ______________% - --------------------------------- (F-1 + F2) X December 31, 1999 Salary $ = 1999 INCENTIVE AWARD $ Compliance Rating Modifier (up to 25% reduction) ($_____________) = 1999 NET INCENTIVE AWARD $ Approved: - -------------------------- -------------------------------------------------- Date Chairman of the Board of Directors of Bremer Financial Corporation EX-10.3 4 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN EXHIBIT 10.3 BREMER FINANCIAL CORPORATION 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN Community Banking Director Contained herein is a detailed outline of the Executive Annual Incentive Compensation Plan which has been designed for the Community Banking Director. A. Purpose 1) To provide an annual incentive award to the Community Banking Director for significant contributions toward the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well-being. B. Eligibility 1) Participant will be the Community Banking Director. C. Plan Year 1) The Executive Annual Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the appropriate designated management to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, award payments will be recommended and approved. 2) Award payments will be made in the first quarter following the end of defined incentive plan year. E. Potential Awards 1) The maximum potential award, stated as a percentage of base salary, will be 40%. F. Performance Measures and Determination of Award 1) Corporate RORE 50% of the incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award -------------- ---------------- Below 13.34 -0- 13.34 33.3% of max (Threshold) 6.66% 13.92 Plan 11.32% 14.03 66.6% of max 13.32% 15.00 Maximum 20.00% 2) Market Revenue Growth 25% of the incentive award will be based upon Market Revenue Growth. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the Market Revenue percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Market Revenue Growth Percentage of Award --------------------- ------------------- Below 7.0% -0- 7.0% 33.3% of max (threshold) 3.33% 9.0% 66.6% of max (Plan) 6.66% 11.0% Maximum 10.00% 3) Work Plan Objectives 25% of the incentive award will be based on achievement of work plan objectives. The work plan objectives should be submitted to the President and CEO of Bremer Financial Corporation ("CEO") for approval. The maximum percentage award for achieving work plan objectives is 10.0% of base salary. 4) Modifier: Compliance Ratings To ensure that there is appropriate system-wide focus on regulatory compliance issues, incentive awards calculated under this plan may be reduced by up to 25% if the Bremer banks selected for compliance examinations by the OCC during the second half of 1999 do not receive satisfactory compliance ratings. G. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation ("Board") which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Award may be deferred. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so s/he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- Eligible employees who terminate during the plan year will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval by the CEO. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- Eligible employees who have a change in position during a plan year will have their incentive award calculated under both plan award levels and prorated by the months of service at each level. Both calculations will be based on the salary effective December 31 of the incentive plan year. 4) Interpolation -- When actual performance falls above threshold and between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent and/or certain performance goals are not met, the CEO has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The CEO has the authority to determine and approve all such exceptions. I. Amendment and termination 1) The Board may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. CALCULATION OF EXECUTIVE INCENTIVE AWARD Plan Year 1999 - ---------------------------- ------------------------------------------------- NAME TITLE Percentage of Salary To Be Awarded ------------- F-1 - Corporate RORE - -------------------- Corporate RORE ______% ______________% (50% of total award) Market revenue growth ______% ______________% (25% of total award) Work Plan Objectives Achievement Level ______% ______________% (25% of total award). ATTACH A DESCRIPTION OF WORK PLAN OBJECTIVES AND HOW THEY WILL BE MEASURED. Total Award Earned as % of Salary ______________% - --------------------------------- X December 31, 1999 Salary $ = 1999 INCENTIVE AWARD $ Compliance Rating Modifier (up to 25% reduction) ($_____________) = 1999 NET INCENTIVE AWARD $ Approved: - -------------------------- -------------------------------------------------- Date President and CEO of Bremer Financial Corporation - -------------------------- -------------------------------------------------- Date Chairman of the Board of Bremer Financial Corporation EX-10.4 5 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN EXHIBIT 10.4 BREMER FINANCIAL CORPORATION 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN Financial Services Director Contained herein is a detailed outline of the Executive Annual Incentive Compensation Plan which has been designed for the Financial Services Director. A. Purpose 1) To provide an annual incentive award to the Financial Services Director for significant contributions toward the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well-being. B. Eligibility 1) Participant will be the Financial Services Director. C. Plan Year 1) The Executive Annual Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the appropriate designated management to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, award payments will be recommended and approved. 2) Award payments will be made in the first quarter following the end of defined incentive plan year. E. Potential Awards 1) The maximum potential award, stated as a percentage of base salary, will be 40%. F. Performance Measures and Determination of Award 1) Corporate RORE 50% of the incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award -------------- ---------------- Below 13.34 -0- 13.34 33.3% of max (Threshold) 6.66% 13.92 Plan 11.32% 14.03 66.6% of max 13.32% 15.00 Maximum 20.00% 2) Market Revenue Growth 25% of the incentive award will be based upon Market Revenue Growth. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the Market Revenue percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Market Revenue Growth Percentage of Award --------------------- ------------------- Below 7.0% -0- 7.0% 33.3% of max (threshold) 3.33% 9.0% 66.6% of max (Plan) 6.66% 11.0% Maximum 10.00% 3) Work Plan Objectives 25% of the incentive award will be based on achievement of work plan objectives. The work plan objectives should be submitted to the President and CEO of Bremer Financial Corporation ("CEO") for approval. The maximum percentage award for achieving work plan objectives is 10.0% of base salary. 4) Modifier: Compliance Ratings To ensure that there is appropriate system-wide focus on regulatory compliance issues, incentive awards calculated under this plan may be reduced by up to 25% if the Bremer banks selected for compliance examinations by the OCC during the second half of 1999 do not receive satisfactory compliance ratings. G. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation ("Board") which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Award may be deferred. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so s/he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- Eligible employees who terminate during the plan year will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval by the CEO. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- Eligible employees who have a change in position during a plan year will have their incentive award calculated under both plan award levels and prorated by the months of service at each level. Both calculations will be based on the salary effective December 31 of the incentive plan year. 4) Interpolation -- When actual performance falls above threshold and between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent and/or certain performance goals are not met, the CEO has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The CEO has the authority to determine and approve all such exceptions. I. Amendment and termination 1) The Board may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. CALCULATION OF EXECUTIVE INCENTIVE AWARD Plan Year 1999 - ---------------------------- ------------------------------------------------- NAME TITLE Percentage of Salary To Be Awarded ------------- F-1 - Corporate RORE - -------------------- Corporate RORE ______% ______________% (50% of total award) Market revenue growth ______% ______________% (25% of total award) Work Plan Objectives Achievement Level ______% ______________% (25% of total award). ATTACH A DESCRIPTION OF WORK PLAN OBJECTIVES AND HOW THEY WILL BE MEASURED. Total Award Earned as % of Salary ______________% - --------------------------------- X December 31, 1999 Salary $ = 1999 INCENTIVE AWARD $ Compliance Rating Modifier (up to 25% reduction) ($_____________) = 1999 NET INCENTIVE AWARD $ Approved: - -------------------------- -------------------------------------------------- Date President and CEO of Bremer Financial Corporation - -------------------------- -------------------------------------------------- Date Chairman of the Board of Bremer Financial Corporation EX-10.5 6 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN EXHIBIT 10.5 BREMER FINANCIAL CORPORATION 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN Chief Credit Officer Chief Financial Officer Chief Information Officer Contained herein is a detailed outline of the Executive Annual Incentive Compensation Plan which has been designed for the Chief Credit Officer, Chief Financial Officer and Chief Information Officer. A. Purpose 1) To provide an annual incentive award to the Chief Credit Officer, Chief Financial Officer and Chief Information Officer for significant contributions toward the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well-being. B. Eligibility 1) The Chief Credit Officer, Chief Financial Officer, and Chief Information Officer are the participants in this plan. C. Plan Year 1) The Executive Annual Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the appropriate designated management to determine and measure performance. Upon completion of the measurement of the participants' goals and objectives, awards will be approved. 2) Award payments will be made in the first quarter following the end of defined incentive plan year. E. Potential Awards 1) The maximum potential award, stated as a percentage of base salary, will be 35%. F. Performance Measures and Determination of Award 1) 50% of the incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award -------------- ---------------- Below 13.34 -0- 13.34 33.3 of max (Threshold) 5.83% 13.92 Plan 9.91% 14.03 66.6% of max 11.66% 15.00 Maximum 17.50% 2) Work Plan Objectives 50% of the incentive award will be based on work plan objectives. The work plan objectives should be submitted to the President and CEO of Bremer Financial Corporation for approval ("CEO"). The maximum percentage award for achieving work plan objectives is 17.5% of base salary. 3) Modifier: Compliance Ratings To ensure that awards calculated under this plan may be reduced by up to 25% if the Bremer banks selected for there is appropriate system wide focus on regulatory compliance issues, incentive compliance examinations by the OCC during the second half of 1999 do not receive satisfactory compliance ratings. G. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation ("Board") which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Awards may not be deferred. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so s/he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- If the eligible participant terminates during the plan year, the incentive award will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval by the CEO. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- If the eligible participant has a change in position during a plan year, their incentive award will be calculated under both plan award levels and prorated by the months of service at each level. Both calculations will be based on the salary effective December 31 of the incentive plan year. 4) Interpolation -- When actual performance falls above threshold and between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent and/or certain performance goals are not met, the CEO has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The CEO has the authority to determine and approve all such exceptions. I. Amendment and termination 1) The Board may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. CALCULATION OF EXECUTIVE INCENTIVE AWARD Plan Year 1999 - ---------------------------- ------------------------------------------------- NAME TITLE Percentage of Salary To Be Awarded ------------- F-1 - Corporate RORE - -------------------- Corporate RORE ______% ______________% (50% of total award) Work Plan Objectives Achievement Level ______% ______________% (50% of total award) ATTACH A DESCRIPTION OF WORK PLAN OBJECTIVES AND HOW THEY WILL BE MEASURED. Total Award Earned as % of Salary ______________% - --------------------------------- X December 31, 1999 Salary $ = 1999 INCENTIVE AWARD $ Compliance Rating Modifier (up to 25% reduction) ($_____________) = 1999 NET INCENTIVE AWARD $ Approved: - -------------------------- -------------------------------------------------- Date President and CEO of Bremer Financial Corporation - -------------------------- -------------------------------------------------- Date Chairman of Board of Bremer Financial Corporation EX-10.6 7 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN EXHIBIT 10.6 BREMER FINANCIAL CORPORATION 1999 EXECUTIVE ANNUAL INCENTIVE COMPENSATION PLAN Human Resources Director Marketing Director Operations Director Retail Director Contained herein is a detailed outline of the Executive Annual Incentive Compensation Plan which has been designed for the Human Resources Director, Marketing Director, Operations Director and Retail Director. A. Purpose 1) To provide an annual incentive award to the Human Resources Director, Marketing Director, Operations Director and Retail Director for significant contributions toward the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well-being. B. Eligibility 1) The Human Resources Director, Marketing Director, Operations Director and Retail Director are the participants in this plan. C. Plan Year 1) The Executive Annual Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the appropriate designated management to determine and measure performance. Upon completion of the measurement of the participants' goals and objectives, awards will be approved. 2) Award payments will be made in the first quarter following the end of defined incentive plan year. E. Potential Awards 1) The maximum potential award, stated as a percentage of base salary, will be 30%. F. Performance Measures and Determination of Award 1) 50% of the incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award -------------- ---------------- Below 13.34 -0- 13.34 33.3 of max (Threshold) 5.00% 13.92 Plan 8.49% 14.03 66.6% of max 10.00% 15.00 Maximum 15.00% 2) Work Plan Objectives 50% of the incentive award will be based on work plan objectives. The work plan objectives should be submitted to the President and CEO of Bremer Financial Corporation for approval ("CEO"). The maximum percentage award for achieving work plan objectives is 15% of base salary. 3) Modifier: Compliance Ratings To ensure that there is appropriate system wide focus on regulatory compliance issues, incentive awards calculated under this plan may be reduced by up to 25% if the Bremer banks selected for compliance examinations by the OCC during the second half of 1999 do not receive satisfactory compliance ratings. G. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation ("Board") which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Awards may not be deferred. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so s/he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- If the eligible participant terminates during the plan year, the incentive award will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval by the CEO. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- If the eligible participant has a change in position during a plan year, their incentive award will be calculated under both plan award levels and prorated by the months of service at each level. Both calculations will be based on the salary effective December 31 of the incentive plan year. 4) Interpolation -- When actual performance falls above threshold and between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent and/or certain performance goals are not met, the CEO has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The CEO has the authority to determine and approve all such exceptions. I. Amendment and termination 1) The Board may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. CALCULATION OF EXECUTIVE INCENTIVE AWARD Plan Year 1999 - ---------------------------- ------------------------------------------------- NAME TITLE Percentage of Salary To Be Awarded ------------- F-1 - Corporate RORE - -------------------- F-1 - Corporate RORE Corporate RORE ______% ______________% (50% of total award) Work Plan Objectives Achievement Level ______% ______________% (50% of total award) ATTACH A DESCRIPTION OF WORK PLAN OBJECTIVES AND HOW THEY WILL BE MEASURED. Total Award Earned as % of Salary ______________% - --------------------------------- X December 31, 1999 Salary $ = 1999 INCENTIVE AWARD $ Compliance Rating Modifier (Up to 25% reduction) ($_____________) = 1999 NET INCENTIVE AWARD $ Approved: - -------------------------- -------------------------------------------------- Date President and CEO of Bremer Financial Corporation - -------------------------- -------------------------------------------------- Date Chairman of Board of Bremer Financial Corporation EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of Bremer Financial Corporation Name of Subsidiaries and State or Other Jurisdiction of Incorporation as of March 13, 2000: State of Minnesota: Bremer Business Finance Corporation Bremer Financial Services, Inc. Bremer Insurance Agencies, Inc. Bremer Services, Inc. Bremer Trust, National Association State of Arizona: Bremer First American Life Insurance Company United States (National Bank Act): Bremer Bank, National Association (Alexandria, MN) Bremer Bank, National Association (Brainerd, MN) Bremer Bank, National Association (Breckenridge, MN) Bremer Bank, National Association (Crookston, MN) Bremer Bank, National Association (Detroit Lakes, MN) Bremer Bank, National Association (Grand Forks, ND) Bremer Bank, National Association (International Falls, MN) Bremer Bank, National Association (Marshall, MN) Bremer Bank, National Association (Menomonie, WI) Bremer Bank, National Association (Minot, ND) Bremer Bank, National Association (Moorhead, MN) Bremer Bank, National Association (St. Cloud, MN) Bremer Bank, National Association (South Saint Paul, MN) Bremer Bank, National Association (Willmar, MN) EX-27 9 ARTICLE 9 - FINANCIAL DATA SCHEDULE
9 0000846616 BREMER FINANCIAL CORPORATION 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 145,407 4,886 0 0 859,842 178,530 177,557 2,542,897 41,895 3,851,485 2,850,692 426,685 44,486 215,832 0 0 27,648 286,142 3,851,485 201,022 62,247 706 263,975 96,436 124,922 139,053 8,321 1,853 122,365 61,254 40,111 0 0 40,111 3.34 3.34 4.12 16,608 4,753 48 115,001 37,019 7,064 1,439 41,897 35,979 0 5,918
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