10-K405/A 1 bremer010917_10ka.txt BREMER FINANCIAL CORPORATION FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 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 $29.50 per share book value of the shares of class A common stock of the Company as of December 31, 2000, the aggregate value of the Company's shares of class A common stock held by employees and directors as of such date was approximately $28.3 million. As of March 30, 2001, 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, 2000 INDEX Page Documents Incorporated by Reference........................................ ii Cross Reference Sheet...................................................... iii PART I Item 1. Business....................................................... 1 Item 2. Properties..................................................... 10 Item 3. Legal Proceedings.............................................. 10 Item 4. Submission of Matters to a Vote of Security Holders............ 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 11 Item 6. Selected Financial Data........................................ 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 14 Item 8. Financial Statements and Supplementary Data.................... 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 54 PART III Item 10 through Item 13. See "Documents Incorporated by Reference" (Page ii)........................ 54 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................... 54 Signatures .............................................................. 57 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 Equity and Related Stockholder described herein of the final Matters Prospectus of the Company dated April 20, 1989 filed with the Securities and Exchange Commission on April 20, 1989. PART III Item 10. Directors and Executive Reference is made to the Registrant's Officers of the Registrant definitive proxy statement ("Proxy Statement"), which will be filed with the Securities and Exchange Commission ("Commission") within 120 days after December 31, 2000. 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 Beneficial Owners and Proxy Statement. Management Item 13. Certain Relationships and Reference is made to the Registrant's Related Transactions Proxy 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 Election of Directors Registrant 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. Because these forward-looking statements involve risk and uncertainties, there are important factors, including the factors discussed in "Risk Factors" filed with this Annual Report on Form 10-K as Exhibit 99.4, that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. ITEM 1. BUSINESS GENERAL Bremer Financial Corporation is a regional financial services company with $4.2 billion in assets as of December 31, 2000, operating 11 subsidiary banks and 101 offices in Minnesota, Wisconsin and North Dakota. We offer a wide range of banking and related products and services, including transaction and savings deposits, commercial, consumer, agricultural and real estate loans, mortgage origination services, insurance, trust, and retail brokerage services. From December 31, 1996 to December 31, 2000, we increased our asset base from $2.9 billion to $4.2 billion, resulting from a combination of internal growth and growth through bank and branch acquisitions within our three-state market area. During the same period, our loans and leases increased from $1.8 billion to $2.9 billion, and our deposits increased from $2.3 billion to $3.1 billion. Giving pro forma effect to the pending Branch Acquisition (described below), we would have had assets of nearly $4.8 billion, loans and leases of $3.2 billion, and deposits of $3.9 billion as of year-end 2000. BUSINESS DEVELOPMENTS IN 2000 In March 2000 we acquired, for cash in a purchase transaction, the stock of Northwest Equity Corp. of Amery, Wisconsin, and its wholly-owned subsidiary, Northwest Savings Bank, with offices in Amery, New Richmond, and Siren, Wisconsin. In May 2000, Northwest Savings Bank was merged with and into our subsidiary bank in Wisconsin, which added about $91.8 million in assets and $61.6 million in deposits to that bank and resulted in the closing of duplicate facilities in Siren and Amery, Wisconsin. In 2000, a number of affiliated business combinations involving our wholly-owned subsidiaries were consummated for the purposes of improving operational efficiencies and streamlining administrative oversight. On June 1, 2000, Bremer Bank, National Association, Breckenridge, Minnesota, merged with and into Bremer Bank, National Association, Alexandria, Minnesota. On June 23, 2000, Bremer Bank, National Association, Moorhead, Minnesota consummated an interim bank merger pursuant to 12 U.S.C. paragraph 215a. As a result of this interim merger, the common stock owned by the minority shareholders of the Moorhead Bank was cancelled and converted into the right to receive cash. Effective August 1, 2000, Bremer Bank, National Association, Crookston, Minnesota, merged with and into Bremer Bank, National Association, Grand Forks, North Dakota. On September 1, 2000, Bremer Services, Inc., the Company's centralized operations subsidiary in West St. Paul, Minnesota, merged with and into Bremer Financial Services, Inc., of St. Paul, Minnesota, its affiliated management and bank services company. And on November 1, 2000, Bremer Bank, National Association, Detroit Lakes, Minnesota merged with and into our subsidiary bank in Moorhead, Minnesota. PENDING BRANCH ACQUISITION FIRSTAR BRANCHES. On January 30, 2001, we entered into a definitive Branch Purchase and Assumption Agreement (the "Branch Agreement") with Firstar Corporation, Milwaukee, Wisconsin, (the "Seller") to acquire 11 of its Minneapolis/St. Paul branch locations and a portfolio of commercial loans and related deposits (the "Branch Acquisition"). This transaction came as a result of the Seller's divestiture requirement related to its recently completed merger with U.S. Bancorp, Minneapolis, Minnesota. As of December 31, 2000, the Seller reported that the operations to be acquired under the Branch Agreement had total deposits of approximately $750 million and loans of approximately $300 million. The levels of deposits and loans of the Seller's branches can be expected to vary prior to closing. Consummation of the Branch Acquisition is subject to regulatory approvals and other customary conditions 1 and is expected to occur in May 2001. The 11 branch offices and the commercial loan portfolio will be acquired by and operated as part of our subsidiary bank charter in South St. Paul, Minnesota. The acquisition will be accounted for as an acquisition of assets and assumption of liabilities and will result in the recognition by us of deposit-based intangibles, including goodwill, in an amount equal to the purchase price premium. In the Branch Agreement, the Seller made certain representations and warranties to us as to matters including the operations and financial condition of the branches. These representations and warranties generally survive until the first anniversary of the closing date. We also made representations and warranties to the Seller as to certain matters, including lack of any conflicts of the Branch Agreement with certain agreements or documents relating to us. The Seller has agreed that until closing, and for an additional 12 months following closing, it will not solicit deposits or loans from customers included in the Branch Acquisition. The Branch Agreement is subject to termination by each party upon a material breach of the agreement by the other party, in the event that the closing has not occurred within 180 calendar days from February 27, 2001, or at any time after the denial of any regulatory approval. In the event of termination, neither party shall have any liability or obligation to the other party, except as it relates to liabilities arising from breach of the agreement. In order to meet the regulatory capital requirements for completion of the Branch Acquisition, we intend to increase our level of Tier I capital by at least $55.0 million through the completion of a trust preferred capital securities offering. In addition to the proposed $55.0 million offering, we issued $16.5 million of Trust Preferred Capital Securities in an institutional private placement on February 22, 2001. We believe that we will be able to consummate the Branch Acquisition in May 2001; however, no assurances can be given that we will be able to meet this timetable. HISTORY Otto Bremer incorporated Bremer Financial Corporation in December 1943 to consolidate his majority stock holdings in community banks located throughout Minnesota, Wisconsin and North Dakota. Mr. Bremer formed the Otto Bremer Foundation in 1944 to own Bremer Financial Corporation's stock. Today we are owned by the Foundation and the employees and directors of the company. The Foundation is organized as a non-profit trust for charitable, educational and religious purposes for the benefit of individuals and entities who are residents of or are located in Minnesota, Wisconsin, North Dakota and Montana. The Foundation is a key part of our community-based philosophy. Earnings from its investment in us and other investments are returned to the bank communities in the form of grants and program-related investments. In 2000, the Otto Bremer Foundation made over $18.2 million in grants to over 650 community organizations and programs. From our incorporation in 1943 and through the late 1980s, we relied on our existing community banks to generate loan and deposit growth in our market area. From 1990 through 2000, we augmented this growth through six acquisitions of banks and bank holding companies totaling approximately $708 million of assets and $585 million of deposits. During that time, we also acquired four branch offices and their related $100 million of deposits. The pending Branch Acquisition will be our fifth branch purchase and eleventh acquisition transaction in the last ten years. We use bank and branch acquisitions to fill in gaps in our geographic markets in order to provide better customer service and leverage existing operations. In recent years, and including the Branch Acquisition, our expansion focus has been primarily in more urban, metropolitan areas, most noticeably in Minneapolis/St. Paul and surrounding communities. OUR STRATEGY We seek to be the preeminent community bank in the markets we serve. Our strategy for achieving this objective includes: * PROVIDING DISTINCTIVE, COMMUNITY BANKING TO OUR CUSTOMERS BY: >> PROVIDING PERSONALIZED SERVICE THROUGH A RELATIONSHIP MANAGEMENT APPROACH We seek to identify the total financial services needs of our clients and provide them with individualized solutions to those needs. We emphasize a sales approach in which a relationship manager is responsible for selling the entire range of our services to our customer base, as opposed to assigning sales people from each product area to a specific client. In this role, our relationship managers work in tandem with representatives from our product areas to develop an effective client solution. As a result, our relationship managers gain a more thorough understanding of their clients' needs, and clients gain more convenient access to our diverse product line. To implement this relationship management focus, we have instituted a comprehensive training program that must be attended by every customer contact employee. 2 We have also modified our information systems to better measure the breadth of each customer relationship and the effectiveness of our relationship managers' cross selling efforts. >> OFFERING A WIDE VARIETY OF INNOVATIVE FINANCIAL PRODUCTS TO OUR CUSTOMERS Our clients use a wide variety of financial services beyond the traditional banking products, and we work with them to identify their particular needs and tailor our services to meet those needs. As our clients' needs have evolved, we have established new competencies in e-commerce, cash management, international banking, specialized financing, estate and financial planning, and asset management. In 2000, new product development resulted in ten new business products and six new consumer products to serve current and new market segments. >> GRANTING SUBSTANTIAL LOCAL AUTONOMY TO OUR SUBSIDIARY BANKS We believe customers in our markets seek banking relationships managed by a decision-maker who can deliver a prompt response to their requests. As smaller, independent banks have been acquired by national, multi-bank holding companies, we believe that the personal relationships that these customers maintained with the management of such banks have increasingly eroded, and the banks' responsiveness and general service levels have declined. Consistent with our long history of community banking, we operate under a management philosophy of local market decision-making by each of our subsidiary banks. Each of our 11 subsidiary banks is separately chartered with its own officers and board of directors who generally are members of the local community. Management of each Bremer subsidiary bank has a high degree of flexibility in responding to local market demands. >> USING OUR UNIQUE OWNERSHIP STRUCTURE TO REINVEST IN THE COMMUNITIES WE SERVE Over the last three years, the Foundation has distributed more than $48 million in the states we serve in the form of grants and program-related investments. Directing most of its grants to non-profit organizations in the communities we serve not only contributes to the economic well being of those communities, it also improves our brand recognition. * INVESTING IN TECHNOLOGY We are committed to investing in technology to improve product offerings, reduce product costs and provide more convenient service to our customers. Over the last three years, we have invested over $5 million to upgrade our technology infrastructure. This included upgrading most of our 1,500 personal computers, effectively connecting them through improvements in the company-wide intranet, enhancing our Internet capabilities, and making improvements in the customer contact information system. In 2000, we >> launched Bremer eBank and Bremer ePay, our retail Internet banking and bill payment services; and >> increased the functionality of www.bremer.com by adding tools such as online loan and account applications, calculators, check reordering, retirement planning, and local Bremer community websites. In August 2001, we plan to launch Bremer eBiz and Bremer eACH, a package of Internet-based cash management services for businesses. In the future, we will continue to invest in technologies that allow customers to communicate with us at the time and in the manner that best meets their needs and preference. * INCREASING PENETRATION IN OUR EXISTING MARKETS To make us more accessible and convenient to our customers, we pursue a strategy of in-market expansion to fill in gaps in our market coverage through opening new branches, acquiring competing banks or branches, and investing in technology-based delivery channels. Examples of this strategy include: >> our pending Branch Acquisition, which will substantially improve customer access in the Minneapolis/St. Paul area; and 3 >> the acquisition of Northwest Savings Bank in 2000, which brought our services to New Richmond, Wisconsin, a rapidly-growing community located between St. Paul and our banking offices in western Wisconsin. * LEVERAGING OUR HOLDING COMPANY STRUCTURE We have centralized at the holding company level many critical subsidiary bank administrative and support functions. Functions that have been centralized at the holding company include: >> policy development in areas such as loans, investments, asset liability management, compliance, data security, accounting, and personnel, and standardized procedures to support the policies; >> customer support services in areas such as loan servicing, deposit servicing, and call center operations; >> investment portfolio management, interest rate risk management, purchasing, management of insurance coverage, employee benefits, credit examination, technology support, and accounting; >> specialized expertise in areas such as cash management, international banking, loan workout, taxation, and compliance; and >> management of key vendor relationships including those vendors supplying data processing, item processing, ATM services, internal and external audit services, computer software and hardware, equipment and supplies. We believe that by standardizing certain policies, procedures and products, and by centralizing administrative functions, subsidiary bank management and personnel can concentrate on individual customer service and community relations. Further, we reduce bank expenses, and can consistently and efficiently implement system-wide banking policies and practices. 4 OUR BANKS Our 11 subsidiary banks are located in Minnesota, Wisconsin and North Dakota. At December 31, 2000, they ranged in size from $71.3 million to $799.0 million in total assets and from $62.4 million to $558.4 million in total deposits. Each of our banks is a community bank that provides a full range of commercial and consumer banking services, primarily to customers within its market area. All of our banks are nationally chartered, operate under the name of Bremer Bank, National Association, and are regulated by the Office of the Comptroller of the Currency. The locations, total assets and total deposits of our banks as of December 31, 2000, are as follows:
Location of Subsidiary Bank Charter Branch Locations Assets Deposits ----------------------------------- ---------------- ------ -------- (in thousands) Alexandria, MN Alexandria, MN (2) $400,592 $292,706 Brandon, MN Breckenridge, MN Fergus Falls, MN Morris, MN Starbuck, MN Wahpeton, ND Brainerd, MN Brainerd, MN (2) $255,953 $194,103 Aitkin, MN Baxter, MN (2) Grand Forks, ND Grand Forks, ND (2) $558,234 $438,031 Crookston, MN Fisher, MN Fordville, ND Forest River, ND Gilby, ND Grafton, ND Hillsboro, ND Hoople, ND Larimore, ND Saint Thomas, ND Shelly, MN Warren, MN International Falls, MN International Falls, MN $71,322 $62,448 Marshall, MN Marshall, MN $210,170 $183,648 Redwood Falls, MN Edgerton, MN Leota, MN
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Location of Subsidiary Bank Charter Branch Locations Assets Deposits ----------------------------------- ---------------- ------ -------- (in thousands) Menomonie, WI Menomonie, WI (3) $474,262 $374,040 Amery, WI Bayfield, WI Colfax, WI Danbury, WI Deer Park, WI Eau Galle, WI Elk Mound, WI Frederic, WI Knapp, WI La Pointe, WI New Richmond, WI Rock Falls, WI Siren, WI Washburn, WI Minot, ND Minot, ND (4) $425,776 $352,413 Berthold, ND Carrington, ND Devils Lake, ND Glenfield, ND Kensal, ND Lansford, ND Max, ND Minnewaukan, ND Richardton, ND Rugby, ND Woodworth, ND Moorhead, MN Moorhead, MN $376,905 $248,292 Fargo, ND (2) Casselton, ND Detroit Lakes, MN Leonard, ND Lisbon, ND Perham, MN St. Cloud, MN St. Cloud, MN (2) $409,775 $277,307 Rice, MN Sartell, MN Sauk Rapids, MN South St. Paul, MN South St. Paul, MN $798,951 $558,358 St. Paul, MN (3) Minneapolis, MN Brooklyn Park, MN Eagan, MN Eden Prairie, MN Inver Grove Heights, MN Milaca, MN Ogilvie, MN Princeton, MN Roseville, MN Watertown, MN White Bear Lake, MN Zimmerman, MN
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Location of Subsidiary Bank Charter Branch Locations Assets Deposits ----------------------------------- ---------------- ------ -------- (in thousands) Willmar, MN Willmar, MN (2) $182,796 $140,002 Hutchinson, MN
When consummated, the Branch Acquisition will expand our Minneapolis/St. Paul area presence to eight additional suburban communities, including Arden Hills, Richfield, St. Anthony, Brooklyn Park, Maplewood, Edina, Minnetonka and St. Louis Park. COMMUNITIES SERVED BY OUR BANKS We operate in 82 communities across Minnesota, Wisconsin and North Dakota. Over the past few years, we have begun to expand significantly in more urban metropolitan areas, including Minneapolis/St. Paul, Fargo/Moorhead, and St. Cloud. Prior to that time, we had our strongest market presence in communities outside the major metropolitan areas. In Minnesota, these non-metropolitan communities are a blend of agricultural-based areas in the southwestern portion of the state to more recreational and resort-based communities in west central Minnesota. Our North Dakota communities are in primarily agricultural-based areas along the Red River Valley as well as in western North Dakota surrounding the Minot trade area. In Wisconsin, our locations are concentrated on the western side of the state. In our markets located outside the major metropolitan areas, we generally are first or second in deposit market share. Over the past few years, most of our expansion has been in higher-growth metropolitan areas. The primary areas targeted for future expansion are expected to continue to be in the Minneapolis/St. Paul to St. Cloud corridor and the Fargo/Moorhead area. While we have maintained charter banks in St. Cloud and South St. Paul for many years, our metropolitan area market share has not been substantial. The acquisition of Dean Financial Services, Inc. in 1999 added eight additional branch offices in the metropolitan Minneapolis/St. Paul area and the pending Branch Acquisition will add another 11 offices in this area. We have also opened a number of offices in the rapidly growing Fargo/Moorhead area during the last few years. Approximately 35% of our deposits and 40% of our loans are in the metropolitan hubs of Minneapolis/St. Paul/St. Cloud and Fargo/Moorhead. LENDING ACTIVITIES We maintain a diversified loan portfolio consisting of commercial, commercial and residential real estate, agricultural, consumer and tax-exempt loans. COMMERCIAL LOANS. Loans in this category include term loans and operating lines of credit for primarily manufacturing, wholesale, or retail businesses. While we look to the borrower's business operations as the principal source of repayment, we also generally obtain personal guarantees and security interests in inventory, receivables, and equipment as collateral support for the loans. We utilize standard advance rates in determining amounts that can be advanced for each collateral type. Advances secured by inventory and receivables are normally short term floating rate advances and constitute about 50% of this portfolio. Equipment loans typically amortize over five years and constitute the remainder of this portfolio. COMMERCIAL REAL ESTATE LOANS. Our commercial real estate portfolio, which includes interim commercial real estate construction, consists primarily of loans to business customers who occupy the property or use the property for income production. Commercial real estate loans generally are made for up to 80% of appraised value or cost and typically have a term of five years with 15 to 20 year amortization. Approximately 70% of our commercial real estate loans are fixed rate loans and 30% are adjustable rate loans. AGRICULTURAL LOANS. Our agricultural loans include term loans secured by farm property or equipment, and operating loans used for commodity production. Our agricultural customers and agricultural-based communities are diversified across the three states we serve, and we extend credit to 12 different areas of commodity production including crops, dairy, and livestock. Approximately 50% of our agricultural loans are short term floating rate loans. The remainder of the agricultural loans are fixed rate loans with terms generally under five years. RESIDENTIAL REAL ESTATE LOANS. The residential real estate portfolio includes home equity loans, first mortgage residential real estate loans, and some construction loans. The construction loans are typically made to builders on homes under construction that have been pre-sold. Loan to value ratios for home equity loans typically range from 80% to 100%. Approximately 75% of our home equity loans are fixed rate loans with terms of five to twelve years. The remaining 25% of our home equity loans are floating rate lines of credit. First mortgage residential real estate 7 lending is generally conducted in compliance with secondary market underwriting guidelines, and most newly originated fixed rate first mortgage loans are sold into the secondary market. The first mortgage residential real estate loans that we keep in our portfolio are generally adjustable rate loans, and often involve vacation homes in our recreational and resort-based communities. CONSUMER LOANS. Loans in this category include automobile loans, home improvement loans and personal lines of credit. In addition to our direct lending operations, our subsidiary banks also purchase indirect retail installment sales contracts primarily from automobile dealers, certain recreational vehicle dealers, and certain sport recreation dealers where the selling dealer is well known to us and located in our primary trade area. Most of our consumer loans are fixed rate loans with terms of three to five years. TAX-EXEMPT LOANS. Tax-exempt loans and leases are made to municipalities and qualifying non-profit organizations located within our primary trade area. DEPOSITS We emphasize developing relationships with individuals and business customers in order to increase our deposit base. We offer a broad range of competitively priced deposit products, including checking accounts, money market accounts, savings accounts and certificates of deposit, designed to meet the individual needs of our customers. Deposits in our banks are insured by the Federal Deposit Insurance Corporation ("FDIC") up to statutory limits (currently $100,000). Deposit product development is the primary responsibility of our holding company marketing and retail delivery departments, with input and feedback from the subsidiary banks' market managers. Pricing of products is generally consistent across all of our banks, with bank market managers having some local authority to modify pricing on certain products to meet the market and/or the local competition. OTHER PRODUCTS AND SERVICES We operate various financial services subsidiaries, which provide trust and other fiduciary services, insurance, and asset-based lending and leasing services. The subsidiaries allow us to offer a full range of products and services to our customers. On a consolidated basis, these other financial services subsidiaries historically have accounted for less than 10% of our annual earnings. BREMER BUSINESS FINANCE CORPORATION. We formed Bremer Business Finance Corporation in late 1996 to expand the services available to customers that may not qualify for traditional bank financing. Bremer Business Finance Corporation engages in secured lending activities and works closely with the Bremer banks in offering services to customers in the areas of asset-based finance, real estate finance, real estate equity finance, corporate finance, project finance, equipment financing and leasing. As of December 31, 2000, Bremer Business Finance Corporation had a loan portfolio of $74.8 million, with the majority of loans being variable rate credits generally priced between 200 and 350 basis points over the prime rate. In 2000, our finance company generated $1.3 million in net income and employed a staff of five. BREMER TRUST, NATIONAL ASSOCIATION. Bremer Trust, National Association has trust powers and offers trust and other fiduciary services in the majority of our markets. Services that Bremer Trust provides to our customers include serving as trustee, investment agent, custodian, personal representative, and as a conservator for individuals, businesses, and public and tax-exempt organizations. Bremer Trust directly serves as an investment advisor for the proprietary stock and bond mutual funds we offer to our trust client accounts. Bremer Trust also operates on a limited basis as a registrar and transfer agent. As of December 31, 2000, Bremer Trust had 85 employees. Our total trust revenues for 2000 were $9.1 million. BREMER INSURANCE AGENCIES, INC. Bremer Insurance Agencies, Inc. is an independent insurance agency with offices in Minnesota, Wisconsin and North Dakota, representing many different insurance companies. This gives agency personnel the ability to tailor coverages to meet the differing needs of our diverse customer base. The agency's book of business is generated by selling personal, life, health, commercial and agricultural insurance products. In 2000, Bremer Insurance generated insurance premium sales of $8.2 million and, as of December 31, 2000, it had 94 employees. BROKERAGE SERVICES. Consumer investment products and services are available at our subsidiary bank offices through INVEST Financial Corporation of Tampa, Florida. We have an agreement with INVEST to deliver investment services to our customers through our branch network and we receive a portion of the commissions earned by the investment representatives in those branches. We had $5.5 million in brokerage commissions in 2000. 8 BREMER LIFE INSURANCE COMPANY. Bremer Life Insurance Company was formed as a reinsurer of credit life and credit accident and health insurance sold by the Bremer banks, in partnership with American General, which owns a preferred stock interest in the life company. OPERATIONS AND ADMINISTRATION We provide a broad range of services to the individual subsidiaries in order to augment the capacities of the subsidiary banks' management and to achieve many of the synergies of a larger company. OPERATIONS CENTER. Back-office operations for all banks are housed in an operations center in West St. Paul, Minnesota. We use a third-party provider for delivery of most data and item processing services for Bremer and its subsidiaries. We have entered into contracts for these services that extend into the next three to five years. Certain of the operations of these third party providers are located in our operations center. CREDIT. We evaluate and approve credit at the individual subsidiary bank level through individual and senior lending officer credit authorities. In addition, each bank has a senior credit committee and a director's credit committee that review and approve larger credits. The director's credit committee can approve credit up to the individual bank limit. These bank limits range from $700 thousand to $7.0 million, depending on the size of the individual bank. We also support the credit process at the holding company level through the use of corporate credit committees and staff. Approval is required at the corporate level for loans that exceed the individual limits of the banks and for certain loans that have characteristics that warrant review at the corporate level as defined in our lending policy. We also provide centralized underwriting and internal syndication for credits that exceed the lending limits of individual banks. Most loan workouts are handled by the special assets group of the holding company. To improve distressed credit management practices, we have established a policy that requires the prompt transfer of certain problem loan situations from the subsidiary banks to the special assets group. RISK MANAGEMENT. The risk management division is an independent unit that assists us in managing risk throughout the organization. This is done through consulting, monitoring, and performing independent audits and examinations of banks, other subsidiaries, and corporate support functions. The director of risk management has a direct reporting relationship to the holding company's board of directors and the boards of the operating entities. Risk management is comprised of credit examination, internal audit, and compliance administration and counsel. * Credit examination reviews our loan portfolio on a regular basis. The frequency of examination is based on a risk assessment and provides for more frequent examinations for units exhibiting higher risk factors. * We have outsourced much of our internal audit function, which conducts periodic operational, compliance and internal control reviews of all of our subsidiary banks and system-wide operations. The director of risk management directs the work of internal audit and coordinates all reporting to the boards of directors. * Compliance administration and legal counsel provide assistance to the banks in meeting their consumer compliance responsibilities. ASSET LIABILITY AND INVESTMENT PORTFOLIO MANAGEMENT. We operate using a centralized treasury function. The asset liability committee of the holding company is responsible for developing appropriate risk management policies and for the monitoring of asset liability activities to insure that they are conducted within established risk parameters. The treasurer has day-to-day responsibility for our overall interest rate risk, liquidity, and investment portfolio management. FINANCE. We have established policies for capital expenditures, accounting policy, capital adequacy and dividends. In addition, we monitor the performance of our individual subsidiaries and coordinate the reporting process, the strategic planning process and annual profit planning. HUMAN RESOURCES. Our human resources division has established standard salary administration procedures, and our subsidiary banks administer these at their level. Employee benefits are standardized and administered by the holding company. MARKETING. Our marketing division manages our branding efforts to ensure that consistent messages are communicated in all of our external communications. 9 COMPETITION We do business in the highly competitive financial services industry. The financial services industry in which we compete is comprised of commercial banks, thrifts, credit unions, investment banks, brokerage houses, money managers, mortgage banks, insurance companies and other providers of financial products and services. These firms compete with us for loans, deposits, trust services, investment products and a host of other financial products and services. We believe that our success in competing effectively with these alternative providers of financial services will be partly based on our ability to monitor the local economies, make decisions close to the marketplace, commit to and be involved in the communities we serve, and fully develop our relationship management concepts. We must preserve our ability to focus on providing personalized, quality banking services to maintain or improve our competitive position in our markets. We believe that our size, combined with our support services in specialized areas, adds to the strength of the individual banks, enabling them to compete more effectively. Some of our competitors are not subject to the same degree of regulation as that imposed on bank holding companies and national banks. In addition, the larger banking organizations, investment banks and brokerage houses have significantly greater resources than us. As a result, some of our competitors have advantages over us in name recognition and market penetration. EMPLOYEES As of February 28, 2001, we had 1,487 full-time equivalent employees. We provide our employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance plans, and 401(k) plans. In addition, all the employees have the opportunity to invest in our class A common stock. We consider our relationship with our employees to be good. ITEM 2. PROPERTIES We lease our principal offices at 445 Minnesota Street, Suite 2000, St. Paul, Minnesota 55101, which consists of approximately 25,000 square feet. In addition, the centralized service operations of the holding company occupy approximately 30,000 square feet of owned property in West St. Paul, Minnesota. As a result of the Branch Acquisition, we anticipate expanded space needs for our service operations and expect to secure additional leased space in the Minneapolis/St. Paul area within the next 12 months. We believe that the principal offices at 445 Minnesota Street in St. Paul will be sufficient for the holding company's needs in the foreseeable future. Substantially all of the current offices and branches of the subsidiary banks are owned, with the primary exception of those located in leased space in downtown St. Paul, Minnesota and leased space in supermarkets. Our bank facilities range in size from 391 square feet to 5,280 square feet. The pending Branch Acquisition will add four new owned properties and seven leased properties, ranging in size from 3,000 square feet to 31,888 square feet. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending other than ordinary routine litigation incidental to our business. 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, 2000 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 our class A common stock. To the best of our knowledge, during the period from May 18, 1989 (the closing date of the registered initial public offering of Bremer's class A common stock) through March 19, 2001, 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 Bremer'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 10 by reference pursuant to Rule 12b-23 under the Securities Exchange Act of 1934). We are 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 our net worth as of the date of such purchase. As of December 31, 2000, our net worth, including redeemable class A common stock, was $354.0 million and 10% of our net worth and redeemable class A common stock was $35.4 million. During the period from January 1, 2000 through March 19, 2001, we did not directly purchase any shares of class A common stock but assigned to our Employee Stock Ownership Plan and the Bremer Banks Profit Sharing Plus Plan our options to purchase a total of 166,879.6765 shares. The ESOP and the Profit Sharing Plan purchased these shares and then transferred them to our employees and employees of our subsidiaries through the ESOP and the Profit Sharing Plan. In addition, 4,295 shares of class A common stock were transferred directly between individuals at various times during the same period. To the best of our knowledge, these were the only transfers of shares of class A common stock effected during the period from January 1, 2000 through March 19, 2001. The sales price of the shares of class A common stock in such transactions ranged from $26.07 to $35.25 per share. These prices were equal to either the per share book value of the class A common stock as shown in our 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 value as determined by an independent appraiser. At December 31, 2000, the most recent date for which a per share book value for the class A common stock is available, such value was $29.50. To the best of our 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 March 19, 2001, there were approximately 1,300 holders of record of the shares of class A common stock. DIVIDENDS The subsidiary banks' ability to pay dividends to the parent and the parent'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 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. In addition, because the deposits of the our subsidiary banks are insured up to the applicable limit (currently $100,000) by the FDIC, all of the subsidiary banks are subject to regulation by the FDIC. The parent and the Foundation, as bank holding companies, are regulated by the Board of Governors of the Federal Reserve System. DIVIDENDS FROM SUBSIDIARY BANKS. A substantial portion of our cash flow and income is derived from dividends paid to us by the subsidiary banks, and restrictions on the payment of such dividends could affect the payment of dividends by the parent. 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 4.00% 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 adequacy guidelines set forth in the portion 11 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 our 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, we have been able to obtain dividends sufficient to meet our cash flow needs. As of December 31, 2000, the subsidiary banks had retained earnings of $24.2 million which were available for distribution to the parent as dividends in 2001 subject to regulatory and administrative restrictions. Of this amount, approximately $15.7 million was available for distribution without obtaining the prior approval of the appropriate bank regulator. In 2000 and 1999, the subsidiary banks paid total dividends to the parent of $46.5 million and $29.1 million. The range of dividend payouts (dividends paid divided by net income) was 27.8% to 220.8% in 2000 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 us. 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 THE COMPANY. Our payment of dividends, 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. We declared and paid dividends to the foundation and all other holders of its class A common stock of $16.7 million in 2000 and $15.8 million in 1999. $4.8 million of dividends were paid in the final quarter of 2000, while $4.0 million of dividends were paid in the first three quarters of 2000 and in each of the four quarters of 1999. The dividend yield, which consists of dividends paid during the year divided by shareholders' equity as of the last day of the preceding year, was 5.3% and 5.2% for the years ended December 31, 2000 and 1999. 12 ITEM 6. SELECTED FINANCIAL DATA BREMER FINANCIAL CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS
AT OR FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING RESULTS Total interest income .......................... $ 314,171 $ 263,967 $ 245,525 $ 226,550 $ 210,703 Net interest income ............................ 150,989 139,053 124,101 116,581 108,193 Net interest income (1) ........................ 159,051 146,370 131,678 124,169 115,862 Provision for credit losses .................... 8,338 8,321 5,570 4,746 2,756 Noninterest income ............................. 54,217 52,465 51,270 38,681 33,842 Noninterest expense ............................ 126,630 121,944 107,013 98,255 92,325 Net income ..................................... 45,781 40,111 41,511 35,060 31,817 Dividends ...................................... 16,680 15,840 15,840 14,400 12,600 AVERAGE BALANCES Assets ......................................... $4,010,098 $3,584,460 $3,248,180 $2,986,600 $2,817,062 Loans and leases (2) ........................... 2,749,662 2,315,105 2,084,462 1,838,218 1,687,900 Securities ..................................... 1,001,031 1,043,771 954,994 963,806 959,278 Deposits ....................................... 2,982,970 2,679,984 2,456,827 2,300,311 2,211,280 Short-term borrowings .......................... 422,508 390,650 367,580 304,384 282,813 Long-term debt ................................. 215,009 156,706 73,047 53,486 22,178 Redeemable class A common stock ................ 26,677 24,650 23,205 21,322 19,686 Shareholders' equity ........................... 306,781 283,467 266,862 245,206 226,388 PERIOD-END BALANCES Assets ......................................... $4,192,596 $3,851,485 $3,398,079 $3,173,701 $2,925,651 Loans and leases (2) ........................... 2,915,601 2,542,897 2,172,631 1,964,127 1,756,146 Securities ..................................... 951,627 1,038,372 996,673 992,249 935,774 Deposits ....................................... 3,106,828 2,850,692 2,570,650 2,442,498 2,283,446 Short-term borrowings .......................... 441,000 426,685 353,213 365,264 275,021 Long-term debt ................................. 232,660 215,832 116,286 30,238 62,389 Redeemable class A common stock ................ 28,324 25,029 24,270 22,308 20,337 Shareholders' equity ........................... 325,715 287,847 279,108 256,541 233,870 FINANCIAL RATIOS Return on average assets (3) ................... 1.14% 1.12% 1.30% 1.22% 1.18% Return on average realized equity (4)(5) ....... 13.54 12.88 14.55 13.32 13.08 Average realized equity to average assets (4)(5) 8.43 8.69 8.79 8.81 8.64 Tangible realized equity to assets (4)(5) ...... 7.34 7.40 8.41 8.50 8.58 Dividend payout ................................ 36.43 39.49 38.16 41.07 39.60 Net interest margin (1) ........................ 4.22 4.34 4.31 4.43 4.37 Efficiency ratio ............................... 57.58 60.54 59.09 58.43 59.87 Net charge-offs to average loans and leases .... 0.17 0.24 0.13 0.09 0.03 Reserve for credit losses to loans and leases .. 1.57 1.65 1.70 1.74 1.74 PER SHARE OF COMMON STOCK (4) Net income-basic and diluted ................... $ 3.82 $ 3.34 $ 3.46 $ 2.92 $ 2.65 Dividends paid ................................. 1.39 1.32 1.32 1.20 1.05 Book value ..................................... 29.50 26.07 25.28 23.24 21.18 Realized book value (5) ........................ 29.37 26.95 24.93 22.79 21.07
--------------------- (1) Tax-equivalent basis (TEB). (2) Net of unearned discount and includes nonaccrual loans and leases. (3) Calculation is based on income before minority interests. (4) Calculation includes shareholders' equity and redeemable class A common stock. (5) Excluding net unrealized gain (loss) on securities available-for-sale. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW EARNINGS. We reported net income of $45.8 million or $3.82 basic and diluted earnings per share for the year ended December 31, 2000. This compares to net income of $40.1 million or $3.34 basic and diluted earnings per share in 1999 and $41.5 million or $3.46 basic and diluted earnings per share in 1998. Return on average realized equity was 13.54% in 2000, as compared to 12.88% in 1999 and 14.55% in 1998. Realized equity excludes the impact on equity of unrealized gains and losses associated with available-for-sale securities. Return on average assets was 1.14% in 2000, versus 1.12% in 1999 and 1.30% in 1998. ASSETS. Total assets at December 31, 2000 increased $341.1 million, or 8.9%, to $4.2 billion from $3.9 billion at December 31, 1999. During 1999, assets increased $453.4 million, or 13.3%, from $3.4 billion at December 31, 1998. During this period we continued to move our asset mix more towards loans and away from lower yielding securities. Loans and leases net of unearned discount as a percentage of total assets increased to 69.5% at December 31, 2000, from 66.0% at December 31, 1999, and 63.9% at December 31, 1998. ACQUISITIONS. Two acquisitions impacted our operating results during the three year period ended December 31, 2000. In July 1999, we acquired, for cash in a purchase transaction, the stock of Dean Financial Services, Inc. Dean was a privately-held bank holding company with approximately $296.9 million in assets and $260.6 million in deposits with four charter banks serving eleven locations in Minnesota. During the latter half of 1999, we merged Dean into Bremer and Dean's four separate charter banks into our previously existing charter banks. In March 2000, we acquired, for cash in a purchase transaction, the stock of Northwest Equity Corp. of Amery, Wisconsin, and its wholly-owned subsidiary, Northwest Savings Bank, with offices in Amery, New Richmond, and Siren, Wisconsin. In May 2000, we merged Northwest Savings Bank with and into our subsidiary bank in Wisconsin, which added about $91.8 million in assets and $61.6 million in deposits to that bank and resulted in the closing of duplicate facilities in Siren and Amery, Wisconsin. In May 2001, we expect to complete the Branch Acquisition. This will add approximately $750 million in deposits and $300 million in loans to our subsidiary bank operating in Minneapolis/St. Paul. Of the $300 million of loans to be acquired, approximately $150 million are loans originated in the branch locations, primarily home equity and other consumer credit. The remaining loans are primarily middle-market commercial loans originated in the commercial banking group. RESULTS OF OPERATIONS NET INTEREST INCOME. We derive our net income primarily from net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on borrowings and customer deposits. Changes in net interest income result from changes in volume, net interest spread, and net interest margin. Volume refers to the average dollar levels of interest earning assets and interest bearing liabilities. Net interest spread refers to the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities. Net interest margin refers to the net interest income divided by average interest earning assets and is influenced by the level and relative mix of interest earning assets and interest bearing liabilities. The following table sets forth, for the periods indicated, information regarding average balances of assets and liabilities and the total dollar amounts of interest income from interest earning assets and interest expense on interest bearing liabilities. In addition, the table shows resultant yields or costs, net interest income, net interest spread, and net interest margin: 14
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------ 2000 1999 ------------------------------------ -------------------------------------- AVERAGE AVERAGE AVERAGE RATE/ AVERAGE RATE/ BALANCE INTEREST (1) YIELD BALANCE INTEREST (1) YIELD ---------- ------------ ---------- ---------- ------------ ---------- (DOLLARS IN THOUSANDS) ASSETS Loans and leases (net of unearned discount)(2) Commercial and other .................. $ 663,494 $ 62,507 9.42% $ 534,954 $ 47,208 8.82% Commercial real estate ................ 753,402 67,881 9.01 609,345 52,648 8.64 Agricultural .......................... 421,539 39,384 9.34 447,715 39,295 8.78 Residential real estate ............... 548,876 48,545 8.84 414,510 35,737 8.62 Consumer .............................. 289,779 26,351 9.09 251,499 22,584 8.98 Tax-exempt ............................ 72,572 6,855 9.45 57,082 5,394 9.45 ---------- ---------- ---------- ---------- TOTAL LOANS AND LEASES ............ 2,749,662 251,523 9.15 2,315,105 202,866 8.76 Reserve for credit losses ............. (44,647) (39,471) ---------- ---------- NET LOANS AND LEASES .............. 2,705,015 2,275,634 Securities Mortgage-backed ....................... 639,065 42,510 6.65 742,299 45,618 6.15 Other taxable ......................... 151,890 10,530 6.93 100,633 6,043 6.00 Tax-exempt ............................ 210,076 16,799 8.00 200,839 16,050 7.99 ---------- ---------- ---------- ---------- TOTAL SECURITIES ................. 1,001,031 69,839 6.98 1,043,771 67,711 6.49 Federal funds sold ......................... 9,466 612 6.47 11,853 575 4.85 Other earning assets ....................... 5,763 259 4.48 2,712 132 4.87 ---------- ---------- ---------- ---------- TOTAL EARNING ASSETS (3) ......... 3,765,922 $ 322,233 8.56% $3,373,441 $ 271,284 8.04% Cash and due from banks .................... 122,611 119,695 Other non interest earning assets .......... 166,212 130,795 ---------- ---------- TOTAL ASSETS ..................... $4,010,098 $3,584,460 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest bearing deposits ............... $ 386,511 $ 347,900 Interest bearing deposits Savings and NOW accounts .............. 312,038 $ 3,965 1.27% 304,182 $ 3,640 1.20% Money market checking ................. 164,080 1,557 0.95 163,636 1,493 0.91 Money market savings .................. 584,676 28,853 4.93 471,531 17,811 3.78 Savings certificates .................. 1,168,334 66,745 5.71 1,109,724 58,110 5.24 Certificates over $100,000 ............ 367,331 22,678 6.17 283,011 15,374 5.43 ---------- ---------- ---------- ---------- TOTAL INTEREST BEARING DEPOSITS ... 2,596,459 123,798 4.77 2,332,084 96,428 4.13 ---------- ---------- TOTAL DEPOSITS .................... 2,982,970 2,679,984 Short-term borrowings ...................... 422,508 25,276 5.98 390,650 19,421 4.97 Long-term debt ............................. 215,009 14,108 6.56 156,708 9,065 5.78 ---------- ---------- ---------- ---------- TOTAL INTEREST BEARING LIABILITIES 3,233,976 $ 163,182 5.05% 2,879,442 $ 124,914 4.34% Non interest bearing liabilities ........... 56,003 46,321 ---------- --------- TOTAL LIABILITIES ................ 3,676,490 3,273,663 Minority interest .......................... 150 909 Redeemable preferred stock ................. -- 1,771 Redeemable class A common stock ............ 26,677 24,650 Shareholders' equity ....................... 306,781 283,467 ---------- ---------- TOTAL LIABILITIES AND EQUITY ..... $4,010,098 $3,584,460 ========== ========== Net interest income ........................ $ 159,051 $ 146,370 ========== ========== Net interest spread ........................ 3.51% 3.70% Net Interest margin ........................ 4.22% 4.34%
[WIDE TABLE CONTINUED FROM ABOVE]
YEARS ENDED DECEMBER 31, -------------------------------------- 1998 -------------------------------------- AVERAGE AVERAGE RATE/ BALANCE INTEREST (1) YIELD ---------- ------------ ---------- ASSETS Loans and leases (net of unearned discount) (2) Commercial and other .................. $ 431,459 $ 39,417 9.14% Commercial real estate ................ 501,802 45,277 9.02 Agricultural .......................... 446,859 40,610 9.09 Residential real estate ............... 394,944 34,758 8.80 Consumer .............................. 254,685 23,285 9.14 Tax-exempt ............................ 54,713 5,497 10.05 ---------- ---------- TOTAL LOANS AND LEASES ............ 2,084,462 188,844 9.06 Reserve for credit losses ............. (35,870) ---------- NET LOANS AND LEASES .............. 2,048,592 Securities Mortgage-backed ....................... 670,505 41,935 6.25 Other taxable ......................... 77,582 4,763 6.14 Tax-exempt ............................ 206,907 16,733 8.09 ---------- ---------- TOTAL SECURITIES ................. 954,994 63,431 6.64 Federal funds sold ......................... 12,312 701 5.69 Other earning assets ....................... 2,341 126 5.38 ---------- ---------- TOTAL EARNING ASSETS (3) ......... $3,054,109 $ 253,102 8.29% Cash and due from banks .................... 107,585 Other non interest earning assets .......... 122,356 ---------- TOTAL ASSETS ..................... $3,248,180 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest bearing deposits ............... $ 304,990 Interest bearing deposits Savings and NOW accounts .............. 290,260 $ 4,424 1.52% Money market checking ................. 156,421 2,079 1.33 Money market savings .................. 349,190 13,953 4.00 Savings certificates .................. 1,115,862 63,519 5.69 Certificates over $100,000 ............ 240,104 13,685 5.70 ---------- ---------- TOTAL INTEREST BEARING DEPOSITS ... 2,151,837 97,660 4.54 ---------- TOTAL DEPOSITS .................... 2,456,827 Short-term borrowings ...................... 367,580 19,488 5.30 Long-term debt ............................. 73,047 4,276 5.85 ---------- ---------- TOTAL INTEREST BEARING LIABILITIES 2,592,464 $ 121,424 4.68% Non interest bearing liabilities ........... 53,105 ---------- TOTAL LIABILITIES ................ 2,950,559 Minority interest .......................... 5,458 Redeemable preferred stock ................. 2,096 Redeemable class A common stock ............ 23,205 Shareholders' equity ....................... 266,862 ---------- TOTAL LIABILITIES AND EQUITY ..... $3,248,180 ========== Net interest income ........................ $ 131,678 ========== Net interest spread ........................ 3.60% Net Interest margin ........................ 4.31%
------------------------------------ (1) Interest income includes $8,062, $7,317, and $7,577, in 2000, 1999, and 1998, to adjust to a fully taxable basis using the federal statutory rate of 35%. (2) Loan and lease amounts include nonaccrual loans and leases. (3) Before deducting the reserve for credit losses. 15 The following table illustrates, on a tax-equivalent basis, for the periods indicated, the changes in our net interest income due to changes in volume and changes in interest rates. Changes in net interest income other than those due to volume have been included in changes due to rate:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 2000 VS. 1999 1999 VS. 1998 ---------------------------------- ---------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO CHANGE IN DUE TO CHANGE IN ---------------------------------- ---------------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL -------- -------- -------- -------- -------- -------- (IN THOUSANDS) INTEREST EARNINGS ASSETS: Loans and leases (1) .................... $ 38,078 $ 10,579 $ 48,657 $ 20,894 $ (6,872) $ 14,022 Taxable securities ...................... (3,186) 4,565 1,379 5,920 (957) 4,963 Tax-exempt securities (1) ............... 738 11 749 (491) (192) (683) Federal funds sold ...................... (116) 153 37 (26) (100) (126) Other interest earning assets ........... 149 (22) 127 20 (14) 6 -------- -------- -------- -------- -------- -------- Total interest earning assets $ 35,663 $ 15,286 $ 50,949 $ 26,317 $ (8,135) $ 18,182 ======== ======== ======== ======== ======== ======== INTEREST BEARING LIABILITIES: Savings and NOW accounts ................ $ 471 $ (146) $ 325 $ 798 $ (1,582) $ (784) Money market accounts ................... 2,496 8,610 11,106 2,890 382 3,272 Savings certificates .................... 7,541 8,398 15,939 2,093 (5,813) (3,720) Short-term borrowings ................... 1,584 4,271 5,855 1,223 (1,290) (67) Long-term debt .......................... 3,373 1,670 5,043 4,897 (108) 4,789 -------- -------- -------- -------- -------- -------- Total interest bearing liabilities 15,465 22,803 38,268 11,901 (8,411) 3,490 -------- -------- -------- -------- -------- -------- CHANGE IN NET INTEREST INCOME ............... $ 20,198 $ (7,517) $ 12,681 $ 14,416 $ 276 $ 14,692 ======== ======== ======== ======== ======== ========
------------------------------------ (1) Interest income includes $8,062, $7,317, and $7,577, in 2000, 1999, and 1998, respectiviely, to adjust to a fully taxable basis using the federal statutory rate of 35%. Tax-equivalent net interest income for 2000 was $159.1 million, an increase of 8.7% from the 1999 total of $146.4 million. Tax-equivalent net interest income in 1999 increased 11.2% from $131.7 million in 1998. The increase in net interest income resulted primarily from our average earning assets, which increased by $392.5 million or 11.6% in 2000 from 1999 and by $319.3 million or 10.5% in 1999 from 1998. Most of the increase in average earning assets was due to growth in loans. Average loans and leases increased by $434.6 million, or 18.8%, in 2000 from 1999 and by $230.6 million, or 11.1%, in 1999 from 1998. The acquisitions of Northwest in 2000 and Dean in 1999 contributed significantly to the growth in loans. The positive impact on net interest income due to growth in average loans and leases in 2000 was partially offset by a decline in the net interest margin to 4.22% in 2000 from 4.34% in 1999 and 4.31% in 1998. While the average yield on earning assets increased by 52 basis points in 2000 from 1999, the cost of interest bearing liabilities increased by 71 basis points. In response to strong competitive pressure in attracting deposits, we emphasized our money market savings product and structured that product to be competitive with other short-term investment alternatives available to customers. Average money market savings grew by 24.0% in 2000 from 1999 and as a result, the increased cost of a more competitively positioned product contributed to the decline in net interest margin. The increase in net interest margin in 1999 from 1998 was primarily due to an increased spread between the average yield on earning assets and the average cost of interest bearing liabilities during 1999. While the average yield on earning assets decreased 25 basis points in 1999 from 1998, the average cost of interest bearing liabilities decreased by 34 basis points. The Branch Acquisition is anticipated to add approximately $750 million in deposits to our balance sheet, reducing the need for us to compete as aggressively for deposits after the Branch Acquisition is completed. Our net interest margin is expected to decline following completion of the Branch Acquisition primarily as a result of debt incurred in connection with the transaction and the initial investment of assumed deposits in excess of acquired loans in lower earning investment securities. PROVISION FOR CREDIT LOSSES. We establish the provision for credit losses based on a quarterly assessment of the adequacy of the reserve for credit losses. The provision for credit losses was $8.3 million in both 2000 and 1999, and $5.6 million in 1998. Net charge-offs were $4.6 million in 2000, $5.6 million in 1999, and in $2.8 million in 1998. For further information regarding the provision for credit losses, see the section entitled Financial Condition - Reserve for Credit Losses. 16 NONINTEREST INCOME. Noninterest income was $54.2 million in 2000 compared to $52.5 million in 1999 and $51.3 million in 1998. Recurring noninterest income, which excludes gains from asset and security sales and a $4.5 million state tax refund in 1998, was $53.8 million in 2000 compared to $49.5 million in 1999 and $44.5 million in 1998. Recurring noninterest income increased by 8.7% in 2000 and 11.1% in 1999. The following table summarizes the components of noninterest income:
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Service charges ....................... $ 22,284 $ 19,434 $ 17,037 Insurance ............................. 10,045 9,703 7,804 Trust ................................. 9,139 7,984 6,990 Brokerage ............................. 5,481 4,533 3,752 Gain on sale of loans ................. 2,758 3,380 4,977 Other recurring noninterest income .... 4,063 4,436 3,972 -------- -------- -------- Recurring noninterest income ..... 53,770 49,470 44,532 Gain on sale of other assets .......... 177 1,142 966 Gain on sale of securities ............ 270 1,853 1,296 State tax refund ...................... -- -- 4,476 -------- -------- -------- Total noninterest income ......... $ 54,217 $ 52,465 $ 51,270 ======== ======== ========
Service charge income increased by 14.7% in 2000 from 1999 and 14.1% in 1999 from 1998. The acquisitions of Northwest in 2000 and Dean in 1999 contributed significantly to the growth in service charge income. Our continued focus on relationship management led to increases in brokerage, trust, and insurance income. Brokerage revenue grew by 20.9% in 2000 and 20.8% in 1999. Trust revenue increased by 14.5% in 2000 and 14.2% in 1999 while insurance revenue increased by 3.5% in 2000 and 24.3% in 1999. The insurance revenue growth rate in 1999 was positively impacted by unusually high levels of crop insurance revenues and contingent commissions which declined to more normal levels in 2000. Gains on sales of loans result primarily from the sale of fixed rate residential real estate first mortgages into the secondary market. Income from loan sales is heavily influenced by the general level of market interest rates and the specific level of customer refinancing activity. Income from loan sales decreased by 18.4% in 2000 and 32.1% in 1999 from a peak of $5.0 million recorded in 1998 when the level of loan refinancing activity was higher than in recent years due to lower mortgage interest rates. NONINTEREST EXPENSE. Noninterest expense increased $4.7 million, or 3.8% in 2000 and $14.9 million, or 14.0%, in 1999. The following table summarizes the components of noninterest expense:
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Salaries and wages ................................ $ 58,331 $ 54,164 $ 49,287 Employee benefits ................................. 14,018 14,901 12,572 Occupancy ......................................... 7,651 6,921 6,128 Furniture and equipment ........................... 9,432 9,170 7,621 Printing, postage and office supplies ............. 5,850 5,916 5,487 Marketing ......................................... 4,862 4,760 4,756 Data processing fees .............................. 7,244 7,465 6,046 Professional fees ................................. 2,878 3,031 1,786 Other real estate owned ........................... 106 104 91 Minority interest in earnings ..................... 21 41 747 FDIC premiums and examination fees ................ 1,652 1,297 1,157 Amortization of goodwill and other intangibles .... 3,713 2,831 1,711 Other noninterest expense ......................... 10,872 11,343 9,624 -------- -------- -------- Total noninterest expense ...................... $126,630 $121,944 $107,013 ======== ======== ========
17 Personnel costs, which include salaries, wages and employee benefits, accounted for 57.1% of noninterest expense in 2000, and increased by $3.3 million, or 4.8%, from 1999 and $7.2 million, or 11.6%, from 1998 to 1999. The acquisitions of Northwest in 2000 and Dean in 1999 contributed significantly to the growth in personnel costs. The 7.7% increase in salaries and wages in 2000 was partially offset by a reduction in employee benefit costs. Employee benefit costs declined by 5.9% to $14.0 million in 2000 from $14.9 million in 1999. A reduction in net pension costs, primarily as a result of increased plan assets augmented by higher market returns, was the most significant contributor to the decline in employee benefit costs. Net pension costs declined to $300 thousand in 2000, from $1.7 million in 1999 and $1.0 million in 1998. Excluding personnel costs, noninterest expense increased $1.4 million, or 2.7%, in 2000. Contributing to the increase in noninterest expense in 2000 was a $1.0 million increase in occupancy and furniture and fixture expense, due in part to the Northwest and Dean acquisitions. The expense associated with goodwill and other intangibles also increased by $882 thousand or 31.2% as a result of those two acquisitions. It is expected that completion of the Branch Acquisition will result in a significant increase in our amortization of goodwill and other intangibles during future periods. Excluding personnel costs, noninterest expense increased $7.7 million or 17.1% in 1999. Approximately $2.8 million of this increase was due to the Dean acquisition in 1999. Furniture and equipment expenses increased by $1.5 million in 1999 as we completed a significant upgrade to our technology infrastructure. Also contributing to the increase in noninterest expense in 1999 was a $1.4 million increase in data processing fees as we changed item processing vendors during the year and integrated the data processing of acquired offices. Professional fees increased by $1.2 million in 1999, primarily due to the outsourcing of the internal audit function. The expense associated with goodwill and other intangibles increased by $1.1 million in 1999 due to the Dean acquisition. 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. Our efficiency ratio was 57.6% in 2000, 60.5% in 1999, and 59.1% in 1998. The decrease in 2000 from 1999 was due to growth in recurring noninterest income and tax-equivalent net interest income of 8.7% each, which was partially offset by an increase of 3.8% in noninterest expense. Our strategic goal is to move the efficiency ratio to 55.0% or below. INCOME TAXES. Income tax expense, which consists of provisions for federal and state income taxes, was $24.5 million for 2000 compared to $21.1 million in 1999 and $21.3 million in 1998. Our effective tax rate was 34.8% in 2000, a slight increase from the effective rates of 34.5% in 1999 and 33.9% in 1998. The effective rate has been increasing slightly as the rate of growth in tax exempt income has been lower than the rate of growth in net income. 18 FINANCIAL CONDITION LOAN AND LEASE PORTFOLIO. We maintain a diversified loan and lease portfolio consisting of commercial, commercial real estate, agricultural, residential real estate, consumer, and tax-exempt loans and leases. The following table summarizes the components of our gross loan and lease portfolio:
AT DECEMBER 31, ----------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------------- ------------------ ------------------ ------------------ ------------------ AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT % ---------- ----- ---------- ------ ---------- ------ ---------- ------ ---------- ------ (DOLLARS IN THOUSANDS) Commercial and other ...... $ 717,936 24.6% $ 596,680 23.4% $ 475,556 21.8% $ 387,048 19.7% $ 346,602 19.7% Commercial real estate .... 733,746 25.1 648,029 25.4 501,205 23.0 419,063 21.3 340,621 19.3 Construction ............ 68,296 2.3 70,869 2.8 59,913 2.8 36,518 1.8 30,039 1.7 Agriculture ............... 416,660 14.3 433,357 17.0 444,784 20.4 409,875 20.8 378,399 21.5 Residential real estate ... 578,876 19.8 450,812 17.7 376,652 17.3 387,549 19.7 351,946 20.0 Construction ............ 18,051 0.6 15,274 0.6 13,397 0.6 12,609 0.6 11,904 0.7 Consumer .................. 302,824 10.4 275,320 10.8 250,803 11.5 263,469 13.4 247,511 14.1 Tax-exempt ................ 83,082 2.9 59,815 2.3 55,477 2.6 52,954 2.7 53,078 3.0 ---------- ----- ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total loans and leases .. $2,919,471 100.0% $2,550,156 100.0% $2,177,787 100.0% $1,969,085 100.0% $1,760,100 100.0% ========== ===== ========== ====== ========== ====== ========== ====== ========== ======
At December 31, 2000, our loan and lease portfolio was comprised of 54.9% commercial credit, 30.8% consumer credit and 14.3% agricultural credit. The loan and lease portfolio increased $369.3 million, or 14.5%, in 2000 and $372.4 million, or 17.1%, in 1999. Approximately 20.0% of the loan growth during 2000 was related to the acquisition of Northwest and approximately 45.0% of the loan growth during 1999 was related to the acquisition of Dean. Our commercial portfolio is primarily secured with collateral consisting of inventory, receivables and equipment. We utilize standard advance rates in determining amounts that can be advanced for each collateral type. Advances secured by inventory and receivables are normally short term floating rate advances. Equipment loans typically amortize over five years. The commercial portfolio grew by $121.3 million, or 20.3%, to $717.9 million as of December 31, 2000 and has grown in excess of 20.0% for each of the last three years. Our commercial real estate portfolio, which includes interim commercial real estate construction loans, consists primarily of loans and leases to business customers who occupy the property or use the property for income production. Commercial real estate loans are generally made for up to 80.0% of appraised value or cost and typically have a term of five years with 15 to 20 year amortization. The commercial real estate portfolio increased $83.1 million, or 11.6%, in 2000 and $157.8 million, or 28.1%, in 1999. The Dean acquisition was a significant contributor to the growth of the commercial real estate portfolio in 1999. Our agricultural loans include term loans secured by farmland or equipment, and operating loans used for commodity production. Our agricultural customers and agricultural-based communities are diversified across the three states we serve and we extend credit to twelve different areas of commodity production. Agricultural loans decreased $16.7 million, or 3.9%, in 2000 and $11.4 million, or 2.6%, in 1999. For our agricultural customers, the year 2000 was generally an average to above average production year. Improved crop conditions and increased governmental support helped mitigate the impact of continuing low commodity prices and higher fuel prices. During 2000, we continued the tightening of our agricultural loan underwriting standards that began in 1999. At December 31, 2000, agricultural loans represented 14.3% of our total loans and leases, down from 17.0% in 1999 and 20.4% in 1998. This decrease reflects our continuing strategy of placing a reduced emphasis on agricultural lending relative to the portfolio as a whole. Residential real estate loans increased $130.8 million, or 28.1%, in 2000 and $76.0 million, or 19.5%, in 1999. The residential real estate portfolio includes home equity loans, first mortgage residential real estate loans, and some construction loans. The construction loans are typically made to builders on homes under construction that have been pre-sold. Home equity loans comprise approximately 52.0% of our $596.9 million in residential real estate loans as of December 31, 2000. Loan to value ratios for home equity loans typically range from 80.0% to 100.0%. Most of the increase in residential real estate loans in 2000 and 1999 was in home equity loans, which increased $82.3 million, or 36.0%, in 2000 and $61.8 million, or 37.1%, in 1999. First mortgage residential real estate lending is generally conducted in compliance with secondary market underwriting guidelines and most newly originated fixed rate first mortgage loans are sold into the secondary market. First mortgage residential real estate loans, which had not changed significantly during 1998 and 1999, did increase by $45.8 million during 2000 due primarily to the acquisition of Northwest. 19 Our consumer loan portfolio increased by $27.5 million, or 10.0%, in 2000 and $24.5 million, or 9.8%, in 1999. As of December 31, 2000 approximately $110.6 million, or 36.5%, of the consumer portfolio consists of indirect auto loans, generally to borrowers within our market area. The remainder of the portfolio consists of direct consumer loans, with credit card loans making up only about 1.9% of the total consumer portfolio. Tax-exempt loans and leases, which are made to municipalities and qualifying non-profit organizations, increased by $23.3 million, or 38.9%, in 2000 and $4.3 million, or 7.8%, in 1999. We expect that the Branch Acquisition will add approximately $300 million to our loan portfolio, including $118 million in commercial real estate loans, $100 million in home equity loans, $70 million in commercial loans, and $12 million in consumer loans. The following table summarizes the amount and maturity of the loan and lease portfolio as of December 31, 2000:
AT DECEMBER 31, 2000, MATURING IN ---------------------------------------------------- ONE YEAR ONE TO OVER OR LESS FIVE YEARS FIVE YEARS TOTAL ---------- ---------- ---------- ---------- (IN THOUSANDS) Commercial and other .......................... $ 355,320 $ 329,771 $ 32,845 $ 717,936 Commercial real estate ........................ 141,139 447,543 145,064 733,746 Construction ............................. 18,351 31,835 18,110 68,296 Agricultural .................................. 180,322 167,035 69,303 416,660 Residential real estate ....................... 59,178 267,234 252,464 578,876 Construction ............................. 17,109 344 598 18,051 Consumer ...................................... 103,943 192,538 6,343 302,824 Tax-exempt .................................... 21,688 33,181 28,213 83,082 ---------- ---------- ---------- ---------- Total loans and leases ................... $ 897,050 $1,469,481 $ 552,940 $2,919,471 ========== ========== ========== ========== Loans and leases maturing after one year Fixed interest rate ...................... $1,076,912 $ 244,062 $1,320,974 Variable interest rate ................... 392,569 308,878 701,447 ---------- ---------- ---------- Total .................................... $1,469,481 $ 552,940 $2,022,421 ========== ========== ==========
20 NONPERFORMING ASSETS. Nonperforming assets include nonaccrual loans, restructured loans, and other real estate acquired in loan settlements. The accrual of interest on loans and leases is suspended when the interest or principal payments are contractually past due 90 days or more, unless the loan is fully secured and in the process of collection. Payments received on nonaccrual loans are typically applied to principal and not recorded as income. Restructured loans generally continue to accrue interest but include concessions in terms as a result of the borrower's deteriorated financial condition. The following table presents comparative data for nonperforming assets:
AT DECEMBER 31, ------------------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Nonaccrual loans and leases ................................. $ 13,941 $ 16,608 $ 13,077 $ 8,958 $ 10,830 Restructured loans and leases ............................... 50 48 178 910 414 -------- -------- -------- -------- -------- Total nonperforming loans and leases .................... 13,991 16,656 13,255 9,868 11,244 Other real estate owned (OREO) .............................. 3,658 527 620 691 240 -------- -------- -------- -------- -------- Total nonperforming assets .............................. $ 17,649 $ 17,183 $ 13,875 $ 10,559 $ 11,484 ======== ======== ======== ======== ======== Past due loans and leases * ................................. $ 3,590 $ 4,753 $ 1,142 $ 3,573 $ 2,205 ======== ======== ======== ======== ======== Nonperforming loans and leases to total loans and leases .... 0.48% 0.65% 0.61% 0.50% 0.64% Nonperforming assets to total loans, leases and OREO ........ 0.60 0.68 0.64 0.54 0.65 Nonperforming assets and past due loans and leases* to total loans, leases and OREO ............................ 0.73 0.86 0.69 0.72 0.78
-------------------------- * Past due loans and leases include accruing loans and leases 90 days or more past due. Nonperforming assets were $17.6 million at December 31, 2000, compared to $17.2 million at the end of 1999, and $13.9 million at the end of 1998. Correspondingly, nonperforming assets as a percentage of total loans, leases, and other real estate owned decreased to 0.60% at December 31, 2000, compared to 0.68% in 1999 and 0.64% in 1998. Nonperforming loans and leases, including nonaccrual and restructured loans and leases, totaled $14.0 million, or 0.48% of total loans and leases, at December 31, 2000, versus $16.7 million, or 0.65% of total loans and leases at December 31, 1999, and $13.3 million, or 0.61% of total loans and leases at December 31, 1998. The $2.7 million decline in nonperforming loans and leases in 2000 from 1999 was primarily in the agricultural loan portfolio. Nonperforming agricultural loans declined to $4.1 million at the end of 2000 from $8.5 million at the end of 1999. This decrease was partially offset by a $2.7 million increase in nonperforming commercial and commercial real estate loans, primarily the result of one $2.0 million credit. Furthermore, low commodity prices and poor crop conditions contributed to the increase in nonperforming agricultural loans in 1999, but improved crop conditions and increased governmental support helped reduce the negative impact of low commodity prices and higher fuel prices during 2000. Other real estate owned ("OREO") increased to $3.7 million at December 31, 2000, compared to $527 thousand at December 31, 1999, and $620 thousand at December 31, 1998. The increase in OREO in 2000 is primarily due to a single hotel property with a carrying value of $3.1 million that was acquired through foreclosure in the fourth quarter of 2000. Redemption rights on this property expire on May 8, 2001 and efforts to sell it will begin shortly after that date if it is not redeemed by the borrower. RESERVE FOR CREDIT LOSSES. We maintain a reserve for credit losses to absorb losses inherent in the loan and lease portfolio. The reserve is based on ongoing, quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio, and to a lesser extent, unused commitments to provide financing. The reserve is increased by the provision for credit losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries. Our methodology for assessing the appropriateness of the reserve consists of several key elements, which include the formula reserve, specific reserves, and the unallocated reserve. The formula reserve is calculated by applying loss factors to our outstanding loans and certain unused commitments. Loss factors for each loan type are based on our historical loss experience through the course of the business cycle and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date. Specific reserves are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred in excess of the amount determined by the application of the formula reserve. The unallocated reserve is comprised of two elements. The first element recognizes the model and estimation risk associated with the formula and specific reserves. The second element is based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific reserves. The conditions evaluated in connection with the unallocated reserve 21 may include existing general economic and business conditions affecting our key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent duration of the current business cycle, and findings of our internal loan review examiners. The reserve also incorporates the results of measuring impaired loans and leases as provided in Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition, and disclosures related to impaired loans and leases. A loan is considered impaired when management determines that it is probable that we will be unable to collect all amounts due according to the original contractual terms of the loan or lease agreement. Impairment is measured by the difference between the recorded investment in the loan or lease (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount) and the estimated present value of total expected future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. Impairment is recognized by adjusting an allocation of the existing reserve for credit losses. 22 The reserve for credit losses was $45.9 million, or 1.57% of total loans and leases, at December 31, 2000, compared to $41.9 million, or 1.65% of loans at December 31, 1999, and $37.0 million, or 1.70% of loans at December 31, 1998. Activity in the reserve for credit losses for the past five years is shown in the following table:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Beginning of year ................................... $ 41,895 $ 37,019 $ 34,253 $ 30,482 $ 28,253 Charge-offs: Commercial and other ............................ 3,273 1,270 820 604 480 Commercial real estate .......................... 287 1,445 152 427 117 Construction ................................. 24 -- 25 2 -- Agricultural .................................... 518 2,138 835 288 489 Residential real estate ......................... 320 351 328 100 47 Consumer ........................................ 1,481 1,860 1,808 1,338 1,097 ---------- ---------- ---------- ---------- ---------- Total charge-offs ............................ 5,903 7,064 3,968 2,759 2,230 ---------- ---------- ---------- ---------- ---------- Recoveries: Commercial and other ............................ 320 351 218 379 911 Commercial real estate .......................... 226 152 322 173 194 Construction ................................. 5 -- -- 10 -- Agricultural .................................... 165 355 102 65 159 Residential real estate ......................... 64 36 30 104 58 Consumer ........................................ 491 545 492 295 381 ---------- ---------- ---------- ---------- ---------- Total recoveries ............................. 1,271 1,439 1,164 1,026 1,703 ---------- ---------- ---------- ---------- ---------- Net charge-offs ..................................... 4,632 5,625 2,804 1,733 527 Provision for credit losses ......................... 8,338 8,321 5,570 4,746 2,756 Reserve related to acquired assets .................. 294 2,180 -- 758 -- ---------- ---------- ---------- ---------- ---------- End of year ......................................... $ 45,895 $ 41,895 $ 37,019 $ 34,253 $ 30,482 ========== ========== ========== ========== ========== Average loans and leases ............................ $2,749,662 $2,315,105 $2,084,462 $1,838,218 $1,687,900 Net charge-offs to average loans and leases ......... 0.17% 0.24% 0.13% 0.09% 0.03% Reserve to total nonperforming loans and leases ..... 328.03 251.53 279.28 347.11 271.10 Reserve to total loans and leases ................... 1.57 1.65 1.70 1.74 1.74
Net charge-offs were $4.6 million in 2000, $5.6 million in 1999, and $2.8 million in 1998. Expressed as a percentage of average loans and leases, net charge-offs declined to 0.17% in 2000 from 0.24% in 1999. Charge-offs of commercial loans increased to $3.3 million in 2000 from $1.3 million in 1999. A single loan with a total charge-off of $1.9 million accounted for most of this increase. Charge-offs in the agricultural loan portfolio declined to $518 thousand in 2000 from $2.1 million in 1999. Agricultural loan charge-offs increased from $835 thousand in 1998 to $2.1 million in 1999, due primarily to a generally poor agricultural economy in the Red River Valley of eastern North Dakota and western Minnesota. The provision for credit losses was $8.3 million in both 2000 and 1999, and $5.6 million in 1998. The reserve to nonperforming loans increased to 328.0% at December 31, 2000, from 251.5% at December 31, 1999, and 279.3% at December 31, 1998. The ratio of classified loans, which include those loans with an internal loan review rating of substandard, doubtful or loss, to total loans was 3.1% at December 31, 2000 compared to 4.5% at December 31, 1999 and 5.1% at December 31, 1998. The improvement in 2000 was primarily the result of a significant reduction of classified agricultural loans, which were down 43.0% in a comparison of 2000 to 1999, and loan growth within the other loan categories. 23 Management has allocated the reserve to sectors based on relative risk characteristics of the loan and lease portfolio. Commercial allocations are based on a quarterly review of individual loans outstanding and commitments to extend credit and standby letters of credit. Consumer allocations are based on an analysis of product mix, credit scoring and risk composition of the portfolio, fraud loss and bankruptcy experiences, historical and expected delinquency, and charge-off statistics for each homogenous category or group of loans. The following table shows the allocation of the reserve for credit losses to sectors for each of the last five years:
AT DECEMBER 31, ------------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 -------------------- -------------------- -------------------- -------------------- -------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF LOANS AND LOANS AND LOANS AND LOANS AND LOANS AND LEASES TO LEASES TO LEASES TO LEASES TO LEASES TO TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS TOTAL LOANS AMOUNT AND LEASES AMOUNT AND LEASES AMOUNT AND LEASES AMOUNT AND LEASES AMOUNT AND LEASES -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Commercial and other .. $ 12,800 24.6% $ 10,200 23.4% $ 8,300 21.8% $ 7,700 19.7% $ 6,800 19.7% Commercial real estate .............. 9,900 27.4 9,200 28.2 10,100 25.8 9,300 23.1 7,500 21.0 Agricultural .......... 9,300 14.3 11,900 17.0 8,200 20.4 7,000 20.8 6,400 21.5 Residential real estate .............. 1,900 20.4 1,900 18.3 2,700 17.9 2,400 20.3 2,200 20.7 Consumer .............. 2,500 10.4 2,300 10.8 1,500 11.5 1,700 13.4 1,500 14.1 Tax-exempt ............ 100 2.9 600 2.3 300 2.6 300 2.7 300 3.0 Unallocated ........... 9,395 -- 5,795 -- 5,919 -- 5,853 -- 5,782 -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total reserve ..... $ 45,895 100.0% $ 41,895 100.0% $ 37,019 100.0% $ 34,253 100.0% $ 30,482 100.0% ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Approximately $9.4 million, or 20.5%, of the reserve for loan and lease losses is not allocated to specific credits at December 31, 2000, compared to $5.8 million, or 13.8%, of the reserve which was not allocated to specific credits at December 31, 1999. Management noted some weakening of general economic conditions during the fourth quarter of 2000 which had not yet been factored into the analysis of specific credits, but which was taken into consideration in the analysis of the overall reserve position. SECURITIES. Our investment portfolio consists of investments and mortgage backed securities that we intend to hold to maturity which are valued at amortized cost. Our portfolio also includes debt and equity securities that are available for sale which are valued at current market value. The investment portfolio is maintained primarily for liquidity and collateral purposes and to generate interest income. Our investment portfolio consists primarily of low risk government and government agency backed securities and high grade municipal bonds. As a result of the Branch Acquisition, we expect to receive cash from the seller of approximately $390.0 million. A significant portion of this cash will be invested in securities. The securities portfolio declined by $86.7 million, or 8.4%, to $951.6 million at December 31, 2000 from $1.0 billion at December 31, 1999 and $996.7 million at December 31, 1998. The majority of the proceeds from maturing securities during 2000 were reinvested in loans rather than securities. 24 The following table presents the amortized cost and fair value of securities held on December 31, 2000:
AT DECEMBER 31, 2000 ---------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) Securities available-for-sale: U. S. Treasury securities .................. $ 1,915 $ 1 $ 3 $ 1,913 U. S. government agency obligations ........ 110,543 672 40 111,175 Obligations of state and political subdivisions .............................. 23,047 562 4 23,605 Mortgage-backed securities ................. 574,236 3,339 2,691 574,884 Equity securities .......................... 55,945 905 114 56,736 Other ...................................... 15,234 -- 33 15,201 ---------- ---------- ---------- ---------- Total securities available-for-sale ..... $ 780,920 $ 5,479 $ 2,885 $ 783,514 ========== ========== ========== ========== Securities held-to-maturity: U. S. government agency obligations ........ $ 5,491 $ 22 $ 56 $ 5,457 Obligations of state and political subdivisions .............................. 162,622 3,354 170 165,806 ---------- ---------- ---------- ---------- Total securities held-to-maturity ....... $ 168,113 $ 3,376 $ 226 $ 171,263 ========== ========== ========== ==========
The following table presents the maturity of securities held at December 31, 2000 and the weighted average rates by range of maturity. The table includes projected payments on mortgage-backed securities. Certain equity securities, which include Federal Home Loan Bank stock, Federal Reserve Bank stock, Federal Home Loan Mortgage Corporation preferred stock, and Federal National Mortgage Association preferred stock, do not have a stated face rate or maturity. Equity securities are presented in this table based on estimated rates at December 31, 2000:
AMORTIZED COST ------------------------------------------------------------------------------------------------- WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS AFTER 10 YEARS TOTALS ----------------- ----------------- ----------------- ----------------- ----------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) U.S. Treasury securities and obligations of U.S. government agencies .......... $ 38,836 6.80% $ 66,269 6.87% $ 12,748 6.71% $ 96 6.90% $117,949 6.83% Obligations of states and political subdivisions (1) ... 36,808 7.83 98,772 7.75 49,330 7.44 759 7.98 185,669 7.67 Mortgage-backed securities ..... 118,697 7.08 236,642 6.77 127,492 6.65 91,405 6.70 574,236 6.79 Equity securities .............. -- -- -- -- -- -- -- -- 55,945 7.31 Other securities ............... 13,199 6.32 -- -- 2,035 6.81 -- -- 15,234 6.32 -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total Investment Securities .............. $207,540 7.19% $401,683 7.05% $191,605 7.04% $ 92,260 6.71% $949,033 7.00% ======== ======= ======== ======= ======== ======= ======== ======= ======== =======
------------------------------ (1) Yields are presented on a tax-equivalent basis to reflect the tax-exempt nature of these securities. The incremental federal statutory rate applied is 35%. The average maturity of the portfolio was 66 months at December 31, 2000, with an average tax-equivalent yield to maturity on the portfolio of 7.00%, unrealized gains of $8.9 million and unrealized losses of $3.1 million. This compares to an average maturity of 76 months at December 31, 1999, and an average tax-equivalent yield to maturity of 6.82%, unrealized gains of $3.3 million, and unrealized losses of $21.7 million. At December 31, 2000, the market value of our securities was $954.8 million, or $5.7 million over its amortized cost. This compares to a market value of $1.0 billion, or $18.5 million under amortized cost, at December 31, 1999. 25 TOTAL DEPOSITS. Deposits increased by $256.1 million, or 9.0% in 2000, and $280.0 million or 10.9% in 1999. The Northwest acquisition in 2000 and the Dean acquisition in 1999 were significant contributors to overall deposit growth. Noninterest bearing deposits increased by $50.1 million, or 12.3%, in 2000, and $37.3 million, or 10.1%, in 1999. Savings, NOW, and money market accounts increased $115.1 million, or 11.3%, in 2000, and $153.6 million, or 17.7%, in 1999. As part of our strategy to grow deposits, we have placed a strong emphasis on the money market savings product and have structured that product to be competitive with other short-term investment alternatives available to customers. Money market savings balances increased by $147.9 million, or 29.4%, in 2000, and $98.5 million, or 24.3%, in 1999. Savings certificate balances increased by $91.0 million, or 6.4%, in 2000, and $89.1 million, or 6.7%, in 1999. The lower growth rate for certificate balances compared to other transaction accounts is consistent with our goal to place less emphasis on savings certificates in our deposit funding. The Branch Acquisition will add approximately $750 million in deposits to Bremer and help us to further the goal of placing less emphasis on certificates in our deposit funding. Only 39.0% of the deposits that we expect to acquire in the Branch Acquisition are in savings certificates as compared to our deposit base at December 31, 2000 which included 48.8% in savings certificates. At December 31, 2000, savings certificates included $76.7 million of deposits acquired through brokers. This compares with $58.7 million of brokered deposits at December 31, 1999 and $40.9 million at December 31, 1998. All of these brokered deposits mature during the first half of 2001. As a result of the deposits being added through the Branch Acquisition, we do not expect to replace these maturing brokered deposits during 2001. The following table sets forth the distribution of our deposits by type:
AT DECEMBER 31, ------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------- ------------------------- ------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Noninterest bearing deposits ..... $ 456,571 14.7% $ 406,478 14.3% $ 369,215 14.4% Savings and NOW accounts ......... 318,481 10.2 342,752 12.0 294,385 11.4 Money market accounts ............ 816,112 26.3 676,775 23.7 571,495 22.2 Time certificates of deposit: Less than $100,000 ............. 1,186,472 38.2 1,132,158 39.7 1,081,795 42.1 $100,000 or more ............... 329,192 10.6 292,529 10.3 253,760 9.9 ---------- ---------- ---------- ---------- ---------- ---------- $3,106,828 100.0% $2,850,692 100.0% $2,570,650 100.0% ========== ========== ========== ========== ========== ==========
Included in interest bearing deposits at December 31, 2000 were $329.2 million of time deposits that had balances of $100,000 or more at December 31, 2000. Maturities of these time deposits are summarized as follows:
AT DECEMBER 31,2000 ------------------- (IN THOUSANDS) Three months or less .................................. $ 122,306 Over three months to six months ....................... 46,383 Over six months to twelve months ...................... 74,560 Over twelve months .................................... 85,943 ------------------- Total ........................................... $ 329,192 ===================
SHORT-TERM BORROWINGS. Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, treasury tax and loan notes, Federal Home Loan Bank ("FHLB") advances with original maturities of one year or less, and advances under an unsecured revolving credit facility. Short-term borrowings increased 3.4% to $441.0 million at December 31, 2000 from $426.7 million at December 31, 1999 and from $353.2 million at December 31, 1998. Repurchase agreements with customers, which constitute 64.5% of short-term borrowings at December 31, 2000, increased to $284.3 million at the end of 2000 from $260.4 million at the end of 1999 and $217.7 million at the end of 1998. At December 31, 2000, 83.2% of the customer repurchase agreements were related to daily checking account sweep mechanisms that are part of our cash management product line. FHLB advances with maturities of one year or less declined to $95.0 million at the end of 2000 from $107.0 million at the end of 1999 and $89.5 million at the end of 1998. We expect that the level of these short-term FHLB advances will decline significantly after we complete the Branch Acquisition. The total amount that can be 26 borrowed under the unsecured revolving credit facility is $60.0 million. The facility is used primarily to provide funding to the Bremer Business Finance Corporation. Advances under this short-term revolving credit facility were $15.0 million at December 31, 2000 compared to $16.0 million at December 31, 1999, and $33.0 million at December 31, 1998. The amount borrowed under this facility is expected to increase by approximately $30 million when the Branch Acquisition is completed. The proceeds from this additional borrowing will be used to provide capital to the South St. Paul bank subsidiary to support the Branch Acquisition. The following table presents a summary of our short-term borrowings for the periods ended on the dates indicated:
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 2000 ........................................... $ 328,315 $ 95,000 $ 2,685 $ 15,000 1999 ........................................... 300,737 107,000 2,948 16,000 1998 ........................................... 221,419 89,500 9,294 33,000 Weighted average interest rate at December 31 2000 ........................................... 6.49% 6.55% 6.25% 7.16% 1999 ........................................... 5.41 5.67 5.25 6.74 1998 ........................................... 4.96 5.22 4.62 6.52 Maximum amount outstanding at any month end 2000 ........................................... $ 328,536 $ 165,419 $ 3,899 $ 40,000 1999 ........................................... 300,737 156,755 12,461 99,000 1998 ........................................... 288,312 178,658 15,167 35,000 Average amount outstanding during the year 2000 ........................................... $ 286,813 $ 105,428 $ 2,412 $ 27,855 1999 ........................................... 246,666 84,556 3,553 55,875 1998 ........................................... 196,731 139,520 8,587 22,742 Weighted average interest cost during the year 2000 ........................................... 5.72% 6.28% 6.18% 7.58% 1999 ........................................... 4.53 5.47 4.65 6.23 1998 ........................................... 5.00 5.55 4.76 6.55
LONG-TERM DEBT. Long-term debt, which includes senior notes, FHLB advances with original maturities of greater than one year, and installment promissory notes, increased $16.8 million, or 7.8%, in 2000, and $99.5 million, or 85.6%, in 1999. The following table summarizes long-term debt for the last three years:
AT DECEMBER 31, 2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS) Senior notes ............................ $ 65,000 $ 65,000 $ -- Federal Home Loan Bank borrowings ....... 164,908 147,587 111,318 Installment promissory notes ............ 2,752 3,245 4,968 ---------- ---------- ---------- Total ................................ $ 232,660 $ 215,832 $ 116,286 ========== ========== ==========
We issued the senior notes in November 1999. The proceeds were used in connection with the Dean and Northwest acquisitions. The installment promissory note obligations were incurred in connection with previous acquisitions. TRUST PREFERRED CAPITAL SECURITIES. On February 22, 2001, we issued $16.5 million of trust preferred capital securities. This issuance will increase our Tier 1 capital in anticipation of the Branch Acquisition. 27 EQUITY OF SHAREHOLDERS AND REDEEMABLE CLASS A COMMON STOCK. Shareholders' equity and redeemable class A common stock was $354.0 million at December 31, 2000 compared to $312.9 million at December 31, 1999 and $303.4 million at December 31, 1998. Book value per share increased to $29.50 at December 31, 2000 from $26.07 at December 31, 1999 and $25.28 at December 31, 1998. Dividends paid per share increased to $1.39 in 2000 from $1.32 in both 1999 and 1998. The dividends paid in 2000 of $16.7 million represented 5.3% of the equity of shareholders at December 31, 1999 and 36.5% of 2000 net income. Realized book value per share, which excludes the impact of the net unrealized gain or loss on securities available-for-sale, increased to $29.37 at December 31, 2000 from $26.95 at December 31, 1999, and $24.93 at December 31, 1998. CAPITAL MANAGEMENT. 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%. We have maintained our capital at the "well-capitalized" level in each of these categories in the past and expect to do so in the future. The capital ratios of the Subsidiary Banks in each of these categories met or exceeded the "well-capitalized" ratios as of December 31, 2000. The following table compares the consolidated capital ratios with the minimum requirements for well capitalized and adequately capitalized banks as of December 31, 2000:
MINIMUM REQUIREMENTS --------------------------------- WELL ADEQUATELY CAPITAL CATEGORY ACTUAL CAPITALIZED CAPITALIZED ------------------------------------- ------------ --------------- --------------- Tier I risk-based capital ........... 10.03% 6.00% 4.00% Total risk-based capital ............ 11.28 10.00 8.00 Leverage ratio ...................... 7.51 5.00 4.00
The completion of the Branch Acquisition and the issuance of additional trust preferred capital securities will significantly impact our capital ratios. After completion of these transactions, the capital ratios are expected to be lower in all cases than the ratios as of December 31, 2000, but remain above the well-capitalized level. ASSET LIABILITY MANAGEMENT LIQUIDITY MANAGEMENT. The objective of liquidity management is to ensure the continuous availability of funds to meet our financial commitments. We use an asset liability management committee ("ALCO") as part of our risk management process. ALCO is responsible for managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving our financial objectives. ALCO meets regularly to review funding capacity, current and forecasted loan demand, investment opportunities, and liquidity positions as outlined in our asset liability policy. With this information, ALCO guides changes in the balance sheet structure to provide for adequate ongoing liquidity. Several factors provide for a favorable liquidity position. The first is the ability to acquire and retain funds in the local markets we serve. This in-market funding provides an historically stable source of funding and represented approximately 86% of total liabilities during 2000. Our available-for-sale securities portfolio is a secondary source of liquidity because of its readily marketable nature and predictable stream of maturities. Approximately 22.0% of the securities portfolio matures in 2001. While we prefer to fund the balance sheet with in-market funding sources, another source of liquidity is our ready access to regional and national wholesale funding markets, including federal funds purchased, Federal Home Loan Bank advances, and brokered deposits. As of December 31, 2000, we also had available $45.0 million of borrowing capacity under a $60.0 million unsecured credit facility. As of December 31, 2000, $15.0 million was advanced and outstanding under this facility. This credit facility is used primarily to provide funding availability for non-bank activities. We intend to use approximately $30 million under this facility to finance capital increases in connection with the Branch Acquisition. The Branch Acquisition, which includes approximately $750 million of deposits but only about $300 million of loans, is expected, when consummated, to significantly enhance our liquidity position. 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 ALCO. ALCO establishes appropriate risk management policies and monitors asset liability activities to minimize our exposure to adverse interest rate trends. The tools used to measure interest rate risk include a valuation model which measures the sensitivity of balance sheet valuations to changes in interest rates, gap analysis, and simulation of future net income. 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 to be 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. 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 3.4% with a 200 28 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 11.9%. This is within our maximum risk limit of 20.0% for this risk measure. The matching of assets and liabilities may be analyzed by examining to the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific time period if it matures or reprices within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets anticipated, based on certain assumptions, to mature or reprice within a specific time period and the amount of interest bearing liabilities anticipated, based on certain assumptions, to mature or reprice within that same time period. An interest rate sensitivity gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities that mature or reprice within a specified time period. An interest rate gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets that mature or reprice within a specified time period. The following table sets forth at December 31, 2000 the amounts of interest earning assets and interest bearing liabilities maturing or repricing within the time periods indicated, based on the information and assumptions set forth in the notes thereto:
AMOUNT REPRICING OR MATURING ------------------------------------------------------------------------- WITHIN 3 - 12 1 - 5 OVER 5 3 MONTHS MONTHS YEARS YEARS TOTAL ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) INTEREST EARNING ASSETS (1) Loans and leases ................................ $ 1,002,645 $ 506,229 $ 1,216,527 $ 194,070 $ 2,919,471 Securities ...................................... 304,653 114,425 260,297 272,252 951,627 Other earning assets ............................ 11,828 -- -- -- 11,828 ----------- ----------- ----------- ----------- ----------- Total interest earning assets ................ $ 1,319,126 $ 620,654 $ 1,476,824 $ 466,322 $ 3,882,926 =========== =========== =========== =========== =========== INTEREST BEARING LIABILITIES Interest bearing deposits (2) ................... $ 963,460 $ 781,851 $ 904,633 $ 313 $ 2,650,257 Short-term borrowings ........................... 407,474 28,116 5,410 -- 441,000 Long-term debt (3) .............................. 56 15,598 181,094 35,912 232,660 ----------- ----------- ----------- ----------- ----------- Total interest bearing liabilities ........... $ 1,370,990 $ 825,565 $ 1,091,137 $ 36,225 $ 3,323,917 ----------- ----------- ----------- ----------- ----------- Rate sensitive gap .................................. $ (51,864) $ (204,911) $ 385,687 $ 430,097 $ 559,009 =========== =========== =========== =========== =========== Cumulative rate sensitive gap ....................... $ (51,864) $ (256,775) $ 128,912 $ 559,009 =========== =========== =========== =========== Rate sensitive gap % to total assets ................ (1.2)% (4.9)% 9.2% 10.2% 13.3% Cumulative rate sensitive gap % to total assets ..... (1.2) (6.1) 3.1 13.3
--------------------------- (1) Adjustable and floating rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Fixed rate assets are included in the periods in which they are scheduled to be repaid based on scheduled amortization, except for mortgage backed securities which are adjusted for prepayment assumptions. (2) Includes non-maturity savings and NOW accounts positioned to run off evenly over sixty months and money market savings accounts, most of which are positioned to reprice within three months. (3) Adjustable and floating rate borrowings are included in the period in which their interest rates are next scheduled to adjust rather than in the period in which they are due. The repricing gaps are well within our risk tolerances, which limit the maximum 90-day and one-year gaps to 15.0% of total assets. We also use simulation modeling of future net interest income and net income as a risk management tool. Simulation modeling results indicate that net income would not change by more than 2.5% over the next year with a 300 basis point change in the level of rates. The projected change in net income is well within the current policy limit that requires that the change in net income over the next 12 months not exceed 10.0%. OTHER MARKET RISK. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of our business activities. 29 IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The assets and liabilities of a financial institution are primarily monetary in nature. As a result, interest rates have more impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. The liquidity and the maturity structure of our assets and liabilities are important to the maintenance of acceptable performance levels. We disclose the estimated fair values of our financial instruments in accordance with FASB Statement No. 107. IMPACT OF NEW ACCOUNTING STANDARDS ACCOUNTING FOR DERIVATIVES. On January 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133", as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other contracts, be recognized as either assets or liabilities and that those financial instruments be measured at fair value. Management has reviewed the requirements of SFAS No. 133 and has determined that we have a minimal amount of derivatives and that there is no material impact to the financial statements due to the adoption of SFAS No. 133. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125. The Statement revises the standards for accounting for the securitization and other transfers of financial assets and collateral, and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occuring after March 31, 2001. Management believes that adopting SFAS No. 140 will not have a material impact on the Company's financial position or results of operations. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (IN THOUSANDS EXCEPT SHARE DATA)
2000 1999 ------------ ------------ ASSETS Cash and due from banks .............................................. $ 200,547 $ 145,407 Interest bearing deposits ............................................ 5,731 4,886 Investment securities available-for-sale (amortized cost of $206,684 and $188,683, respectively) .............................. 208,630 187,857 Mortgage-backed securities available-for-sale (amortized cost of $574,236 and $688,649, respectively) .............................. 574,884 671,985 ------------ ------------ TOTAL SECURITIES AVAILABLE-FOR-SALE ............................... 783,514 859,842 Investment securities held-to-maturity (fair value of $171,263 and $170,788, respectively) .............................. 168,113 171,720 Mortgage-backed securities held-to-maturity (fair value of $0 and $6,769, respectively) ...................................... -- 6,810 ------------ ------------ TOTAL SECURITIES HELD-TO-MATURITY ................................. 168,113 178,530 Loans and leases ..................................................... 2,919,471 2,550,156 Reserve for credit losses ......................................... (45,895) (41,895) Unearned discount ................................................. (3,870) (7,259) ------------ ------------ NET LOANS AND LEASES .............................................. 2,869,706 2,501,002 Interest receivable .................................................. 40,822 34,148 Premises and equipment, net .......................................... 57,742 59,821 Other assets ......................................................... 66,421 67,849 ------------ ------------ TOTAL ASSETS ...................................................... $ 4,192,596 $ 3,851,485 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Noninterest bearing deposits ......................................... $ 456,571 $ 406,478 Interest bearing deposits ............................................ 2,650,257 2,444,214 ------------ ------------ TOTAL DEPOSITS .................................................... 3,106,828 2,850,692 Federal funds purchased and repurchase agreements .................... 328,315 300,737 Other short-term borrowings .......................................... 112,685 125,948 Long-term debt ....................................................... 232,660 215,832 Accrued expenses and other liabilities ............................... 57,919 44,486 ------------ ------------ TOTAL LIABILITIES ................................................. 3,838,407 3,537,695 Minority interests ................................................... 150 914 Redeemable class A common stock, 960,000 shares issued and outstanding ............................................ 28,324 25,029 Shareholders' 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 ................................................. 321,665 294,892 Accumulated other comprehensive income (loss) ..................... 1,431 (9,664) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY ........................................ 325,715 287,847 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $ 4,192,596 $ 3,851,485 ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 31 BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 ---------- ---------- ---------- INTEREST INCOME Loans and leases, including fees ............................ $ 249,178 $ 201,022 $ 186,963 Securities Taxable ................................................... 53,040 51,661 46,698 Tax-exempt ................................................ 11,082 10,577 11,036 Federal funds sold .......................................... 612 575 701 Other ....................................................... 259 132 127 ---------- ---------- ---------- Total interest income ................................. 314,171 263,967 245,525 INTEREST EXPENSE Deposits .................................................... 123,798 96,428 97,660 Federal funds purchased and repurchase agreements ........... 16,392 11,175 9,836 Other short-term borrowings ................................. 8,884 8,246 9,652 Long-term debt .............................................. 14,108 9,065 4,276 ---------- ---------- ---------- Total interest expense ................................ 163,182 124,914 121,424 ---------- ---------- ---------- Net interest income ....................................... 150,989 139,053 124,101 Provision for credit losses ................................. 8,338 8,321 5,570 ---------- ---------- ---------- Net interest income after provision for credit losses ..... 142,651 130,732 118,531 NONINTEREST INCOME Service charges ............................................. 22,284 19,434 17,037 Insurance ................................................... 10,045 9,703 7,804 Trust ....................................................... 9,139 7,984 6,990 Brokerage ................................................... 5,481 4,533 3,752 Gain on sale of loans ....................................... 2,758 3,380 4,977 Gain on sale of securities .................................. 270 1,853 1,296 State tax refund ............................................ -- -- 4,476 Other ....................................................... 4,240 5,578 4,938 ---------- ---------- ---------- Total noninterest income .............................. 54,217 52,465 51,270 NONINTEREST EXPENSE Salaries and wages .......................................... 58,331 54,164 49,287 Employee benefits ........................................... 14,018 14,901 12,572 Occupancy ................................................... 7,651 6,921 6,128 Furniture and equipment ..................................... 9,432 9,170 7,621 Data processing fees ........................................ 7,244 7,465 6,046 FDIC premiums and examination fees .......................... 1,652 1,297 1,157 Amortization of goodwill and other intangibles .............. 3,713 2,831 1,711 Other ....................................................... 24,589 25,195 22,491 ---------- ---------- ---------- Total noninterest expense ............................. 126,630 121,944 107,013 ---------- ---------- ---------- INCOME BEFORE INCOME TAX EXPENSE ................................ 70,238 61,253 62,788 Income tax expense .......................................... 24,457 21,142 21,277 ---------- ---------- ---------- NET INCOME ...................................................... $ 45,781 $ 40,111 $ 41,511 ========== ========== ========== Per common share amounts: Net income-basic and diluted .............................. $ 3.82 $ 3.34 $ 3.46 Dividends paid ............................................ $ 1.39 1.32 1.32
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 32 BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED COMMON STOCK OTHER ---------------- COMPREHENSIVE COMPREHENSIVE RETAINED CLASS A CLASS B INCOME(LOSS) INCOME EARNINGS TOTAL ------- ------- ------------ ------ -------- ----- BALANCE, DECEMBER 31, 1997 $ 57 $ 2,562 $ 4,977 $ 248,945 $ 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 tax and reclassification adjustment (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 3,927 272,562 279,108 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 tax and reclassification adjustment (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 (9,664) 294,892 287,847 Comprehensive income Net income 45,781 45,781 45,781 Other comprehensive income Change in net unrealized gain (loss) on securities available-for-sale, net of tax and reclassification adjustment 12,060 12,060 12,060 ----------- Comprehensive income $ 57,841 =========== Dividends, $1.39 per share (16,680) (16,680) 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 (965) (2,328) (3,293) ------- -------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2000 $ 57 $ 2,562 $ 1,431 $ 321,665 $ 325,715 ======= ======== =========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 33 BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
2000 1999 1998 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ........................................................... $ 45,781 $ 40,111 $ 41,511 Adjustments to reconcile net income to net cash provided by operating activities Provision for credit losses ........................................ 8,338 8,321 5,570 Depreciation and amortization ...................................... 11,521 11,001 9,081 Deferred income taxes .............................................. 3,825 5,091 2,283 Minority interests in earnings of subsidiaries ..................... 21 41 747 Gain on sale of securities ......................................... (270) (1,853) (1,296) Gain on sale of other real estate owned, net ....................... (72) (405) (242) Other assets and liabilities, net .................................. 9,683 6,005 1,656 Proceeds from loans originated for sale ............................ 135,936 185,448 289,472 Loans originated for sale .......................................... (133,404) (186,259) (290,493) ---------- ---------- ---------- Net cash provided by operating activities ....................... 81,359 67,501 58,289 CASH FLOWS FROM INVESTING ACTIVITIES Interest bearing deposits, net ....................................... (845) (3,174) 174 Purchases of securities available for sale ........................... (54,247) (394,091) (359,454) Purchases of securities held to maturity ............................. (12,180) (41,168) (34,381) Proceeds from maturities of securities available for sale ............ 105,386 215,050 221,601 Proceeds from maturities of securities held to maturity .............. 22,621 62,793 99,379 Proceeds from sales of securities available for sale ................. 45,520 92,302 67,179 Proceeds from sales of other real estate owned ....................... 1,092 919 862 Loans and leases, net ................................................ (379,574) (372,897) (210,289) Acquisition of minority interests .................................... (458) -- (12,149) Acquisitions, net of cash acquired ................................... (18,416) (47,789) -- Purchase of premises and equipment ................................... (5,717) (12,979) (9,264) ---------- ---------- ---------- Net cash used in investing activities .............................. (296,818) (501,034) (236,342) CASH FLOWS FROM FINANCING ACTIVITIES Noninterest bearing deposits, net .................................... 50,093 37,263 24,694 Interest bearing deposits (excluding certificates of deposit), net.... 132,980 171,488 125,907 Certificates of deposits, net ........................................ 73,063 71,291 (22,449) Federal funds purchased and repurchase agreements, net ............... 27,578 79,318 54,245 Other short-term borrowings, net ..................................... (13,263) (5,846) (66,296) Proceeds from issuance of long-term debt ............................. 33,099 142,432 97,298 Repayments of long-term debt ......................................... (16,271) (42,886) (11,250) Dividends paid to minority interests ................................. -- (32) (326) Redeemable preferred stock ........................................... -- (2,079) (65) Dividends paid ....................................................... (16,680) (15,840) (15,840) ---------- ---------- ---------- Net cash provided by financing activities .......................... 270,599 435,109 185,918 ---------- ---------- ---------- Net increase in cash and due from banks ............................ 55,140 1,576 7,865 Cash and due from banks Beginning of year ................................................... 145,407 143,831 135,966 ---------- ---------- ---------- End of year ......................................................... $ 200,547 $ 145,407 $ 143,831 ========== ========== ========== Supplemental disclosures of cash flow information Cash paid during the year for interest ............................... $ 153,534 $ 125,658 $ 121,198 Cash paid during the year for income taxes ........................... 17,274 17,534 19,079
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 34 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 the sole shareholder of 11 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 other 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, 2000, 1999, and 1998, the Company received real estate valued at $3,154,000, $725,000, and $776,000, 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 the resultant allocation to redeemable class A common stock reflected as a separate component of shareholders' equity until realized. Gains or losses on these securities are computed based on the amortized cost of the specific securities when 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. Loans held for sale in the secondary market are recorded at lower of aggregate cost or market. 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 Accounting Standards ("SFAS") Nos. 114 and 118. Impaired loans as defined by SFAS 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. The reserve also incorporates the results of measuring impaired loans and leases as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". These accounting standards prescribe the measurement methods, income recognition, and disclosures related to impaired loans and leases. A loan is considered impaired when management determines that it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan or lease agreement. Impairment is measured by the difference between the recorded investment in the loan or lease (including accrued interest, net deferred loan fees or costs, and unamortized premium or discount) and the estimated present value of total expected 35 future cash flows, discounted at the loan's effective rate, or the fair value of the collateral, if the loan is collateral dependent. Impairment is recognized by adjusting an allocation of the existing reserve for credit losses. 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 of the assets which range from three to forty years. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of premises and equipment are reflected in income. 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, 2000 and 1999 were approximately $49,373,000 and $43,606,000, 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. 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 SFAS 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 available-for-sale securities. NEW ACCOUNTING PRONOUNCEMENTS - On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives, including those embedded in other contracts, be recognized as either assets or liabilities and that those financial instruments be measured at fair value. Management has reviewed the requirements of SFAS No. 133 and has determined that the Company has a minimal amount of derivatives and that there is no material impact to the financial statements due to the adoption of SFAS No. 133. In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125. The Statement revises the standards for accounting for the securitization and other transfers of financial assets and collateral, and requires certain disclosures, but carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occuring after March 31, 2001. Management believes that adopting SFAS No. 140 will not have a material impact on the Company's financial position or results of operations. ESTIMATES - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 shareholders' equity. 36 NOTE B: RESTRICTIONS ON CASH AND DUE FROM BANKS The Subsidiary Banks are required to maintain average reserve balances in the form of vault cash or balances maintained either directly with a Reserve Bank or in a pass-through account, in accordance with the Federal Reserve Bank requirements. The amount of those cash reserve balances was approximately $31,170,000 and $28,363,000 as of December 31, 2000 and 1999, respectively. NOTE C: INVESTMENT AND MORTGAGE-BACKED SECURITIES At December 31, 2000 and 1999, investment and mortgage-backed securities with an amortized cost of $661,455,000 and $818,305,000, 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, 2000, 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 ......................... $ 35,552 $ 35,956 $ 171,988 $ 172,600 1 - 5 years ........................... 90,013 91,957 311,670 312,852 5 - 10 years .......................... 41,964 42,765 149,641 150,289 After 10 years ........................ 584 585 91,676 91,037 Equity securities ..................... -- -- 55,945 56,736 ---------- ---------- ---------- ---------- Total investment securities ....... $ 168,113 $ 171,263 $ 780,920 $ 783,514 ========== ========== ========== ==========
The amortized cost and fair value of investment and mortgage-backed securities available-for-sale as of December 31 consisted of the following:
2000 1999 --------------------------------------------- --------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- (IN THOUSANDS) U.S. Treasury securities ............ $ 1,915 $ 1 $ 3 $ 1,913 $ 9,679 $ 20 $ 25 $ 9,674 Obligations of U.S. government agencies ............... 110,543 672 40 111,175 100,500 384 282 100,602 Obligations of state and political subdivisions ........ 23,047 562 4 23,605 27,264 108 593 26,779 Mortgage-backed securities ........................ 574,236 3,339 2,691 574,884 688,649 1,320 17,983 671,986 Equity securities ................... 55,945 905 114 56,736 48,190 8 295 47,903 Other ............................... 15,234 -- 33 15,201 3,050 19 171 2,898 ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- Total securities available- for-sale ...................... $ 780,920 $ 5,479 $ 2,885 $ 783,514 $ 877,332 $ 1,859 $ 19,349 $ 859,842 ========== ========== ========== ========= ========== ========== ========== =========
Proceeds from sales of investments and mortgage-backed securities were $45,520,000, $83,444,000, and $67,179,000 for 2000, 1999, and 1998, respectively. Gross gains of $429,630, $1,866,000, and $1,563,000 and gross losses of $164,000, $21,000, and $267,000 were realized on those sales for 2000, 1999, and 1998, respectively. 37 A summary of amortized cost and fair value of investment and mortgage-backed securities held-to-maturity at December 31 consisted of the following:
2000 1999 --------------------------------------------- --------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- (IN THOUSANDS) U.S. Treasury securities ............ $ 5,491 $ 22 $ 56 $ 5,457 $ 10,486 $ -- $ 313 $ 10,173 Obligations of state and political subdivisions ........ 162,622 3,354 170 165,806 161,234 1,421 2,040 160,615 Mortgage-backed securities ........................ -- -- -- -- 6,810 -- 41 6,769 ---------- ---------- ---------- --------- ---------- ---------- ---------- --------- Total securities held- to-maturity .................. $ 168,113 $ 3,376 $ 266 $ 171,263 $ 178,530 $ 1,421 $ 2,394 $ 177,557 ========== ========== ========== ========= ========== ========== ========== =========
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. A decline in the local economies in these areas could negatively impact the quality of these loans. Loans and leases at December 31 consisted of the following:
2000 1999 ------------ ------------ (IN THOUSANDS) Commercial and other ............................. $ 717,936 $ 596,680 Commercial real estate ........................... 733,746 648,029 Construction ................................ 68,296 70,869 Agricultural ..................................... 416,660 433,357 Residential real estate .......................... 578,876 450,812 Construction ................................ 18,051 15,274 Consumer ......................................... 302,824 275,320 Tax-exempt ....................................... 83,082 59,815 ------------ ------------ Total loans and leases ................... $ 2,919,471 $ 2,550,156 ============ ============
Impaired loans and leases were $13,991,000 and $16,656,000 at December 31, 2000 and 1999, 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 $2,724,000 and $2,692,000 relating to impaired loans and leases at December 31, 2000 and 1999, respectively. 38 The effect of nonaccrual and restructured loans and leases on interest income for each of the three years ended December 31 was as follows:
2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS) Average investment in impaired loans ............. $ 14,896 $ 15,004 $ 10,831 ========== ========== ========== Interest income as originally contracted ......... 1,626 2,254 1,708 ========== ========== ========== Interest income as recognized .................... (778) (770) (324) ========== ========== ==========
Other nonperforming assets, consisting of other real estate owned, amounted to $3,658,000 and $527,000 at December 31, 2000 and 1999, respectively. Loans totaling $935,270,000 and $283,140,000 had been pledged to secure Federal Home Loan Bank ("FHLB") as such advances at December 31, 2000 and 1999, 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 $38,630,000 and $17,605,000 at December 31, 2000 and 1999, respectively. During 2000, $100,166,000 of new loans were made, repayments totaled $86,200,000, and changes in the composition of the Group or their associations increased loans outstanding by $7,059,000. 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:
2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS) Beginning of year ................................ $ 41,895 $ 37,019 $ 34,253 Charge-offs ................................ (5,903) (7,064) (3,968) Recoveries ................................. 1,271 1,439 1,164 ---------- ---------- ---------- Net charge-offs ....................... (4,632) (5,625) (2,804) Provision for credit losses ................ 8,338 8,321 5,570 Reserve related to acquired assets ......... 294 2,180 -- ---------- ---------- ---------- End of year ...................................... $ 45,895 $ 41,895 $ 37,019 ========== ========== ==========
39 NOTE F: PREMISES AND EQUIPMENT Premises and equipment at December 31 consisted of the following:
2000 1999 ---------- ---------- (IN THOUSANDS) Land ..................................................... $ 7,969 $ 7,787 Buildings and improvements ............................... 66,240 65,583 Furniture and equipment .................................. 51,871 48,372 ---------- ---------- Total premises and equipment .................. 126,080 121,742 Less: accumulated depreciation and amortization .......... 68,338 61,921 ---------- ---------- Premises and equipment, net .............................. $ 57,742 $ 59,821 ========== ==========
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 agreement. The size of the credit facility available at December 31, 2000, is $60 million, of which $45 million was unused. The facility contains covenants which require the Company to maintain certain levels of capitalization. Information related to short-term borrowings for the three 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 2000 .................................... $ 328,315 $ 95,000 $ 2,685 $ 15,000 1999 .................................... 300,737 107,000 2,948 16,000 1998 .................................... 221,419 89,500 9,294 33,000 Weighted average interest rate at December 31 2000 .................................... 6.49% 6.55% 6.25% 7.16% 1999 .................................... 5.41 5.67 5.25 6.74 1998 .................................... 4.96 5.22 4.62 6.52 Maximum amount outstanding at any month end 2000 .................................... $ 328,536 $ 165,419 $ 3,899 $ 40,000 1999 .................................... 300,737 156,755 12,461 99,000 1998 .................................... 288,312 178,658 15,167 35,000 Average amount outstanding during the year 2000 .................................... $ 286,813 $ 105,428 $ 2,412 $ 27,855 1999 .................................... 246,666 84,556 3,553 55,875 1998 .................................... 196,731 139,520 8,587 22,742 Weighted average interest cost during the year 2000 .................................... 5.72% 6.28% 6.18% 7.58% 1999 .................................... 4.53 5.47 4.65 6.23 1998 .................................... 5.00 5.55 4.76 6.55
40 NOTE H: LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) at December 31 consisted of the following:
AT DECEMBER 31, 2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS) Senior notes ................................... $ 65,000 $ 65,000 $ -- Federal Home Loan Bank borrowings .............. 164,908 147,587 111,318 Installment promissory notes ................... 2,752 3,245 4,968 ---------- ---------- ---------- Total ....................................... $ 232,660 $ 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 4.99% to 7.83%, with maturity dates from 2001 through 2013, and are secured by certain loans. The installment promissory notes bear interest at rates ranging from 7.59% to 7.83%, paid predominantly in annual installments through 2007. Maturities of long-term debt outstanding at December 31, 2000, were as follows:
(IN THOUSANDS) 2001 ..................................................... $ 1,654 2002 ..................................................... 18,768 2003 ..................................................... 18,684 2004 ..................................................... 70,700 2005 ..................................................... 15,942 Beyond 2005 .............................................. 106,912 -------- Total ................................................. $232,660 ========
At December 31, 2000, $71 million of the FHLB borrowings due in years beyond 2005 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. 41 NOTE I: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Most of the Company's assets and liabilities are considered financial instruments as defined in SFAS 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, 2000 and 1999. 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, 2000 and, therefore, current estimates of fair value may differ from the amounts presented. As of December 31, carrying amounts and estimated fair values were:
2000 1999 ------------------------ ------------------------ ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) FINANCIAL ASSETS: Cash and due from banks ........................ $ 200,547 $ 200,547 $ 145,407 $ 145,407 Interest bearing deposits ...................... 5,731 5,731 4,886 4,886 Investment securities held-to-maturity ......... 168,113 171,263 178,530 177,557 Investment securities available-for-sale ....... 783,514 783,514 859,842 859,842 Loans and leases ............................... 2,869,706 2,890,338 2,501,002 2,481,897 FINANCIAL LIABILITIES: Demand deposits ................................ $1,591,164 $1,591,164 $1,426,005 $1,426,005 Time deposits .................................. 1,515,664 1,532,697 1,424,687 1,418,486 Short-term borrowings .......................... 441,000 441,334 426,685 426,698 Long-term debt ................................. 232,660 236,410 215,832 208,365
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 loan and lease portfolio consists of both variable and fixed rate obligations. The carrying amounts of variable rate loans, a majority of which reprice within the next three months, and for which there has been no significant change in credit risk, are assumed to approximate fair value. The fair values for fixed rate loans and leases are estimated using discounted cash flow analysis. The discount rates applied are based on the current interest rates for loans with similar terms to borrowers of similar credit quality. DEPOSITS - The estimated fair value of deposits with no stated maturity, such as non-interest 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 approximates 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. 42 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. 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 monthly average of the 60 consecutive months' compensation out of the last 120 months that gives the highest average. 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 SFAS No. 106 as amended by SFAS No. 132, "Employers' Accounting for Postretirement Benefits Other than Pensions," the Company accrues the cost of these benefits during the employees' active service. 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 SFAS No. 106 are funded on a pay-as-you-go-basis. The cost of these programs are as follows:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS -------------------------------- -------------------------------- 2000 1999 1998 2000 1999 1998 -------- -------- -------- -------- -------- -------- (IN THOUSANDS) NET PENSION COST Service cost .................................. $ 1,757 $ 1,674 $ 1,408 $ 151 $ 152 $ 157 Interest cost ................................. 2,271 2,178 1,937 167 146 171 Expected return on plan assets ................ (3,704) (2,629) (2,439) -- -- -- Net (gain) recognition ........................ (197) -- -- (78) (72) (47) Prior service cost amortization ............... 173 173 130 (6) (6) (6) Loss due to special termination benefits ...... -- 352 -- -- -- -- -------- -------- -------- -------- -------- -------- Net pension cost ........................... $ 300 $ 1,748 $ 1,036 $ 234 $ 220 $ 275 ======== ======== ======== ======== ======== ========
43 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.
OTHER POST- PENSION BENEFITS RETIREMENT BENEFITS ------------------------- ------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at end of prior year ....................... $ 29,712 $ 30,134 $ 2,063 $ 2,072 Service cost .................................................. 1,757 1,674 151 152 Interest cost ................................................. 2,271 2,179 167 146 Amendments .................................................... -- 817 -- -- Actuarial (gain)/loss ......................................... 199 (4,172) 638 (113) Benefits paid ................................................. (1,127) (920) (194) (194) ---------- ---------- ---------- ---------- Benefit obligation at end of year ............................. $ 32,812 $ 29,712 $ 2,825 $ 2,063 ========== ========== ========== ========== CHANGE IN PLAN ASSETS Fair value of plan assets at September 30, prior year ........ $ 34,800 $ 28,173 $ -- $ -- Actual return on plan assets .................................. 4,209 5,400 -- -- Employer contribution ......................................... 2,337 2,147 194 194 Benefits paid ................................................. (1,127) (920) (194) (194) ---------- ---------- ---------- ---------- Fair value of plan assets at September 30, current year ....... $ 40,219 $ 34,800 $ -- $ -- ========== ========== ========== ========== FUNDED STATUS OF PLANS Funded status of plans ........................................ $ 7,407 $ 5,088 $ (2,825) $ (2,063) Unrecognized net (gain)/loss .................................. (6,014) (5,905) (662) (1,341) Unrecognized prior service costs .............................. 587 760 (79) (122) Contributions between September 30 and December 31 ............ 1,049 3,500 -- -- ---------- ---------- ---------- ---------- Prepaid benefit asset/(accrued benefit liability) ......... $ 3,029 $ 3,443 $ (3,566) $ (3,526) ========== ========== ========== ==========
44 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 PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------------------ ------------------------------ WEIGHTED AVERAGE ASSUMPTIONS 2000 1999 1998 2000 1999 1998 -------- -------- -------- -------- -------- -------- Discount rate ............................ 7.75% 7.75% 6.75% 7.75% 7.75% 6.75% Expected return on plan assets ........... 10.00% 10.00% 9.00% N/A N/A N/A Rate of compensation increase ............ 4.25% 4.25% 4.25% N/A N/A N/A
For purposes of the 2000 postretirement benefits measurements, the Company has assumed a health-care cost trend rate of 7.375%. 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 2000 service and interest cost on the accumulated postretirement benefit obligation at December 31, 2000:
ONE (1) PERCENTAGE POINT ------------------------ INCREASE DECREASE ---------- ---------- (IN THOUSANDS) Effect on service and interest cost components of net periodic cost ...... $ 44 $ (38) Effect on accumulated postretirement benefit obligation .................. 322 (279)
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. Total contribution expense for 2000, 1999, and 1998 was approximately $3,291,000, $2,795,000 and $2,465,000, respectively. 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 was $100,000 for both 2000 and 1999 and was $250,000 in 1998. NOTE K: OTHER NONINTEREST INCOME Other noninterest income at December 31 consisted of the following:
2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Fees on loans .......................... $ 3,024 $ 2,841 $ 2,944 Other .................................. 1,216 2,737 1,994 -------- -------- -------- Total ............................. $ 4,240 $ 5,578 $ 4,938 ======== ======== ========
45 NOTE L: OTHER NONINTEREST EXPENSE Other noninterest expense at December 31 consisted of the following:
2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Printing, postage and office supplies ........... $ 5,850 $ 5,916 $ 5,487 Marketing ....................................... 4,862 4,760 4,756 Other real estate owned ......................... 106 104 91 Other ........................................... 13,771 14,415 12,157 -------- -------- -------- Total ...................................... $ 24,589 $ 25,195 $ 22,491 ======== ======== ========
NOTE M: INCOME TAXES The components of the provision for income taxes at December 31 were as follows:
2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Current Federal ..................................... $ 16,538 $ 12,305 $ 14,713 State ....................................... 4,094 3,746 4,281 Deferred ........................................ 3,825 5,091 2,283 -------- -------- -------- Total ................................. $ 24,457 $ 21,142 $ 21,277 ======== ======== ========
A reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate at December 31 was as follows:
2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS) Tax at statutory rate ......................................... $ 24,583 $ 21,440 $ 21,976 Plus state income tax, net of federal tax benefits ............ 3,110 3,153 3,083 ---------- ---------- ---------- 27,693 24,593 25,059 Less tax effect of: Interest on state and political subdivision securities .... 2,890 2,939 2,972 Other tax-exempt interest ................................. 1,714 1,259 1,483 Goodwill Amortization ..................................... (1,176) (753) (330) Minority interest in earnings ............................. (7) (14) (262) Other ..................................................... (185) 20 (81) ---------- ---------- ---------- 3,236 3,451 3,782 ---------- ---------- ---------- Income tax expense ............................................ $ 24,457 $ 21,142 $ 21,277 ========== ========== ==========
46 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:
2000 1999 ---------- ---------- (IN THOUSANDS) Deferred tax assets Provision for credit losses .............................. $ 18,160 $ 16,490 Employee compensation and benefits accruals .............. 771 1,293 Deferred income .......................................... 950 960 Unrealized loss on securities available for sale ......... -- 6,994 Other .................................................... 9 40 ---------- ---------- Total ................................................ $ 19,890 $ 25,777 ========== ========== Deferred tax liabilities Deferred expense ......................................... $ 1,567 $ 1,577 Depreciation ............................................. 17,355 12,017 Unrealized gain on securities available for sale ......... 1,046 -- Other .................................................... 556 39 ---------- ---------- Total ................................................ 20,524 13,633 ---------- ---------- Net deferred tax (liabilities) assets .......................... $ (634) $ 12,144 ========== ==========
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:
2000 1999 ---------- ---------- (IN THOUSANDS) Standby letters of credit .......................... $ 26,567 $ 25,939 Loan commitments ................................... 586,873 589,860
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. 47 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 to third party providers 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. 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, 2000 and 1999, 960,000 shares of redeemable class A stock were issued and outstanding. At December 31, 2000, these shares were subject to redemption at a price of $29.50 per share, which approximated book value. 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. 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 and its subsidiaries and not be directly purchased by the Company or the Otto Bremer Foundation. 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 Bank's equity if made to all affiliates and the Company in the aggregate. At December 31, 2000, 1999 and 1998, no Subsidiary Banks had extended credit to the Company. 48 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, 2000, $24,205,000 of retained earnings of the Subsidiary Banks was available for distribution to the Company as dividends subject to these limitations. Approximately $15,679,000 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 and the regulatory framework for prompt corrective action, 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. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000, that the Company meets all capital adequacy requirements to which it is subject. 49 The Company's and Subsidiary Banks' actual capital amounts and ratios as of December 31 are also presented below:
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS --------------------- --------------------- ---------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------- ------- ---------- ------- ---------- ------- (DOLLARS IN THOUSANDS) As of December 31, 2000: Total capital (to risk weighted assets) Consolidated .................... $ 341,979 11.28% $ 242,502 > 8.00% N/A - Subsidiary Banks ................ $ 330,283 11.41% $ 231,516 > 8.00% $ 289,395 > 10.00% - - Tier I capital (to risk weighted assets) Consolidated .................... $ 303,988 10.03% $ 121,251 > 4.00% N/A - Subsidiary Banks ................ $ 293,700 10.15% $ 115,758 > 4.00% $ 173,637 > 6.00% - - Tier I capital (to average assets) Consolidated .................... $ 303,988 7.51% $ 161,851 > 4.00% N/A - Subsidiary Banks ................ $ 293,700 7.29% $ 161,225 > 4.00% $ 201,531 > 5.00% - - As of December 31, 1999: Total capital (to risk weighted assets) Consolidated .................... $ 315,100 11.67% $ 216,029 > 8.00% N/A - Subsidiary Banks ................ $ 313,166 12.10% $ 207,056 > 8.00% $ 258,820 > 10.00% - - Tier I capital (to risk weighted assets) Consolidated .................... $ 281,244 10.42% $ 108,015 > 4.00% N/A - Subsidiary Banks ................ $ 280,717 10.85% $ 103,528 > 4.00% $ 155,292 > 6.00% - - Tier I capital (to average assets) Consolidated .................... $ 281,244 7.48% $ 150,379 > 4.00% N/A - Subsidiary Banks ................ $ 280,717 7.47% $ 150,354 > 4.00% $ 187,943 > 5.00% - -
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, 2000. 50 NOTE Q: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS: BALANCE SHEETS
DECEMBER 31 ------------------------ 2000 1999 ---------- ---------- (IN THOUSANDS) ASSETS Cash and cash equivalents ........................... $ 221 $ 49 Investment securities available for sale ............ 3,987 -- Investment in and advances to: Bank subsidiaries ................................ 342,477 320,468 Non-bank subsidiaries ............................ 89,086 74,923 Other assets ........................................ 3,960 4,576 ---------- ---------- Total assets .................................. $ 439,731 $ 400,016 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings ............................... $ 15,000 $ 16,000 Long-term debt ...................................... 67,752 68,176 Accrued expenses and other liabilities .............. 2,940 2,964 Redeemable class A common stock ..................... 28,324 25,029 Shareholders' equity ................................ 325,715 287,847 ---------- ---------- Total liabilities and shareholders' equity .... $ 439,731 $ 400,016 ========== ==========
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) INCOME Dividends from: Bank subsidiaries .................................... $ 46,475 $ 29,049 $ 31,873 Non-bank subsidiaries ................................ 1,300 1,230 600 Interest from subsidiaries .............................. 5,107 4,288 3,060 Interest income on taxable securities ................... 222 -- -- Other income ............................................ -- 354 353 -------- -------- -------- Total income ......................................... 53,104 34,921 35,886 EXPENSES Interest expense: Short-term borrowings ................................ 2,112 3,479 1,489 Long-term debt ....................................... 5,736 1,149 305 Salaries and benefits ................................... 792 1,505 685 Operating expense paid to subsidiaries .................. 998 1,008 1,083 Other operating expenses ................................ 1,239 1,184 538 -------- -------- -------- Total expenses ....................................... 10,877 8,325 4,100 -------- -------- -------- Income before income tax benefit ..................... 42,227 26,596 31,786 Income tax benefit ...................................... 2,432 1,341 208 -------- -------- -------- Income of parent company only ........................ 44,659 27,937 31,994 Equity in undistributed earnings of subsidiaries ........ 1,122 12,174 9,517 -------- -------- -------- NET INCOME .................................................. $ 45,781 $ 40,111 $ 41,511 ======== ======== ========
51 NOTE Q: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS (CONTINUED): STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ---------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income ..................................................... $ 45,781 $ 40,111 $ 41,511 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed (earnings) of subsidiaries ....... (1,122) (12,174) (9,517) Depreciation and amortization ............................ 662 858 490 Other, net ............................................... 232 (1,357) (303) ---------- ---------- ---------- Net cash provided by operating activities ............. 45,553 27,438 32,181 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in and advances to subsidiaries, net ................ (23,290) (59,226) (42,887) Purchases of securities, net ................................... (4,626) -- -- Proceeds from sales of securities .............................. 639 -- -- ---------- ---------- ---------- Net cash used by investing activities ................. (27,277) (59,226) (42,887) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net ..................................... (1,000) (17,000) 27,000 Proceeds of long-term debt ..................................... -- 65,000 -- Repayments of long-term debt ................................... (424) (423) (424) Dividends paid ................................................. (16,680) (15,840) (15,840) ---------- ---------- ---------- Net cash (used) provided by financing activities ...... (18,104) 31,737 10,736 ---------- ---------- ---------- Increase (decrease) in cash and cash equivalents ................... 172 (51) 30 Cash and cash equivalents Beginning of year .............................................. 49 100 70 ---------- ---------- ---------- End of year .................................................... $ 221 $ 49 $ 100 ========== ========== ==========
NOTE R: SUBSEQUENT EVENTS On January 30, 2001, the Company entered into a definitive agreement to purchase eleven branch locations and a related commercial banking group from Firstar Corporation, Milwaukee, Wisconsin ("Firstar"), including deposits of approximately $750 million and loans of approximately $300 million. Structured as a purchase of assets and assumption of liabilities, the purchase of the Minneapolis and St. Paul, Minnesota branches came as a result of Firstar's divestiture requirement related to its recently announced merger with U.S. Bancorp, Minneapolis, Minnesota. Subject to the necessary regulatory approvals, the transaction is expected to close in May 2001. In conjunction with this transaction, and in order to maintain its well-capitalized position, the Company issued $16.5 million in trust preferred capital securities on February 22, 2001, and expects to issue an additional $55 million of similar securities during the second quarter of 2001. 52 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Bremer Financial Corporation Saint Paul, Minnesota 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, 2000 and 1999 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial statements present fairly, in all material respects, the financial position of Bremer Financial Corporation and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche Minneapolis, Minnesota January 25, 2001 (February 22, 2001 as to Note R) 53 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, 2000. PART III Items 10 through 13 of the Form 10-K are omitted because the Company will file before April 30, 2001 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 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, 2000 and December 31, 1999 Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholder's Equity - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 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 2000 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation.* 10.2 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for Community Banking Director.* 10.3 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for Financial Services Director.* 10.4 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for Chief Financial Officer, Chief Credit Officer, Chief Information Officer, and Retail Director.* 10.5 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for Human Resources Director, Marketing Director, Assistant Community Banking Director, and Risk Management Director.* 10.6 Bremer Financial Corporation Note Purchase Agreement dated November 1, 1999 - Series A Senior Notes, Tranche 1 and Series A Senior Notes, Tranche 2.* 10.7 Bremer Financial Corporation Credit Agreement dated October 21, 1997, as amended - unsecured revolving credit facility.* 10.8 Purchase and Assumption Agreement dated as of January 30, 2001.* 21 Subsidiaries of the Company.* 99.4 Risk Factors* * Incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 21 and 99.4, respectively to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 54 The following exhibits are incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, and 10.6, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1999: 10.9 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation. 10.10 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation. 10.11 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Community Banking Director. 10.12 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Financial Services Director. 10.13 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for Chief Credit Officer, Chief Financial Officer, and Chief Information Officer. 10.14 Bremer Financial Corporation 1999 Executive Annual Incentive Compensation Plan for other Senior Management Positions. 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: 10.15 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. 10.16 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Group Presidents. 10.17 Bremer Financial Corporation 1998 Executive Annual Incentive Compensation Plan for Chairman of the Board of Bremer Financial Corporation. 10.18 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 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. 55 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. 10.19 Bremer Financial Corporation Employee Stock Ownership Plan and Trust Agreement. 10.20 Bremer Banks Profit Sharing Plus Plan, as amended and restated effective January 1, 1986, and Amendment No. 1 thereto. 10.21 Bremer Banks Profit Sharing Plus Trust Agreement dated October 1, 1986 and Amendment No. 1 thereto. 10.22 Bremer Banks Retirement Plan as effective April 1, 1985. 10.23 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 2000, which ended December 31, 2000. A copy of this Form 10-K and exhibits herein can be obtained by writing Robert B. Buck, Executive Vice President and Chief Financial Officer, Bremer Financial Corporation, 445 Minnesota Street, Suite 2000, St. Paul, MN 55101. 56 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. April 10, 2001. 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 April 10, 2001 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 EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) /s/Stuart F. Bradt ------------------------------------------------- Stuart F. Bradt CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) 57 INDEX TO EXHIBITS Description of Exhibits Page 10.1 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for President and CEO of Bremer Financial Corporation. 10.2 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for Community Banking Director. 10.3 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for Financial Services Director. 10.4 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for Chief Financial Officer, Chief Credit Officer, Chief Information Officer, and Retail Director. 10.5 Bremer Financial Corporation 2000 Executive Annual Incentive Compensation Plan for Human Resources Director, Marketing Director, Assistant Community Banking Director, and Risk Management Director. 10.6 Bremer Financial Corporation Note Purchase Agreement dated November 1, 1999 -- Series A Senior Notes, Tranche 1 and Series A Senior Notes, Tranche 2. 10.7 Bremer Financial Corporation Credit Agreement dated October 21, 1997, as amended -- unsecured revolving credit facility. 10.8 Purchase and Assumption Agreement dated as of January 30, 2001. 21 Subsidiaries of the Company.