-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Otay11/p32+Kc26pwTWRd5E5y822PHnjf6kTjSxGcDniqtRtAdGlQN/4cHAygFiv //q+tE+GiaSaf3fjtvLCHQ== 0000897101-96-000125.txt : 19960401 0000897101-96-000125.hdr.sgml : 19960401 ACCESSION NUMBER: 0000897101-96-000125 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BREMER FINANCIAL CORPORATION CENTRAL INDEX KEY: 0000846616 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 410715583 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18342 FILM NUMBER: 96540815 BUSINESS ADDRESS: STREET 1: 445 MINNESOTA ST STE 2000 CITY: SAINT PAUL STATE: MN ZIP: 55418 BUSINESS PHONE: 6122277621 MAIL ADDRESS: STREET 1: 445 MINNESOTA STREET STREET 2: SUITE 2000 CITY: ST PAUL STATE: MN ZIP: 55418 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 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, Suite 2000, St. Paul, MN 55101 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (612) 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 $19.83 per share book value of the shares of class A common stock of the Company as of December 31, 1995, the aggregate value of the Company's shares of class A common stock held by employees and directors as of such date was approximately $19 million. As of March 29, 1996, 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, 1995 INDEX Page Documents Incorporated by Reference 3 Cross Reference Sheet 4 PART I Item 1. Business 5 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37 PART III Item 10 through Item 13. See "Documents Incorporated by Reference" (Page 3) 37 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37 Signatures Index to Exhibits 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 Documents Incorporated on Form 10-K by Reference
Part II Item 5. Market for Registrant's Reference is made to the portions Common Equity and Related described herein of the final Stockholder 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 Reference is made to the Registrant's Executive Officers definitive proxy statement of the Registrant. ("Proxy Statement"), which will be filed with the Securities and Exchange Commission ("Commission") within 120 days after December 31, 1995. Item 11. Executive Compensation. Reference is made to the Registrant's Proxy Statement. Item 12. Security Ownership of Reference is made to the Certain Beneficial Registrant's Proxy Statement. Owners and Management. Item 13. Certain Relationships Reference is made to the and Related Transactions. Registrant's Proxy Statement.
(The remainder of this page was intentionally left blank.) CROSS REFERENCE SHEET Between Items in Part III of Form 10-K and Proxy Statement Pursuant to Paragraph G-4 of General Instructions to Form 10-K Subject Headings Item Number and Caption In Proxy Statement
Item 10. Directors and Executive Officers of the Registrant. Election of Directors Item 11. Executive Compensation. Election of Directors Item 12. Security Ownership of Certain Beneficial Owners and Management. Principal Shareholders Item 13. Certain Relationships and Related Transactions. Election of Directors
(The remainder of this page was intentionally left blank.) PART I. ITEM 1. BUSINESS. General Bremer Financial Corporation (the "Company") is a regional multi-state bank holding company headquartered in St. Paul, Minnesota, and incorporated under Minnesota law on December 7, 1943. As of March 29, 1996, the Company owned at least 95.8% of the total outstanding capital stock of its 14 subsidiary banks (collectively, "Subsidiary Banks"). As a bank holding company, the Company is subject to the federal Bank Holding Company Act of 1956, as amended ("Holding Company Act"), and to regulation and supervision by the Federal Reserve System (including the Board of Governors of the Federal Reserve System). The Subsidiary Banks are located in Minnesota, Wisconsin and North Dakota and have a total of 74 offices throughout these states. The Subsidiary Banks draw most of their deposits from and make substantially all of their loans within the states of Minnesota, Wisconsin and North Dakota and have no foreign loans. At December 31, 1995, the Company and its subsidiaries (including the Subsidiary Banks) had consolidated assets of approximately $2.8 billion and consolidated deposits of approximately $2.2 billion. The Subsidiary Banks ranged in size from $60.7 million to $339.5 million in total assets and from $51.8 million to $277.6 million in total deposits as of December 31, 1995. See the portion of this Form 10-K, Item 1. entitled "Business Developments in 1995." The Company also owns several financial service subsidiaries. It owns all of the outstanding capital stock of First American Trust Company of Minnesota ("First American Trust"), which provides trust and other fiduciary services to most of the Minnesota Subsidiary Banks' communities; Bremer Financial Services, Inc. ("Bremer Financial"), which provides management and support services to the Company and its subsidiaries; the two First American Insurance Agencies, Inc. (the "Insurance Agencies"), which provide insurance agency services to the Subsidiary Banks' communities; Bremer Investment Services, Inc. ("Bremer Investment"), which provides brokerage and investment advisory services to the Subsidiary Banks; Premium Finance Corporation ("Premium Finance"), which provides commercial insurance premium financing services in Wisconsin; and First American Services, Inc. ("First American Services"), which provides operations and support services to the Subsidiary Banks. The Company also owns a controlling portion of the capital stock of Bremer First American Life Insurance Company, which is engaged in the underwriting and reinsurance of credit life and health insurance sold in conjunction with the extension of credit by the Subsidiary Banks. The operations of the Insurance Agencies, First American Trust, Bremer First American Life Insurance, Bremer Financial, Bremer Investment, Premium Finance, and First American Services, taken as a whole, are not material to and do not have a significant impact upon the financial condition or operations of the Company. The Otto Bremer Foundation (the "Foundation") owns 20% of the outstanding shares of the Company's class A common stock and 100% of the outstanding shares of its class B common stock, for a total of 92% of the outstanding shares of the Company's capital stock, consisting only of the class A and class B common stock. Accordingly, the Foundation is, and is subject to regulation as, a bank holding company within the meaning of the Holding Company Act. Competition The banking business is highly competitive. As the financial service industry expands, the scope of potential competition for the Subsidiary Banks also expands. The Subsidiary Banks compete with other commercial banks, savings and loan associations, and credit unions for loans and deposits and with money market funds for deposits. Consumer and commercial finance companies, department stores, mortgage banks and insurance companies are also important competitors for various types of loans. Some of these entities and institutions are not subject to the same regulatory restrictions as the Company and the Subsidiary Banks. In addition, competition has intensified as local institutions become part of larger national associations as a result of amendments to interstate banking laws. Management believes that each Subsidiary Bank will be able to continue to compete successfully in its community. Management further believes that the Company's emphasis on local autonomy and the ability of the Subsidiary Banks to make decisions close to the marketplace, the Subsidiary Banks' community commitment and involvement, and the commitment to a strong sales culture and to providing quality banking services, are factors that should allow the Subsidiary Banks to continue to maintain and improve their competitive position. Trademarks The Company has registered its stylized "Bremer Eagle" symbol with the United States Patent and Trademark Office. This trademark is used by all of the Company's affiliates, including the Subsidiary Banks. The Company has also registered a stylized version of the word "Transaction" with the United States Patent and Trademark Office for use in connection with the Subsidiary Banks' automatic teller machine cards. The Company has registered no other trademarks, patents or copyrights. While management believes that a trademark or service mark is useful in identifying and advertising a common identity among the Subsidiary Banks and the Company or a service offered by the Subsidiary Banks, it also believes that the "Bremer Eagle" symbol, the "Transaction" service mark, or any other trademark, patent or copyright or the registration thereof is not material to the business of the Company or its subsidiaries. Business Developments in 1995 On December 20, 1994, the Company entered into a definitive agreement to acquire Morris State Bancorporation, Inc. ("MSBI") of Morris, Minnesota. MSBI was a single-bank holding company which owned approximately 94% of Morris State Bank. Morris State Bank had approximately $55 million of assets and 25 employees. Effective May 1, 1995, the Company closed its acquisition of all of the outstanding capital stock of MSBI. The agreement to acquire such stock was reported in the Company's Quarterly Reports on Form 10-Q for the quarters ended June 30, 1994, September 30, 1994 and March 31, 1995 and the Annual Report on Form 10-K for the year ended December 31, 1994. On January 31, 1995, First American Bank of Alexandria ("Alexandria Bank") signed an agreement to purchase the Starbuck, Minnesota branch (the "Branch") of First Bank, fsb (formerly Metropolitan Federal Bank, fsb). Effective June 26, 1995, Alexandria Bank closed this acquisition, adding assets of approximately $18 million. The agreement to acquire the Branch was reported in the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995 and June 30, 1995. On February 1, 1995, First American Insurance Agencies, Inc. of St. Paul, Minnesota (a wholly-owned subsidiary of the Company) finalized its purchase of Morris State Agency, Inc. of Morris, Minnesota. Morris State Agency, with annual premiums of approximately $4 million, was affiliated with Morris State Bank, although the ownership of the two entities was distinctly separate. On January 1, 1996, First American Insurance Agencies, Inc. of St. Paul, Minnesota (a wholly-owned subsidiary of the Company) acquired the United Insurance Agency in Minot, North Dakota. The United Insurance Agency has annual premiums of $7 million. Employees As of March 29, 1996, the Company and its subsidiaries (including the Subsidiary Banks) had a total of 1,260 full-time equivalent positions. The Company and each of its subsidiaries considers its relations with employees to be good. None of the Company's employees is a member of a collective bargaining unit. ITEM 2. PROPERTIES. The Company leases its principal offices at 445 Minnesota Street, Suite 2000, St. Paul, Minnesota 55101, which consist of approximately 20,000 square feet of space. Management believes that these facilities will be sufficient for the Company's needs in the foreseeable future, but, if this is not the case, that other space would be readily available in downtown St. Paul. Each of the Subsidiary Banks owns its main office and its branches, if any; the facilities are all well maintained and range in size from 404 square feet to 52,280 square feet. Certain properties of the Subsidiary Banks are subject to pledges or mortgages. However, the amount of long-term debt secured by mortgages on the Subsidiary Banks' properties is not material. See Notes F and H to the Notes to Consolidated Financial Statements of the Company set forth in Item 8 of Part II of this Form 10-K. ITEM 3. LEGAL PROCEEDINGS. The Company and certain of its Subsidiary Banks are involved in legal actions in various stages of litigation and investigation. After reviewing all actions, pending or threatened, involving the Company and such Subsidiary Banks, management believes that such legal actions, whether pending or threatened, constitute ordinary routine litigation incidental to the business of the Company and the Subsidiary Banks and that the ultimate resolution of these matters should not materially affect the Company's consolidated financial position or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted during the fourth quarter of the year ended December 31, 1995 to a vote of the Company's security holders, through the solicitation of proxies or otherwise. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information There is no established trading market for the shares of the Company's class A common stock. To the best of the Company's knowledge, during the period from May 18, 1989 (the closing date of the registered initial public offering of the Company's class A common stock) through and including March 29, 1996, a majority of the purchases and sales of shares of the class A common stock have consisted of transfers effected upon the exercise of the options described in the portions of the Company's Prospectus dated April 20, 1989 ("Prospectus") entitled "Description of Capital Stock - Description of Class A Common Stock - Restrictions on Transfer" on page 62 of the Prospectus and "Description of Capital Stock - Description of Class A Common Stock First Call Option to Company" on page 64 of the Prospectus (which portions are hereby incorporated by reference pursuant to Rule 12b-23 under the Securities Exchange Act of 1934). The Company is not obligated to purchase any shares of class A common stock from a holder upon the exercise of a put option if the purchase price paid for the shares subject to the put option, when added to the purchase price paid for all previous purchases of class A common stock during the preceding twelve-month period, would exceed 10% of the Company's net worth as of the date of such purchase. As of December 31, 1995, the Company's net worth was $218.9 million and 10% of the Company's net worth was $21.9 million. During the period from January 1, 1995 and through and including March 29, 1996, the Company did not directly purchase any shares of class A common stock but assigned to its Employee Stock Ownership Plan ("ESOP") and the Bremer Banks Profit Sharing Plus Plan ("Profit Sharing Plan") its options to purchase a total of 157,698.2419 shares. The ESOP and the Profit Sharing Plan purchased these shares and then transferred them to employees of the Company and its subsidiaries through the ESOP and the Profit Sharing Plan. In addition, 1,578.0 shares of class A common stock were transferred directly between individuals at various times throughout the year. To the best of the Company's knowledge, these were the only transfers of shares of class A common stock effected during the period from January 1, 1995 through and including March 29, 1996. The sales price of the shares of class A common stock in such transactions ranged from $16.99 to $23.75 per share. These prices were equal to either the per share book value of the class A common stock as shown in the Company's consolidated balance sheet dated as of the last day of the immediately preceding fiscal quarter or, and only with respect to shares transferred that had been held for employees in the ESOP, the per share fair market values of $22.00, $21.25, and $23.75 as of June 30, 1994, December 31, 1994, and June 30, 1995, respectively, as determined by an independent appraiser. At December 31, 1995, the most recent date for which a per share book value for the class A common stock is available, such value was $19.83. To the best of the Company's knowledge, no brokers are used to sell the shares of class A common stock, and there are no market makers for the class A common stock. Holders As of March 29, 1996, there were approximately 1,033 holders of record of the shares of class A common stock. Dividends The Subsidiary Banks' ability to pay dividends to the Company and the Company's ability to pay dividends to holders of the class A common stock are restricted and limited. (The restrictions on payments of dividends also are described in Note O of the Company's Notes to Consolidated Financial Statements set forth in Item 8 of this Form 10-K.) Each of the Subsidiary Banks is subject to extensive regulation regarding the payment of dividends and other matters. The state Subsidiary Banks incorporated under Minnesota law are subject to regulation by the Minnesota Department of Commerce, the state Subsidiary Bank incorporated under Wisconsin law is subject to regulation by the Wisconsin Commissioner of Banking, and the North Dakota Subsidiary Banks are subject to regulation by the North Dakota Department of Banking and Financial Institutions. In addition, because the deposits of the Company's state Subsidiary Banks are insured up to the applicable limit (currently $100,000) by the Federal Deposit Insurance Corporation ("FDIC"), all of the state Subsidiary Banks are subject to regulation by the FDIC. The national Subsidiary Banks are regulated by the Office of the Comptroller of the Currency ("Comptroller"). The Company and the Foundation, as bank holding companies, as well as the one state Subsidiary Bank that is a member of the Federal Reserve System, are regulated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). Dividends from Subsidiary Banks A substantial portion of the Company's cash flow and income is derived from dividends paid to it by the Subsidiary Banks, and restrictions on the payment of such dividends could affect the payment of dividends by the Company. A Minnesota bank may declare and pay dividends only out of accumulated net earnings, if it complies with certain capital requirements, and if it obtains the prior approval of the Minnesota Commissioner of Commerce. A Wisconsin bank may declare and pay dividends out of net earnings for the year in which the dividend is to be declared and paid. However, if such dividend exceeds such earnings and if the bank has paid dividends in excess of net earnings in either of the two previous years, then prior approval of the Wisconsin Commissioner of Banking is required to pay dividends in excess of net earnings for the current year. A North Dakota bank may declare and pay dividends out of cumulative adjusted net profits for the last three years, and the prior approval of the North Dakota Department of Banking and Financial Institutions is required for dividends paid that exceed that statutory limit. With regard to national 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 or state banking agency could take the position that it has the power to prohibit a national or state bank from paying dividends if, in its view, such payments would constitute unsafe or unsound banking practices. The payment of dividends by any state or national bank also is affected by the requirements to maintain adequate capital pursuant to the capital adequacy guidelines issued by the FDIC and the Comptroller. The FDIC and the Comptroller each has issued capital adequacy regulations for state banks subject to the FDIC's primary supervision and for national banks subject to the Comptroller's primary supervision. These regulations provide for a minimum tier 1 capital to total assets (leverage) ratio of 3.00% for the most highly-rated banks and a minimum total capital to risk-weighted assets (total capital) ratio of 8.00%. These guidelines and regulations further provide that capital adequacy is to be considered on a case-by-case basis in view of various qualitative factors that affect a bank's overall financial condition. Most banking organizations are expected to maintain a leverage ratio of 100 to 200 basis points above this minimum depending on their financial condition. The Subsidiary Banks are in compliance with the FDIC's and the Comptroller's minimum capital guidelines. See the discussion of the capital adequacy guidelines set forth in the portion of Item 7. Management's Discussion and Analysis "Capital Management," in Part II of this Form 10-K. The above regulations and restrictions on dividends paid by the Subsidiary Banks may limit the Company's ability to obtain funds from such dividends for its cash needs, including funds for payment of operating expenses and for the payment of dividends on the class A and class B common stock, as well as funds necessary to facilitate acquisitions. However, because of the capital positions of the Subsidiary Banks, the Company has been able to obtain dividends sufficient to meet its cash flow needs. As of December 31, 1995, the Subsidiary Banks had retained earnings of $33.2 million which were available for distribution to the Company as dividends in 1996 subject to regulatory and administrative restrictions. Of this amount, approximately $12.5 million was available for distribution without obtaining the prior approval of the appropriate bank regulator. In 1994 and 1995, the Subsidiary Banks paid total dividends to the Company of $26.5 million and $26.5 million, respectively. Thirteen of the fourteen banks that were Subsidiary Banks in 1994 and 1995 paid dividends in both years. Of the Subsidiary Banks that paid dividends in 1994 and/or 1995, the range of dividend payouts (dividends paid divided by net income) was 62.7% to 228.0% in 1994 and 47.0% to 336.1% in 1995. Under the ESOP, and at the option of the ESOP's Administrator, cash dividends declared on the shares of class A common stock held by the ESOP will be allocated to the ESOP participants. To the extent that cash dividends declared on the class A common stock held by the ESOP are distributed to the participants (whether directly or indirectly), the dividends will be deductible to the Company. Any dividends paid in the form of class A common stock with respect to shares allocated to the individual participants' accounts will be allocated to such accounts, and dividends paid in the form of class A common stock with respect to shares held in the suspense account are added to the suspense account. Under the Profit Sharing Plan, all cash dividends paid on the class A common stock are allocated to the accounts of the participants holding shares of the class A common stock in their profit sharing accounts. All such proceeds are available to the participants for investment under the Profit Sharing Plan in accordance with the terms and conditions of the Profit Sharing Plan. All dividends paid in the form of class A common stock will be allocated to the account of the participant in which the shares are held. In no event will dividends paid on the class A common stock held by the participants' accounts within the Profit Sharing Plan be forfeited or otherwise allocated and held by the trustees of the Profit Sharing Plan. Dividends from Company The payment of dividends by the Company, as a bank holding company, is limited by, among other things, the requirement to maintain adequate capital pursuant to the capital adequacy guidelines issued by the Federal Reserve Board. These guidelines are substantially similar to those promulgated by the FDIC and the Comptroller with respect to state and national banks, which are discussed above. The payment of dividends by a bank holding company also is subject to the general limitation that the Federal Reserve Board could take the position that it has the power to prohibit the bank holding company from paying dividends if, in its view, such payments would constitute an unsafe or unsound practice. The Company declared and paid dividends to the Foundation and all other holders of its class A common stock of $9.36 million in 1994 and $9.60 million in 1995. In 1994, $2.16 million of dividends were paid in the first quarter and $2.4 million of dividends were paid in each of the second, third and fourth quarters. In 1995, $2.4 million were paid in each of the four quarters. The dividend yield, which consists of dividends paid during the year divided by shareholder's equity as of the last day of the preceding year, was 4.6% and 4.7% for the years ended December 31, 1994 and 1995, respectively. ITEM 6. SELECTED FINANCIAL DATA.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS 1995 Change 1994 1993 1992 1991 ---- ------ ---- ---- ---- ---- OPERATING RESULTS (in thousands) Total interest income .................... $ 199,781 23.1% $ 162,267 149,192 163,309 184,935 Net interest income ...................... 100,645 7.0 94,083 87,094 87,427 82,537 Net interest income (1) .................. 107,898 7.2 100,698 93,665 92,564 88,267 Provision for loan losses ................ 1,780 N/M (1,300) (1,000) 6,844 11,194 Noninterest income ....................... 27,892 4.2 26,768 30,816 26,637 22,723 Noninterest expense ...................... 87,296 1.9 85,636 79,762 74,421 68,766 Net income ............................... 27,136 5.2 25,797 26,885 22,647 18,589 Dividends ................................ 9,600 2.6 9,360 7,200 6,000 5,760 AVERAGE BALANCES (in thousands) Total assets ............................. 2,647,758 12.4 2,356,426 2,137,952 2,040,707 2,015,321 Loans .................................... 1,545,231 16.2 1,330,269 1,173,332 1,166,926 1,257,960 Securities ............................... 942,521 5.5 893,266 843,394 753,132 635,243 Deposits ................................. 2,113,070 11.0 1,903,284 1,776,395 1,718,844 1,669,461 Redeemable class A common stock .......... 17,672 8.1 16,347 15,191 13,738 12,559 Shareholder's equity ..................... 203,222 8.1 187,986 174,702 157,989 144,430 PERIOD-END BALANCES (in thousands) Total assets ............................. 2,812,232 10.8 2,537,712 2,279,853 2,120,965 2,052,292 Loans .................................... 1,626,616 12.7 1,443,128 1,238,717 1,143,695 1,217,032 Securities ............................... 984,768 8.5 907,211 875,454 826,318 688,914 Deposits ................................. 2,242,307 10.8 2,024,464 1,894,453 1,776,954 1,724,802 Redeemable class A common stock .......... 19,035 16.7 16,308 16,386 14,404 13,072 Shareholder's equity ..................... 218,906 16.7 187,538 188,434 165,646 150,331 FINANCIAL RATIOS Return on average total assets (2) ....... 1.07% (7.0) 1.15% 1.32 1.17 0.97 Return on average realized equity (3)(4) . 12.06 (2.8) 12.41 14.16 13.19 11.84 Average equity to average total assets (3) 8.34 (3.8) 8.67 8.88 8.42 7.79 Tangible equity to total assets .......... 8.40 5.0 8.03 9.14 8.98 8.47 Dividend payout .......................... 35.38 (2.5) 36.28 26.78 26.49 30.99 Net interest margin (1) .................. 4.33 (4.2) 4.52 4.64 4.79 4.63 Net charge-offs to average total loans ... 0.08 N/M 0.02 0.03 0.46 0.56 Reserve for loan losses to total loans ... 1.74 (7.0) 1.87 2.23 2.39 2.13 PER SHARE OF COMMON STOCK (3) Income before accounting changes ......... $ 2.26 -- $ 2.15 2.24 1.93 1.55 Income after accounting changes .......... 2.26 5.2 2.15 2.24 1.89 1.55 Dividends paid ........................... 0.80 2.6 0.78 0.60 0.50 0.48 Book value ............................... 19.83 16.7 16.99 17.07 15.00 13.62 Realized book value (4) .................. 19.47 8.1 18.01 16.65 15.00 13.62
(1) Tax-equivalent basis (TEB). (2) Calculation is based on income before minority interests. (3) Calculation is based on 12,000,000 shares, including redeemable class A common stock. (4) Excluding net unrealized gain (loss) on securities available for sale. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HIGHLIGHTS Earnings Bremer Financial Corporation (the "Company") reported net income of $27.1 million for the year ended December 31, 1995, a $1.3 million or 5.2% increase from the $25.8 million earned in 1994. Earnings per share were $2.26 in 1995 compared to $2.15 in 1994. Return on realized equity was 12.06% in 1995, as compared to the 12.41% return in 1994. Return on average assets was 1.07% in 1995, versus 1.15% in 1994. To facilitate comparisons, net interest income and net interest margin in the accompanying discussion and tables have been adjusted to show tax-exempt income, such as interest on municipal securities and loans, on a tax-equivalent basis. Table I presents a comparative summary of operating data for 1991 through 1995. Table II presents the major components affecting the changes in return on assets for 1995. TABLE I Summary Income Statement (Tax-Equivalent Basis) (dollars in thousands, except per share amounts)
1995 Change 1994 1993 1992 1991 ---- ------ ---- ---- ---- ---- Interest income ..................... $207,034 22.6% $ 168,882 155,763 168,446 190,665 Interest expense .................... 99,136 45.4 68,184 62,098 75,882 102,398 -------- --------- ------- ------- ------- Net interest income ............ 107,898 7.2 100,698 93,665 92,564 88,267 Provision for loan losses ........... 1,780 236.9 (1,300) (1,000) 6,844 11,194 -------- --------- ------- ------- ------- Net funds function ............. 106,118 4.0 101,998 94,665 85,720 77,073 Noninterest income .................. 27,892 4.2 26,768 30,816 26,637 22,723 -------- --------- ------- ------- ------- Adjusted gross income .......... 134,010 4.1 128,766 125,481 112,357 99,796 Noninterest expense ................. 87,296 1.9 85,636 79,762 74,421 68,766 -------- --------- ------- ------- ------- Income before taxes and accounting changes ............. 46,714 8.3 43,130 45,719 37,936 31,030 Income taxes ........................ 19,578 13.0 17,333 18,834 14,821 12,441 -------- --------- ------- ------- ------- Income before accounting changes 27,136 5.2 25,797 26,885 23,115 18,589 Accounting changes .................. -- -- -- -- (468) -- -------- --------- ------- ------- ------- Net income ..................... $ 27,136 5.2% $ 25,797 26,885 22,647 18,589 ======== ========= ====== ====== ====== Earnings per share .................. $ 2.26 5.2% $ 2.15 2.24 1.89 1.55 Dividends paid per share ............ $ 0.80 2.6% $ 0.78 0.60 0.50 0.48
TABLE II CHANGES IN RETURN ON ASSETS 1995 VS 1994 ------------ Return on assets, prior year ............... 1.15% Increases Service charges ..................... 0.01 Insurance ........................... 0.01 Gain on sale of securities .......... 0.02 Salaries and wages .................. 0.14 Employee benefits ................... 0.07 Marketing ........................... 0.01 Data processing fees ................ 0.02 FDIC premiums and examination fees .. 0.09 Other non-interest expense .......... 0.02 ---- Total increases .................. 0.39 ---- Decreases Net interest income (TEB) ........... 0.20 Provision for loan loss ............. 0.12 Trust fees .......................... 0.01 Brokerage ........................... 0.03 Gain on sale of loans ............... 0.02 Gain on sale of other assets ........ 0.04 Other non-interest income ........... 0.02 Furniture and equipment ............. 0.01 Printing, postage and office supplies 0.01 Other real estate owned ............. 0.01 ---- Total decreases .................. 0.47 ---- Return on assets, current year ............. 1.07% ==== Equity of Shareholders Shareholder's equity and redeemable class A common stock totaled $237.9 million at December 31, 1995. Book value per share increased from $16.99 at December 31, 1994 to $19.83 at December 31, 1995, while dividends paid per share increased from $.78 to $.80. The 1995 dividends paid of $9.6 million represented 4.7% of the equity of shareholders at December 31, 1994 and 35.4% of 1995 net income. Realized book value per share, which excludes the impact of Financial Accounting Standards No. 115 (FAS 115), increased from $18.01 at December 31, 1994 to $19.47 at December 31, 1995. Income Statement Analysis Net Interest Income The most significant component of the Company's earnings is net interest income, which is the difference between interest earned on assets and interest paid on liabilities. Net interest margin measures the effectiveness of generating net interest income on earning assets and is calculated by dividing net interest income by earning assets. The following table sets forth certain information regarding changes in net interest income (tax-equivalent basis), by volume and rate, of the Company for the periods indicated. TABLE III CHANGES IN NET INTEREST INCOME (TEB)
1995 vs 1994 1994 vs 1993 ---------------------------- --------------------------- (in thousands) Volume Yield/Rate* Total Volume Yield/Rate* Total - -------------- ------ ----------- ----- ------ ----------------- Increase (decrease) in: Interest income Loans ................... $13,641 14,895 28,536 10,471 1,750 12,221 Taxable securities ...... 4,643 3,272 7,915 3,988 (3,988) -- Tax-exempt securities ... 1,757 (105) 1,652 1,421 (556) 865 Interest bearing deposits -- -- -- -- -- -- Federal funds sold ...... 4 (41) (37) 4 (11) (7) Other earning assets .... 13 73 86 7 33 40 ------- ------- ------- ------ ------ ------- Total ............... 20,058 18,094 38,152 15,891 (2,772) 13,119 ------- ------- ------- ------ ------ ------- Interest expense Savings deposits ........ 1,876 502 2,378 1,392 (1,298) 94 Other time deposits ..... 5,712 17,595 23,307 4,119 (2,562) 1,557 Short-term borrowings ... 1,105 2,957 4,062 435 3,642 4,077 Long-term debt .......... 49 1,156 1,205 2 356 358 ------- ------- ------- ------ ------ ------- Total ............... 8,742 22,210 30,952 5,948 138 6,086 ------- ------- ------- ------ ------ ------- Net interest income .......... $11,316 (4,116) 7,200 9,943 (2,910) 7,033 ======= ======= ======= ====== ====== =======
* All changes in net interest income, other than those due to volume, have been allocated to yield/rate. Tax-equivalent net interest income for 1995 was $107.9 million, an increase of $7.2 million or 7.2% from 1994. The increase in net interest income resulted primarily from a $264 million increase in average earning assets. Approximately 34.3% of that growth was due to assets acquired in the September 1994 purchase of Dunn County Bankshares, Inc. of Menomonie, Wisconsin, the May 1995 purchase of Morris State Bancorporation, Inc. of Morris, Minnesota, and the June 1995 purchase of the Starbuck, Minnesota branch of First Bank, fsb, (formerly Metropolitan Federal Bank, fsb). Offsetting the increase in earning assets was a decrease in the net interest margin, which declined 19 basis points from 4.52% in 1994 to 4.33% in 1995. The decrease in net interest margin was primarily due to a reduced spread in rates during 1995, as costs on interest bearing liabilities increased faster than yields on earning assets. The interest bearing liabilities costs and net interest margin were impacted significantly by increased rates paid on savings certificates and the increased use of other borrowings to fund a portion of the earning asset growth experienced in 1995. Contributing positively to net interest margin, but not enough to offset the increased cost on interest bearing liabilities and a less favorable mix in interest bearing liabilities, were favorable improvements in earning asset yields driven by a 65 basis point improvement in the loan yields coupled with a 70 basis point improvement in the investment portfolio yield and a more favorable mix of assets. Provision for Loan Losses The provision for loan losses reflects the cost associated with the risks inherent in the loan portfolio, taking into consideration an evaluation of economic conditions, changes in the composition and size of the loan portfolio, net charge-offs, and the level of nonperforming and other problem loans. From December 31, 1994 to December 31, 1995, nonperforming loans decreased $917 thousand to $10.2 million. However, after ten consecutive quarters of improvement, the quality of the portfolio, as measured by the ratio of classified loans to total loans, reflected modest deterioration during each quarter of 1995, despite strong loan growth. The modest deterioration in credit quality occurred primarily in the commercial (non-real estate), agricultural, and residential real estate segments of the loan portfolio. Several large commercial credits continued to experience pressure on their margins, while farmers in certain geographical locations experienced another adverse growing season this past year. The reserve to outstanding loan ratio decreased from 1.87% in 1994 to 1.74% in 1995 while the reserve to nonperforming loan coverage increased from 241.3% to 275.7% from 1994 to 1995. The reserve for loan losses remains strong as compared to the Company's peer group. A complete discussion of asset quality and credit management can be found in the "Corporate Risk Profile" section of Item 7 in this Form 10-K. Noninterest Income Noninterest income was $27.9 million in 1995 compared to $26.8 million in 1994, representing a $1.1 million or 4.2% increase. Contributing to this increase in noninterest income were the strong growth in service charges of $1.4 million or 14.8% and an increase in insurance commissions of $787 thousand, due in large part to the acquisition of Morris State Agency in February 1995. Also contributing to the increase in noninterest income was a $574 thousand difference between the $270 thousand of securities losses in 1994 and the $304 thousand of security gains in 1995. The losses in 1994 resulted primarily from the sale of several corporate securities as the Company repositioned its investment portfolio to improve future returns. Gains on loans sold in the secondary market continued to decline as the volume of real estate mortgage financing decreased due to slowly rising interest rates. Decreasing $839 thousand from 1994 were gains on the sale of other assets, primarily other real estate owned (OREO). Table IV presents the components of noninterest income. TABLE IV NONINTEREST INCOME
(in thousands) 1995 Change 1994 1993 1992 1991 - --------------------------------- ------- ------- -------- ------ ------ ------ Service charges ................. $11,047 14.8% $ 9,627 8,823 8,455 8,233 Insurance ....................... 5,503 16.7 4,716 4,671 4,576 4,528 Trust ........................... 4,784 6.3 4,502 4,462 4,087 3,936 Brokerage ....................... 1,243 (33.4) 1,865 1,950 1,361 928 Gain on sale of loans ........... 1,302 (21.0) 1,649 3,949 2,891 1,588 Gain on sale of other assets .... 709 (54.2) 1,548 2,118 941 863 Other ........................... 3,000 (4.2) 3,131 3,058 3,176 2,635 ------- -------- ------ ------ ------ Operating noninterest income 27,588 2.0 27,038 29,031 25,487 22,711 Gain on sale of subsidiary ...... -- -- -- -- 500 -- Gain (loss) on sale of securities 304 212.6 (270) 1,785 650 12 ------- -------- ------ ------ ------ Total ...................... $27,892 4.2% $ 26,768 30,816 26,637 22,723 ======= ======== ====== ====== ======
Noninterest Expense Noninterest expense increased $1.7 million or 1.9% from 1994 to 1995. The following table summarizes the components of noninterest expense from 1991 to 1995. TABLE V NONINTEREST EXPENSE
(in thousands) 1995 Change 1994 1993 1992 1991 - ------------------------------------- ------- ------- ------ ------ ------ ------ Salaries and wages .................. $37,325 2.1% $ 36,556 33,633 31,297 29,662 Employee benefits ................... 10,878 (3.3) 11,254 10,340 8,994 8,589 Occupancy ........................... 5,433 11.5 4,871 4,614 4,370 4,511 Furniture and equipment ............. 5,020 16.2 4,320 3,994 4,028 5,271 Printing, postage and office supplies 4,599 17.4 3,918 3,723 3,557 3,720 Marketing ........................... 3,041 2.9 2,954 2,440 1,707 1,684 Data processing fees ................ 7,334 4.3 7,031 6,595 5,399 1,767 Other real estate owned ............. 84 233.3 (63) 791 1,948 1,787 Minority interest in earnings ....... 1,277 0.5 1,271 1,408 1,166 960 FDIC premiums and examination fees .. 2,901 (38.5) 4,719 4,449 4,190 3,864 Other ............................... 9,404 6.8 8,805 7,775 7,765 6,951 ------- -------- ------ ------ ------ Total .......................... $87,296 1.9% $ 85,636 79,762 74,421 68,766 ======= ======== ====== ====== ======
Personnel costs, which accounted for 55.2% of noninterest expense, experienced a slight increase of $393 thousand or .8%, as salaries and wages increased 2.1% while the cost of employee benefits decreased 3.3%. Affecting 1994 personnel costs were $1.8 million of one-time costs associated with the consolidation of the Company's operations. Affecting 1995 personnel costs were $1.8 million in salaries and benefits relating to acquisitions; therefore, excluding the 1994 one-time costs and the net increase associated with acquisitions, personnel costs would have increased $715 thousand or 1.6% over 1994. The acquisitions completed in the second half of 1994 and the first half of 1995 also had an impact on the comparison of non-personnel expenditures. Excluding the $2.5 million in non-personnel expenditures attributed to these acquired entities, non-personnel expenses collectively declined $681 thousand or 1.8% from 1994 to 1995. Contributing significantly to this overall decline were an FDIC insurance premium reduction in 1995 and operational efficiency initiatives noted below. A common industry statistic used to measure the productivity of banking organizations is the efficiency ratio. The efficiency ratio measures the cost required to generate each dollar of revenue and is calculated by dividing recurring noninterest expense by tax-equivalent net interest income and recurring noninterest income. The Company's efficiency ratio improved from 64.5% in 1994 to 63.0% in 1995. Contributing to this improvement were significant increases in tax-equivalent net interest income of 7.2% and modest growth in recurring noninterest expense of 4.5%. The Company will continue its strategic focus to reduce the efficiency ratio below 60%, with mid-1995 initiatives to increase productivity via cost-effective use of technology and improved efficiencies through the consolidation of operations and accounting activities. Management believes the quality of service will improve and the integrity of operations will be maintained in this new environment. Income Taxes Income tax expense, which consists of provisions for federal and state income taxes, was $12.3 million for 1995, representing an increase of $1.6 million from 1994. Comparing 1995 to 1994, the Company's effective tax rate also increased, from 29.4% to 31.2%, reflecting the impact of proportionately more taxable than tax-exempt income in 1995. For further discussion and detail on the Company's income taxes, refer to Notes A and L to the Consolidated Financial Statements found in Item 8. Financial Statements and Supplementary Data of this Form 10-K. Corporate Risk Profile The Management of Risk Managing risk is an essential part of the operation of a banking organization. When risk is undertaken, the Company expects a return commensurate with the risk. If the risk profile is lowered, expectations of returns also are reduced. By effectively managing and balancing the many risks involved in its business, the Company believes consistent growth in earnings will occur. The most prominent risks facing the Company are credit risk, interest rate risk, and liquidity risk. Credit risk involves the risk of either not collecting interest when it is due or not receiving the principal balance of a loan or investment when it matures. Credit risk is the most significant risk the Company must manage. Interest rate risk is the risk to net interest income caused by differences in the repricing and maturing characteristics of assets and liabilities. Liquidity risk is the risk that the Company will not be able to fund its obligations and is largely a function of how effectively the Company manages its other risks. The Company has established policies, procedures, and constraint levels to enable it to contain, accurately measure, monitor, and have senior management regularly review the Company's total risk position. Credit Risk Management The Company manages asset quality and controls credit risk through standardized lending policies and procedures and an internal loan review system. The Company, through its corporate credit division in cooperation with the Subsidiary Banks, has developed a credit philosophy aimed at minimizing credit risk by emphasizing the importance of a strong credit management process. Loan Portfolio Review One of the ways the Company manages its credit risk is by maintaining a loan portfolio that management believes is well diversified by industry and size of loan. The Company also benefits from significant diversity among its banks, both as to loan type and local economic conditions. For example, while certain farmers near the Red River Valley experienced another year of adverse growing conditions, many of our other service areas had very favorable weather. Similarly, while cattle prices generally remained depressed, milk prices and many small grain prices remained favorable. As a result of this type of diversification, concentrations and risks in any single category are acceptable, as indicated by the following table summarizing the composition of the portfolio. TABLE VI LOAN PORTFOLIO
(in thousands) December 31 - ----------------------- --------------------------------------------------------------------- 1995 1994 1993 --------------------- --------------------- ----------------------- Amount % Amount % Amount % ---------- ----- ---------- ----- ---------- ----- Commercial and other .. $ 331,605 20.34% $ 292,643 20.23% $ 240,772 19.43% Commercial real estate 313,287 19.22 282,203 19.51 273,204 22.04 Construction ..... 31,952 1.96 26,421 1.83 12,704 1.03 Agricultural .......... 350,786 21.52 299,127 20.68 250,163 20.19 Residential real estate 322,296 19.77 293,671 20.30 252,085 20.34 Construction ..... 11,511 0.71 10,577 0.73 8,597 0.69 Consumer .............. 221,727 13.60 192,865 13.33 157,169 12.68 Tax-exempt ............ 46,936 2.88 49,135 3.40 44,612 3.60 ---------- ----- ---------- ----- ---------- ----- Total ........ $1,630,100 100.0% $1,446,642 100.0% $1,239,306 100.0% ========== ===== ========== ===== ========== =====
(wide table continued from above) (in thousands) December 31 - ----------------------- --------------------------------------------- 1992 1991 --------------------- --------------------- Amount % Amount % ---------- ----- ---------- ----- Commercial and other .. $ 200,600 17.53% $ 229,794 18.86% Commercial real estate 286,395 25.03 321,082 26.36 Construction ..... 6,093 0.53 4,968 0.41 Agricultural .......... 233,132 20.37 228,523 18.76 Residential real estate 231,947 20.27 234,659 19.26 Construction ..... 6,020 0.53 6,084 0.50 Consumer .............. 128,084 11.19 136,200 11.18 Tax-exempt ............ 52,052 4.55 56,872 4.67 ---------- ----- ---------- ----- Total ........ $1,144,323 100.0% $1,218,182 100.0% ========== ===== ========== ===== While in recent years the composition of the Company's loan portfolio reflects a general decrease in commercial real estate loans, indicating the result of continued efforts to reduce classified loan levels, the Company's Subsidiary Banks continued to selectively extend credit in this area in 1995. The Company believes that even if the economy continues to improve only slowly or suffers modest deterioration, its exposure to significant commercial real estate losses in the foreseeable future will continue to be limited. Of the Company's real estate lending, approximately 51% is in commercial real estate loans, as compared to 50% in 1994 and 52% in 1993. These commercial real estate loans consist primarily of loans to business customers who occupy the property or use it for income production. The remaining 49% of real estate lending is in the form of residential mortgages and home equity loans. The commercial real estate loan portfolio experienced growth of $36.6 million or 11.9% between 1994 and 1995, reflecting continued strong business loan demand and the effect of acquisitions. The residential real estate loan portfolio experienced growth of $29.6 million or 9.7% due to the effect of acquisitions and relatively low mortgage rates. The Company is not involved in highly leveraged transaction lending or lending to foreign countries. While 1995 generally was a good year for the Company's agricultural customers, a few isolated segments of the portfolio continued to experience difficulties. This included some farmers in the Red River Valley who experienced another year of adverse conditions. Geographic dispersion of the Subsidiary Banks and diversity of agricultural products and activities were especially beneficial to our agricultural portfolio and mitigated the negative effects of the segments of the portfolio experiencing these poor conditions. Of that loan portfolio, approximately two-thirds represents crop production lending, with the remainder primarily related to livestock and dairy lending. Net Loan Charge-Offs Net loan charge-offs increased to $1.2 million in 1995 from $251 thousand in 1994 and $317 thousand in 1993. Correspondingly, net charge-offs as a percentage of average loans increased to .08% in 1995 from .02% in 1994 and .03% in 1993. Loan loss experience paralleled the modest decline in overall credit quality. Charge-offs during 1995 were widely distributed among Subsidiary Banks and loan types. No individual charge-off represented more than 10% of the total. Table VIII includes a summary of the charge-offs by loan category for the past five years. Nonperforming Assets Nonperforming assets include nonaccrual loans, restructured loans, and other real estate acquired in loan settlements. The accrual of interest on loans is suspended when the credit becomes 90 days or more past due, unless the loan is fully secured and in the process of collection. Restructured loans accrue interest but include concessions in terms which have been made as a result of deterioration in the borrower's financial condition. Table VII summarizes the nonperforming assets as of December 31 for the past five years. TABLE VII NON-PERFORMING ASSETS AT DECEMBER 31
(dollars in thousands) 1995 Change 1994 1993 1992 1991 - ---------------------------------- -------- ------ -------- ------ ------ ------ Nonaccrual loans ............................................. $ 8,392 (19.3)% $ 10,401 13,356 20,983 21,275 Restructured loans ........................................... 1,856 142.9 764 1,127 7,515 5,159 -------- -------- ------ ------ ------ Total nonperforming loans ............................... 10,248 (8.2) 11,165 14,483 28,498 26,434 Other real estate owned (OREO) ............................... 380 (68.5) 1,208 3,325 5,732 7,620 -------- -------- ------ ------ ------ Total nonperforming assets .............................. $ 10,628 (14.1) $ 12,373 17,808 34,230 34,054 ======== ======== ====== ====== ====== Past due loans* .............................................. $ 2,504 60.2% $ 1,563 1,985 902 4,381 ======== ======== ====== ====== ====== Nonperforming loans to total loans ........................... 0.63% 0.77% 1.17 2.49 2.17 Nonperforming assets to total loans and OREO ................. 0.65 0.86 1.43 2.98 2.78 Nonperforming assets and past due loans* to total loans and OREO .......................................... 0.81 0.96 1.59 3.06 3.14 Reserve to nonperforming loans ............................... 275.69 241.34 190.73 95.95 97.85 Reserve to total loans ....................................... 1.74 1.87 2.23 2.39 2.13 Reserve for Loan Losses Beginning of year ............................................ $ 26,946 (2.5)% $ 27,624 27,344 25,866 21,766 Charge-offs .............................................. (2,834) 37.2 (2,065) (3,022) (7,302) (8,846) Recoveries ............................................... 1,610 (11.2) 1,814 2,705 1,936 1,752 -------- -------- ------ ------ ------ Net charge-offs ......................................... (1,224) 387.6 (251) (317) (5,366) (7,094) Provision for loan losses ................................ 1,780 236.9 (1,300) (1,000) 6,844 11,194 Reserve related to acquired assets ....................... 751 (14.0) 873 1,597 -- -- -------- -------- ------ ------ ------ End of year .................................................. $ 28,253 4.9% $ 26,946 27,624 27,344 25,866 ======== ======== ====== ====== ======
* Past due loans include accruing loans 90 days or more past due. Nonperforming assets were $10.6 million at December 31, 1995, compared to $12.4 million at December 31, 1994, and $17.8 million at December 31, 1993. Correspondingly, as a percentage of total loans and other real estate owned, nonperforming assets decreased to .65% in 1995 from .86% in 1994 and 1.43% in 1993. Nonperforming loans were $10.2 million and .63% of total loans at December 31, 1995, compared to $11.2 million and .77% of total loans at December 31, 1994 and $14.5 million and 1.17% at December 31, 1993. The continued improvement in nonperforming loans reflects improved operations or successful resolution of several large distressed credits. The Subsidiary Banks also continue to closely monitor emerging repayment issues. The Company will continue to enhance systems for monitoring portfolio segments to identify deterioration and non-performance at the earliest possible stages. Reserve for Loan Losses The purpose of the reserve for loan losses is to provide for future loan losses inherent in the Company's loan portfolio. Even in the presence of credit policies and procedures, credit quality is subject to many economic and non-economic factors that influence a borrower's financial condition over time. Table VIII summarizes the activity in the reserve for loan losses along with the loan loss reserve allocation from 1991 through 1995. TABLE VIII RESERVE FOR LOAN LOSSES
(in thousands) December 31 - --------------------------------- ------------------------------------------------------------------ 1995 1994 1993 1992 1991 ---------- --------- --------- --------- --------- Beginning of year ................... $ 26,946 27,624 27,344 25,866 21,766 Charge-offs Commercial and other ........... 532 680 1,004 4,416 2,900 Commercial real estate ......... 381 67 868 1,256 3,835 Construction ............... -- -- -- 110 -- Agricultural ................... 375 675 247 570 355 Residential real estate ........ 170 157 141 188 596 Construction ............... 10 -- -- -- 26 Consumer ....................... 835 486 526 759 1,006 Tax-exempt ..................... 531 -- 236 3 128 ---------- --------- --------- --------- --------- Total ...................... 2,834 2,065 3,022 7,302 8,846 ---------- --------- --------- --------- --------- Recoveries Commercial and other ........... 352 688 1,478 522 604 Commercial real estate ......... 389 466 565 604 353 Construction ............... -- -- -- -- -- Agricultural ................... 232 184 238 383 408 Residential real estate ........ 313 81 115 58 104 Construction ............... 10 13 -- -- -- Consumer ....................... 280 236 309 358 255 Tax-exempt ..................... 34 146 -- 11 28 ---------- --------- --------- --------- --------- Total ...................... 1,610 1,814 2,705 1,936 1,752 ---------- --------- --------- --------- --------- Net charge-offs ..................... 1,224 251 317 5,366 7,094 Provision for loan losses ........... 1,780 (1,300) (1,000) 6,844 11,194 Reserve related to acquired assets .. 751 873 1,597 -- -- ---------- --------- --------- --------- --------- End of year ......................... $ 28,253 26,946 27,624 27,344 25,866 ========== ========= ========= ========= ========= Average loans ....................... $1,545,231 1,330,269 1,173,332 1,166,926 1,257,960 Net charge-offs/average loans ....... 0.08% 0.02 0.03 0.46 0.56 ALLOCATION OF RESERVE FOR LOAN LOSSES Commercial and other ................ $ 5,500 4,700 5,500 6,600 6,500 Commercial real estate .............. 7,000 6,700 8,000 8,800 10,000 Construction ................... 500 300 200 80 120 Agricultural ........................ 5,500 4,100 3,800 4,000 4,300 Residential real estate ............. 2,000 1,800 1,700 1,500 1,200 Construction ................... 100 100 50 30 80 Consumer ............................ 1,200 1,100 1,000 1,100 300 Tax-exempt .......................... 400 500 1,000 1,100 200 ---------- --------- --------- --------- --------- Total allocated ............ 22,200 19,300 21,250 23,210 22,700 Unallocated ......................... 6,053 7,646 6,374 4,134 3,166 ---------- --------- --------- --------- --------- Total ...................... $ 28,253 26,946 27,624 27,344 25,866 ========== ========= ========= ========= ========= Reserve to total loans .............. 1.74% 1.87 2.23 2.39 2.13
The reserve for loan losses was $28.3 million or 1.74% of total loans at December 31, 1995, compared to $26.9 million or 1.87% at December 31, 1994. In establishing the reserve, management has considered its current credit process, continued strong loan growth in 1995, the Company's level of unfunded commitments, unfavorable conditions in certain segments of the agricultural markets, and continued uncertainty about economic strength in some of the Company's markets. Management believes the reserve is adequate to cover the risks inherent in the portfolio, specifically nonperforming loans and other loans that have been identified for careful monitoring. Although the Company has prepared an allocation of the reserve based on loan- and industry-specific risk parameters, this allocation does not represent the total amount available for actual future loan losses in any single category, nor does it prohibit losses from being absorbed by portions allocated to other categories or by the unallocated portion. Interest Rate Risk Management The primary objective of the asset/liability management process is to maintain an appropriate balance between the stability of net interest income and the risks associated with significant changes in market interest rates. The responsibility for this process rests with both the Subsidiary Banks' and the Company's asset/liability committees (the "ALCOs"). Together, the ALCOs and the Company's financial staff establish asset/liability policies and develop strategies to minimize Company-wide exposure to adverse interest rate trends. Interest rate risk is the risk that changing interest rates will adversely affect net interest income. While certain levels of interest rate risk are unavoidable, and may even be desirable, it is important to measure and manage this risk as closely as possible to ensure that it does not reach levels that are unacceptable. Interest rate sensitivity is determined by the amount of assets and liabilities repricing or maturing within a specified time period. TABLE IX INTEREST RATE SENSITIVITY AT DECEMBER 31, 1995
REPRICING OR MATURING ----------------------------------------------------- WITHIN 3 - 12 1 - 5 OVER 5 (dollars in thousands) 3 MONTHS MONTHS YEARS YEARS TOTAL - ---------------------------- --------- ------- ------- ------ --------- INTEREST SENSITIVE ASSETS Loans ................... $ 662,654 287,397 469,735 206,830 1,626,616 Tax-exempt securities ... 16,125 17,205 81,071 90,453 204,854 Taxable securities ...... 232,067 135,505 298,049 106,959 772,580 Interest bearing deposits 1,533 307 103 -- 1,943 Federal funds sold ...... -- -- -- -- -- Other earning assets .... -- 1,064 367 30 1,461 --------- ------- ------- ------ --------- Total ............... 912,379 441,478 849,325 404,272 2,607,454 --------- ------- ------- ------ --------- INTEREST SENSITIVE LIABILITIES Savings deposits ........ 686,884 -- -- -- 686,884 Other time deposits ..... 297,713 543,304 355,803 32,072 1,228,892 Short-term borrowings ... 183,160 45,148 10,743 17,476 256,527 Long-term debt .......... 18,846 1,050 5,472 200 25,568 --------- ------- ------- ------ --------- Total ............... 1,186,603 589,502 372,018 49,748 2,197,871 --------- ------- ------- ------ --------- REPRICING GAP ................ ($ 274,224) (148,024) 477,307 354,524 409,583 ========= ======= ======= ====== ========= CUMULATIVE REPRICING GAP ..... ($ 274,224) (422,248) 55,059 409,583 ========= ======= ======= ====== CUMULATIVE GAP TO TOTAL ASSETS (9.75)% (15.01) 1.96 14.56 ========= ======= ======= ======
One tool for measuring interest rate sensitivity is the gap report, which is the traditional measurement of interest rate risk from an accounting perspective. Gap reports assign each asset and liability to a time interval based on contractual maturity or repricing. The difference between assets and liabilities in each interval represents the interest sensitivity gap. A positive gap, when assets exceed liabilities, theoretically means that rising rates during the given time interval will positively affect net interest income. The opposite is true for a negative gap. While providing a rough measure of rate risk, the gap report has a number of shortcomings, including the fact that it is a static point-in-time measurement that is not effective in capturing changing rate relationships or the velocity at which assets and liabilities reprice. Because of the shortcomings of gap reports, the Company uses simulation modeling as its primary method of measuring interest rate risk. Modeling, because of its dynamic rather than static nature, can better capture the effects of future balance sheet trends, different patterns of rate movements, and changing relationships between rates. For these reasons, a gap report by itself could considerably overstate the rate risk in the Company's current sensitivity position. From a gap report perspective, interest rate risk constraints are quantified by the ratio of gap to total assets, which represents the percentage of total assets exposed to interest rate risk. As presented in Table IX, at December 31, 1995, the cumulative gap to total assets ratio within one year was a negative 15.01%, with the Company's interest rate sensitivity gap within one year a negative $422.2 million. However, simulation modeling results indicate the amount of net interest income at risk as a result of an immediate and substantial change in market interest rates was within acceptable policy limits. Liquidity Management The objective of liquidity management is to ensure the continuous availability of funds to meet the demands of depositors, investors, and borrowers. The ALCOs are responsible for managing balance sheet and off-balance sheet commitments to meet the needs of customers while achieving the Company's financial objectives. ALCOs meet regularly to review funding capacity, current and forecasted loan demand, investment opportunities, and liquidity positions as outlined in the Company's liquidity policy. With this information, the ALCOs guide changes in the balance sheet structure to provide for adequate ongoing liquidity. Several factors provide a favorable liquidity position for the Company. The first is the ability to acquire and retain deposits. Core deposits, which generally include all deposits and repurchase agreements except for those greater than $100 thousand of nonpersonal and public entities, and certain other public funds, provide a historically stable source of funding. The Company has a high proportion of core deposits to total liabilities compared to industry averages; this index was approximately 84% for 1995 and 87% for 1994. The Company's available for sale securities portfolio is a secondary source of liquidity because of its readily marketable nature and predictable stream of maturities, as approximately 28% of the portfolio matures within 1995. While the Company prefers to fund its balance sheet with core deposits, a third source of liquidity is the Company's ready access to regional and national wholesale funding sources, including federal funds purchased and Federal Home Loan Bank ("FHLB") advances for several Subsidiary Banks who are FHLB members. Capital Management The Company's capital position is both a strength and an opportunity, as it provides a degree of safety and soundness and a foundation for future growth. The capital position of the Company and the Subsidiary Banks reflects management's commitment to maintain ratios above the regulatory minimums. TABLE X CAPITOL RATIOS(1)
Regulatory Requirements --------------------------- Adequately Well - 1995 1994 Capitalized capitalized ------------ ------------ ----------- ------------ Equity to assets (2) 8.46% 8.02 -- -- Equity to tangible assets (2) 8.40 8.03 -- -- Tier I capital (3) 12.75 13.25 4.00 6.00 Tier I and tier II capital (3) 14.01 14.51 8.00 10.00 Leverage ratio (3) 8.41 8.69 3.00 5.00
(1) Calculations include redeemable class A common stock. (2) Computed in accordance with generally accepted accounting principles, including the unrealized market value adjustment of securities available for sale. (3) Computed exclusive of the unrealized market value adjustment of securities available for sale. The Company's Tier I capital ratio at December 31, 1995 was 12.75%, its total risk-adjusted capital ratio (Tier I plus Tier II) was 14.01%, and its Tier I leverage ratio was 8.41%. 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 capital ratios equal or exceed the ratios as indicated in Table X. As can be seen in Table X, the Company's ratios in each of these categories are well above the regulatory requirements for a "well-capitalized" organization. In addition, all of the Company's Subsidiary Banks exceeded the "well-capitalized" ratios for each of the three categories as of December 31, 1995. Impact of Inflation The assets and liabilities of a financial institution are primarily monetary in nature. Because banks generally have an excess of monetary assets over monetary liabilities, inflation, in theory, will cause a loss of purchasing power in the value of shareholder's equity. Other sections of this financial review provide the information necessary for an understanding of the Company's ability to react to changing interest rates. Balance Sheet Analysis The table below sets forth for the periods indicated the average balance sheets and related yields and rates on earning assets and interest bearing liabilities. TABLE XI CONSOLIDATED AVERAGE BALANCE SHEET AND RELATED YIELDS AND RATES
1995 1994 Average Rate/ Average Rate/ (dollars in thousands) Balance Interest Yield Balance Interest Yield - -------------------------------------------------------- ---------------------- ----------------------- ASSETS Loans (net of unearned discount)* Commercial and other ........................ $ 314,903 $30,092 9.56% $ 270,415 $22,305 8.25% Commercial real estate ...................... 328,163 30,542 9.31 295,579 25,955 8.78 Agricultural ................................ 330,422 31,615 9.57 269,266 23,696 8.80 Residential real estate ..................... 318,447 27,638 8.68 276,860 23,268 8.40 Consumer .................................... 205,766 18,706 9.09 173,193 15,044 8.69 Tax-exempt .................................. 47,530 4,799 10.10 44,956 4,588 10.21 ----------------------- ---------------------- TOTAL LOANS ............................. 1,545,231 143,392 9.28 1,330,269 114,856 8.63 Reserve for loan losses ..................... (27,858) (28,632) ---------- ----------- NET LOANS ............................... 1,517,373 1,301,637 Securities Mortgage-backed ............................. 245,227 17,195 7.01 227,915 13,933 6.11 Other taxable ............................... 499,632 29,811 5.97 483,384 25,158 5.20 Tax-exempt .................................. 197,662 16,444 8.32 181,967 14,792 8.13 ----------------------- ---------------------- TOTAL SECURITIES ........................ 942,521 63,450 6.73 893,266 53,883 6.03 Federal funds sold .................................... -- -- -- 789 37 4.69 Other earning assets .................................. 3,083 192 6.23 2,094 106 5.06 ----------------------- ---------------------- TOTAL EARNING ASSETS** .................. 2,490,835 207,034 8.31 2,226,418 168,882 7.59 Cash and due from banks ............................... 69,625 64,141 Nonearning assets ..................................... 115,156 94,499 ---------- ----------- TOTAL ASSETS .............................. $2,647,758 $2,356,426 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest bearing deposits .......................... $257,888 $242,439 Interest bearing deposits Savings and NOW accounts .................... 255,104 5,160 2.02 259,947 4,424 1.70 Money market checking ....................... 172,994 3,507 2.03 156,658 2,827 1.80 Money market savings ........................ 241,417 8,343 3.46 270,850 7,381 2.73 Savings certificates ........................ 1,035,354 59,461 5.74 886,245 40,719 4.59 Certificates over $100,000 .................. 150,313 8,401 5.59 87,145 3,836 4.40 ----------------------- ---------------------- TOTAL TIME DEPOSITS ....................... 1,855,182 84,872 4.57 1,660,845 59,187 3.56 TOTAL DEPOSITS ............................ 2,113,070 1,903,284 CORE DEPOSITS*** .......................... 2,034,837 1,867,688 Short-term borrowings ................................. 229,935 12,678 5.51 199,186 8,616 4.33 Long-term debt ........................................ 23,306 1,586 6.81 8,813 381 4.32 ----------------------- ---------------------- TOTAL INTEREST BEARING LIABILITIES ...... 2,108,423 99,136 4.70 1,868,844 68,184 3.65 Other liabilities ..................................... 47,179 29,850 ---------- ----------- TOTAL LIABILITIES ....................... 2,413,490 2,141,133 Minority interest ..................................... 8,676 8,536 Redeemable preferred stock ............................ 4,698 2,424 Redeemable class A common stock ....................... 17,672 16,347 Shareholder's equity .................................. 203,222 187,986 ---------- ----------- TOTAL LIABILITIES AND EQUITY ............ $2,647,758 $2,356,426 ========== ========== Net interest income ................................... $107,898 $100,698 ======== ======== Gross spread .......................................... 3.61% 3.94% Percent of earning assets Interest income ............................. 8.31 7.59 Interest cost ............................... 3.98 3.07 ----- ----- NET INTEREST MARGIN ..................... 4.33% 4.52% Interest bearing liabilities to earning assets 84.65% 83.94% Profitability Net income .................................. $27,136 $25,797 Return on average assets .................... 1.07% 1.15% Leverage .................................... 11.74X 11.40X Return on average realized equity ........... 12.03% 12.41% (WIDE TABLE CONTINUED) 1993 1992 Average Rate/ Average Rate/ (dollars in thousands) Balance Interest Yield Balance Interest Yield - -------------------------------------------------------- ---------------------- ----------------------- ASSETS Loans (net of unearned discount)* Commercial and other ........................ $ 221,719 $17,328 7.82% $212,115 $17,524 8.26% Commercial real estate ...................... 286,986 24,189 8.43 301,973 28,068 9.29 Agricultural ................................ 233,632 20,852 8.93 233,379 23,167 9.93 Residential real estate ..................... 244,719 22,016 9.00 235,080 23,516 10.00 Consumer .................................... 138,377 12,949 9.36 129,361 13,763 10.64 Tax-exempt .................................. 47,899 5,301 11.07 55,018 6,306 11.46 ----------------------- ---------------------- TOTAL LOANS ............................. 1,173,332 102,635 8.75 1,166,926 112,344 9.63 Reserve for loan losses ..................... (28,893) (27,902) ---------- ----------- NET LOANS ............................... 1,144,439 1,139,024 Securities Mortgage-backed ............................. 330,208 21,156 6.41 357,127 26,678 7.47 Other taxable ............................... 350,708 17,935 5.11 297,279 19,125 6.43 Tax-exempt .................................. 162,478 13,927 8.57 98,726 9,789 9.92 ----------------------- ---------------------- TOTAL SECURITIES ........................ 843,394 53,018 6.29 753,132 55,592 7.38 Federal funds sold .................................... 1,690 44 2.60 5,923 228 3.85 Other earning assets .................................. 1,898 66 3.48 4,645 282 6.07 ----------------------- ---------------------- TOTAL EARNING ASSETS** .................. 2,020,314 155,763 7.71 1,930,626 168,446 8.72 Cash and due from banks ............................... 73,867 65,540 Nonearning assets ..................................... 72,664 72,443 ---------- ----------- TOTAL ASSETS .............................. $2,137,952 $2,040,707 ========== ========== LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest bearing deposits .......................... $210,386 $185,188 Interest bearing deposits Savings and NOW accounts .................... 231,702 4,576 1.97 191,508 5,547 2.90 Money market checking ....................... 156,572 3,133 2.00 161,672 4,506 2.79 Money market savings ........................ 255,498 6,829 2.67 238,528 8,257 3.46 Savings certificates ........................ 852,055 39,992 4.69 870,088 48,908 5.62 Certificates over $100,000 .................. 70,182 3,006 4.28 71,860 3,898 5.42 ----------------------- ---------------------- TOTAL TIME DEPOSITS ....................... 1,566,009 57,536 3.67 1,533,656 71,116 4.64 TOTAL DEPOSITS ............................ 1,776,395 1,718,844 CORE DEPOSITS*** .......................... 1,747,904 1,691,067 Short-term borrowings ................................. 139,119 4,539 3.26 114,664 4,695 4.09 Long-term debt ........................................ 357 23 6.44 883 71 8.04 ----------------------- ---------------------- TOTAL INTEREST BEARING LIABILITIES ...... 1,705,485 62,098 3.64 1,649,203 75,882 4.60 Other liabilities ..................................... 23,447 25,918 ---------- ----------- TOTAL LIABILITIES ....................... 1,939,318 1,860,309 Minority interest ..................................... 8,741 8,671 Redeemable preferred stock ............................ -- -- Redeemable class A common stock ....................... 15,191 13,738 Shareholder's equity .................................. 174,702 157,989 ---------- ----------- TOTAL LIABILITIES AND EQUITY ............ $2,137,952 $2,040,707 ========== ========== Net interest income ................................... $93,665 $92,564 ======= ======= Gross spread .......................................... 4.07% 4.12% Percent of earning assets Interest income ............................. 7.71 8.72 Interest cost ............................... 3.07 3.93 ----- ----- NET INTEREST MARGIN ..................... 4.64% 4.79% Interest bearing liabilities to earning assets 84.42% 85.42% Profitability Net income .................................. $26,885 $22,647 Return on average assets .................... 1.32% 1.17% Leverage .................................... 11.26X 11.88X Return on average realized equity ........... 14.16% 13.19% (WIDE TABLE CONTINUED) 1991 Average Balance Average Rate/ 1995 vs Five-Year (dollars in thousands) Balance Interest Yield 1994 Growth Rate - -------------------------------------------------------- ---------------------- ---------------------------- ASSETS Loans (net of unearned discount)* Commercial and other ........................ $ 237,581 $22,180 9.34 % 16.45 % 0.54 Commercial real estate ...................... 335,596 34,271 10.21 11.02 5.03 Agricultural ................................ 236,267 26,679 11.29 22.71 8.28 Residential real estate ..................... 248,901 27,002 10.85 15.02 10.60 Consumer .................................... 140,815 16,800 11.93 18.81 5.35 Tax-exempt .................................. 58,800 7,659 13.03 5.73 (10.37) --------------------- TOTAL LOANS ............................. 1,257,960 134,591 10.70 16.16 4.87 Reserve for loan losses ..................... (24,069) (2.70) 7.14 ---------- NET LOANS ............................... 1,233,891 16.57 4.83 Securities Mortgage-backed ............................. 243,346 21,602 8.88 7.60 10.87 Other taxable ............................... 298,684 23,628 7.91 3.36 10.29 Tax-exempt .................................. 93,213 9,976 10.70 8.63 15.74 --------------------- TOTAL SECURITIES ........................ 635,243 55,206 8.69 5.51 11.47 Federal funds sold .................................... 7,008 433 6.18 N/M N/M Other earning assets .................................. 5,332 435 8.16 47.23 (15.59) --------------------- TOTAL EARNING ASSETS** .................. 1,905,543 190,665 10.01 11.88 6.64 Cash and due from banks ............................... 61,507 8.55 4.05 Nonearning assets ..................................... 72,340 21.86 11.40 ---------- TOTAL ASSETS .............................. $2,015,321 12.36 6.74 ========== Liabilities and Shareholder's Equity Noninterest bearing deposits .......................... $167,569 6.37 10.17 Interest bearing deposits Savings and NOW accounts .................... 181,559 7,613 4.19 (1.86) 7.28 Money market checking ....................... 128,104 5,476 4.27 10.43 6.62 Money market savings ........................ 196,292 10,012 5.10 (10.87) 8.52 Savings certificates ........................ 908,475 63,910 7.03 16.82 3.46 Certificates over $100,000 .................. 87,462 6,101 6.98 72.49 3.94 --------------------- TOTAL TIME DEPOSITS ....................... 1,501,892 93,112 6.20 11.70 4.87 TOTAL DEPOSITS ............................ 1,669,461 11.02 5.43 CORE DEPOSITS*** .......................... 1,633,628 8.95 5.69 Short-term borrowings ................................. 151,287 9,185 6.07 15.44 17.30 Long-term debt ........................................ 1,359 101 7.43 164.45 59.52 --------------------- TOTAL INTEREST BEARING LIABILITIES ...... 1,654,538 102,398 6.19 12.82 6.09 Other liabilities ..................................... 27,916 58.05 11.16 ---------- TOTAL LIABILITIES ....................... 1,850,023 12.72 6.57 Minority interest ..................................... 8,309 1.64 0.70 Redeemable preferred stock ............................ -- N/M N/M Redeemable class A common stock ....................... 12,559 8.11 8.53 Shareholder's equity .................................. 144,430 8.10 8.53 ---------- TOTAL LIABILITIES AND EQUITY ............ $2,015,321 12.36 6.74 ========== Net interest income ................................... $ 88,267 ======== Gross spread .......................................... 3.82% Percent of earning assets Interest income ............................. 10.01 Interest cost ............................... 5.38 ----- NET INTEREST MARGIN ..................... 4.63% Interest bearing liabilities to earning assets 86.83% Profitability Net income .................................. $18,589 Return on average assets .................... 0.97% Leverage .................................... 12.84X Return on average realized equity ........... 11.84%
Interest and rates are realized on a fully taxable equivalent basis using a 35% tax rate in 1995, 1994 and 1993, and a 34% tax rate in previous years. * Loan amounts include nonaccrual loans. ** Before deducting the reserve for loan losses. *** Total deposits less nonpersonal and public certificates of deposits over $100,000, and certain other public funds, plus repurchase agreements less than $100,000 and personal repurchase agreements greater than $100,000. Acquisitions added approximately $152 million of assets to the Company during 1994 and 1995 and had an impact on the 1995 average balance sheet growth. Specifically, acquisitions made during 1994 and 1995 increased the Company's full-year 1995 total averages in assets by $124.3 million, gross loans by $68.0 million, securities by $42.5 million, and core deposits by $97.8 million. Sources of Funds The Company's balance sheet strength rests in its strong capital position and its share of the deposit base in the communities served. The Company relies on three major sources of funding: core deposits, short-term borrowings, and equity capital. The diversity and supply of this funding base enable the Company to replace maturing liabilities and finance asset growth on an ongoing basis. CORE DEPOSITS - Average core deposits increased $167.1 million or 9.0% in 1995. Average total deposits increased $209.8 million or 11.0% from 1994 to $2.1 billion in 1995. Excluding the effects of acquisitions, average total deposits increased $130.0 million or 6.8% during 1995. Beginning in 1994, the Company focused on redefining the pricing of its core deposits, emphasizing customer relationships and responsiveness to national market rates, in an effort to consistently provide its customers with fair returns on their deposits. The strong growth experienced in 1995 is a result of this effort and the aforementioned acquisitions. Within core deposits, savings certificates had the strongest growth, increasing $149.1 million or 16.8%, while demand deposits, a non-interest bearing source of funds, increased $15.4 million or 6.4%, and money market checking accounts increased $16.3 million or 10.4%. Savings and NOW accounts and money market savings accounts both experienced declines of $4.8 million or 1.9% and $29.4 million or 10.9%, respectively, as many customers consolidated balances and moved these funds into higher interest-bearing checking accounts and savings certificates. The table below sets forth the amount and maturity of time deposits that had balances of more than $100,000 at December 31, 1995. TABLE XII MATURITY OF TIME DEPOSITS OVER $100,000 December 31 ----------- (in thousands) 1995 1994 - ------------------------- ---- ---- Within 3 months ............. $ 44,650 28,691 3 - 6 months ................ 38,901 33,249 6 - 12 months ............... 32,259 21,594 After 12 months ............. 37,640 37,757 ------ ------ Total ................ $153,450 121,291 ======== ======= SHORT-TERM BORROWINGS - Average short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase, treasury tax and loan notes, and FHLB advances with maturities of one year or less, increased 9.2% from $199.2 million in 1994 to $229.9 million in 1995. This increase can be attributed to an increase in the Company's use of FHLB advances. While deposit growth was strong throughout the year, asset growth (as discussed below) was more intense, creating the need for this funding source. The associated interest rate risk was monitored closely and steps were taken to match the repricability of assets and liabilities. LONG-TERM DEBT - Average long-term debt, which includes FHLB advances with maturities of greater than one year, and installment promissory notes, increased $14.5 million. Of this increase, $8.1 million is attributable to an increase in the Company's use of FHLB advances, and $6.4 million is related to installment promissory notes issued as part of the acquisitions during 1994 and 1995. Uses of Funds Between 1994 and 1995, average total assets increased $291.3 million or 12.4%. Acquisitions accounted for $98.1 million or 33.7% of this growth. Average earning assets increased $264.4 million or 11.9%. Strong loan growth, starting in 1994, and continuing throughout 1995, increased loans as a percent of average earning assets from 59.7% in 1994 to 62.0% in 1995, while securities decreased from 40.1% to 37.8%. LOAN PORTFOLIO - The increase in average loans from 1994 to 1995 was $215.0 million with all categories of loans experiencing increases as loan demand remained strong in our markets. Agricultural loans led the loan growth in 1995 increasing $61.2 million or 22.7% due to strong loan demand and $21.8 million attributable to acquisitions. Of the remaining loan categories, commercial loans increased $44.5 million, residential real estate loans increased $41.6 million, commercial real estate and consumer loans both increased $32.6 million and tax-exempt loans increased $2.6 million. The following table summarizes the amount and maturity of the loan portfolio as of December 31, 1995. TABLE XIII MATURITY OF LOANS Within After 5 (in thousands) 1 Year 1 - 5 Years Years Total - -------------- ------ ----------- ------- ----- Commercial and other ........ $ 197,780 109,786 24,039 331,605 Commercial real estate ...... 70,983 158,250 84,051 313,284 Construction ......... 7,774 12,137 12,044 31,955 Agricultural ................ 192,838 99,203 58,745 350,786 Residential real estate ..... 47,733 128,391 146,172 322,296 Construction ......... 9,833 904 774 11,511 Consumer .................... 76,161 129,983 15,583 221,727 Tax-exempt .................. 12,541 16,528 17,867 46,936 ------ ------ ------ ------ Total ................ $ 615,643 655,182 359,275 1,630,100 ========= ======= ======= ========= Loans maturing after one year Fixed interest rate .. $ 368,263 178,453 546,716 Variable interest rate 286,919 180,822 467,741 ------- ------- ------- Total ................ $ 655,182 359,275 1,014,457 ========= ======= ========= SECURITIES - Average total securities rose $49.3 million or 5.5% from 1994 to 1995, with mortgage-backed and other taxable securities increasing $33.6 million or 4.7%. The increase in tax-exempt securities of $15.7 million or 8.6% was due to the Company's continued ability to utilize tax-exempt income. Mortgage-backed securities represented 58.2% of total securities at December 31, 1995 compared to 56.1% at December 31, 1994. The primary risk of these types of securities is prepayment risk, which is continuously monitored to assess the impact on the yield of the portfolio. While the Company believes the yield on these securities adequately compensates for the risks unique to this type of investment, it is the Company's position to primarily acquire securities that carry limited risk of prepayment. The table below sets forth the maturities of the Company's investment and mortgage-backed securities at December 31, 1995 and the weighted average yields of such securities. TABLE XIV MATURITY OF INVESTMENT AND MORTGAGE-BACKED SECURITIES
Amortized Cost ----------------------------------------------------------------------------------------------- Within 1 Year 1-5 Years 5-10 Years After 10 Years --------------- ---------------- ----------------- ----------------- (in thousands) Amount Yield Amount Yield Amount Yield Amount Yield - -------------------- ------ ----- ------ ----- ------ ----- ------ ----- Governments and agencies ............... $69,543 5.96% $58,014 6.30% $ -- --% $ -- --% State and political subdivisions ........... 24,158 7.24 67,653 8.15 80,636 7.93 16,346 8.32 Corporate bonds ............... 10,723 5.93 37,513 5.75 -- -- -- -- Mortgage-backed securities ............. 81,447 6.06 265,244 6.49 78,641 6.46 143,609 6.88 Equity securities ............. -- -- 16,133 10.22 -- -- 17,303 7.25 Other securities .............. 5,947 7.21 994 6.48 2,393 7.22 1,137 5.48 -------- ---- -------- ---- -------- ---- -------- ---- Total .................. $191,818 6.20% $445,551 6.79% $161,670 7.20% $178,395 7.04% ======== ==== ======== ==== ======== ==== ======== ====
(wide table continued from above) ------------------ Total ------------------ (in thousands) Amount Yield - -------------- ------ ----- Governments and agencies ............... $127,557 6.12% State and political subdivisions ........... 188,793 7.96 Corporate bonds ............... 48,236 5.79 Mortgage-backed securities ............. 568,941 6.52 Equity securities ............. 33,436 8.69 Other securities .............. 10,471 6.96 -------- ---- Total .................. $977,434 6.79% ======== ==== The average maturity of the portfolio was 51 months at December 31, 1995, with an average tax-equivalent yield to maturity on the $977 million portfolio of 6.79%, unrealized gains of $14.8 million and unrealized losses of $4.0 million. At December 31, 1995, the market value of the Company's securities was $988.2 million or $10.8 million over its amortized cost. This compares to a market value of $886.5 million or $42.2 million under amortized cost at December 31, 1994. In accordance with FAS 115, the available for sale securities are recorded at market value. For further discussion and detail on the Company's securities portfolio, refer to Note C to the Consolidated Financial Statements. Analysis of 1994 Compared with 1993 The following analysis compares 1994 consolidated financial results with 1993 results. Net Income Net income was $25.8 million or $2.15 per share in 1994 compared to $26.9 million or $2.24 per share in 1993. Included in the 1994 results were approximately $2.5 million of costs to consolidate certain operations and accounting functions. Excluding these expenses, net income for 1994 would have been $27.2 million or $2.27 per share, representing a $342 thousand or 1.3% increase over 1993. Net Interest Income Tax-equivalent net interest income for 1994 was $100.7 million, an increase of $7.0 million or 7.5% from 1993. Approximately 58.4% of that growth was due to assets acquired in the September 1993 purchase of Valley Bancshares, Inc. of Grand Forks, North Dakota ("Valley Bank"), and the September 1994 purchase of Dunn County Bankshares, Inc. of Menomonie, Wisconsin. Offsetting the increase in earning assets was a decrease in the net interest margin, which declined 12 basis points from 4.64% in 1993 to 4.52% in 1994. The decrease in net interest margin was primarily due to a reduced spread in rates during 1994, as yields on earning assets continued to decline while costs on interest bearing liabilities increased slightly. The earning asset yield and net interest margin were impacted significantly by reduced investment portfolio yields. Contributing positively to the net interest margin, but not enough to offset the reduced rate spread and a somewhat less favorable mix of assets, were a decline in average nonaccruing loans and more free funds supporting earning assets. Provision for Loan Losses From December 31, 1993 to December 31, 1994, nonperforming loans decreased $3.3 million to $11.2 million, while the volume of at-risk performing loans also declined. These improvements in the quality of the loan portfolio, as well as generally favorable economic conditions in the communities served, resulted in a negative loan loss provision of $1.3 million in 1994. While the reserve to outstanding loan ratio decreased from 2.23% in 1993 to 1.87% in 1994, the reserve to nonperforming loan coverage increased from 190.7% to 241.3% during this time. Noninterest Income Noninterest income was $26.8 million in 1994 compared to $30.8 million in 1993, representing a $4.0 million or 13.1% decrease. Contributing to this decline in noninterest income was a $2.1 million difference between the $1.8 million of securities gains recorded in 1993 and the $270 thousand of security losses recorded in 1994. The losses resulted primarily from the sale of several corporate securities as the Company repositioned its available for sale investment portfolio to improve future returns. Gains on loans sold in the secondary market declined $2.3 million as the volume of real estate mortgage refinancing declined significantly during 1994 due to the rising interest rate environment. Gains from the sales of other assets decreased $600 thousand from 1993, consisting primarily of other real estate owned ("OREO"). An increase in service charges of $800 thousand helped to offset these declines. Noninterest Expense Noninterest expense increased $5.9 million or 7.4% from 1993 to 1994. Personnel costs, which accounted for 55.8% of noninterest expense, increased $3.8 million or 8.7% from 1993 to 1994, as salaries and wages increased 8.7% and the cost of employee benefits increased 8.8%. Affecting the increases in both salaries and benefits were $1.8 million of one-time costs associated with the consolidation of the Company's operations and accounting functions and $2.0 million in salaries and benefits relating to acquisitions. Although non-personnel expenses collectively increased $2.0 million or 5.7% from 1993 to 1994, primarily attributable to operating costs of acquired affiliates, OREO expense declined $854 thousand or 100.8% from 1993. OREO expense declined significantly as a result of the decrease in other real estate holdings during the period of marked improvement and the quality of the Company's loan portfolio. Marketing expense increased $500 thousand, as the strategic corporate-wide communications and advertising campaign introduced early in 1993 continued throughout 1994. Income Taxes Income tax expense, which consists of provisions for federal and state income taxes, was $10.7 million for 1994, representing a decrease of $1.5 million from 1993. Comparing 1994 to 1993, the Company's effective tax rate also decreased from 31.3% to 29.4%, reflecting the impact of proportionately more tax-exempt than taxable income in 1994. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31 -------------------------- (in thousands) 1995 1994 ----------- ----------- ASSETS Cash and due from banks ........................................................ $ 127,786 116,041 Interest bearing deposits ...................................................... 3,008 1,612 Investment securities (market value of $203,607 and $224,518, respectively) .... 198,515 229,639 Mortgage-backed securities (market value of $116,772 and $149,015, respectively) 118,390 164,609 ----------- ----------- TOTAL SECURITIES HELD TO MATURITY ....................................... 316,905 394,248 Investment securities available for sale ....................................... 213,520 171,778 Mortgage-backed securities available for sale .................................. 454,343 341,185 ----------- ----------- TOTAL SECURITIES AVAILABLE FOR SALE ..................................... 667,863 512,963 Loans .......................................................................... 1,630,100 1,446,642 Reserve for loan losses .................................................... (28,253) (26,946) Unearned discount .......................................................... (3,484) (3,514) ----------- ----------- NET LOANS ............................................................... 1,598,363 1,416,182 Premises and equipment, net .................................................... 44,252 36,702 Interest receivable and other assets ........................................... 54,055 59,964 ----------- ----------- TOTAL ASSETS ............................................................ $ 2,812,232 2,537,712 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest bearing deposits ................................................... $ 326,531 285,658 Interest bearing deposits ...................................................... 1,915,776 1,738,806 ----------- ----------- TOTAL DEPOSITS .......................................................... 2,242,307 2,024,464 Federal funds purchased and repurchase agreements .............................. 187,100 204,061 Other short-term borrowings .................................................... 69,427 41,940 Long-term debt ................................................................. 25,568 18,215 Accrued expenses and other liabilities ......................................... 38,633 29,694 ----------- ----------- TOTAL LIABILITIES ....................................................... 2,563,035 2,318,374 Minority interests ............................................................. 9,112 8,240 Redeemable preferred stock, $100 par, 80,000 shares authorized; 71,594 shares issued; 21,437 and 71,594 shares outstanding, respectively 2,144 7,252 Redeemable class A common stock, 960,000 shares issued and outstanding .................................................. 19,035 16,308 Shareholder's equity Common stock Class A, no par, 12,000,000 shares authorized; 240,000 shares issued and outstanding ................... 57 57 Class B, no par, 10,800,000 shares authorized, issued and outstanding .................................. 2,562 2,562 Retained earnings .............................................................. 212,392 196,259 Net unrealized gain (loss) on securities available for sale .................... 3,895 (11,340) ----------- ----------- TOTAL SHAREHOLDER'S EQUITY .............................................. 218,906 187,538 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .............................. $ 2,812,232 2,537,712 =========== ===========
See notes to consolidated financial statements. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts) Year Ended December 31 -------------------------------- 1995 1994 1993 -------------------------------- INTEREST INCOME Loans, including fees ................................... $141,754 113,295 100,831 Securities Taxable ........................................... 47,006 39,091 39,091 Tax-exempt ........................................ 10,839 9,748 9,163 Federal funds sold ...................................... -- 37 44 Other ................................................... 182 96 63 -------- ------- ------- Total interest income ............................. 199,781 162,267 149,192 -------- ------- ------- INTEREST EXPENSE Deposits ................................................ 84,872 59,187 57,536 Federal funds purchased and repurchase agreements ....... 8,175 6,771 4,372 Other borrowed funds .................................... 6,089 2,226 190 -------- ------- ------- Total interest expense ............................ 99,136 68,184 62,098 -------- ------- ------- Net interest income ............................... 100,645 94,083 87,094 Provision for loan losses ............................... 1,780 (1,300) (1,000) -------- ------- ------- Net interest income after provision for loan losses 98,865 95,383 88,094 -------- ------- ------- NONINTEREST INCOME Service charges ......................................... 11,047 9,627 8,823 Insurance ............................................... 5,503 4,716 4,671 Trust ................................................... 4,784 4,502 4,462 Gain on sale of loans ................................... 1,302 1,649 3,949 Gain (loss) on sale of securities ....................... 304 (270) 1,785 Other ................................................... 4,952 6,544 7,126 -------- ------- ------- Total noninterest income .......................... 27,892 26,768 30,816 -------- ------- ------- NONINTEREST EXPENSE Salaries and wages ...................................... 37,325 36,556 33,633 Employee benefits ....................................... 10,878 11,254 10,340 Occupancy ............................................... 5,433 4,871 4,614 Furniture and equipment ................................. 5,020 4,320 3,994 Data processing fees .................................... 7,334 7,031 6,595 FDIC premiums and examination fees ...................... 2,901 4,719 4,449 Other ................................................... 18,405 16,885 16,137 -------- ------- ------- Total noninterest expense ......................... 87,296 85,636 79,762 -------- ------- ------- INCOME BEFORE INCOME TAX EXPENSE ............................... 39,461 36,515 39,148 Income tax expense ...................................... 12,325 10,718 12,263 -------- ------- ------- NET INCOME ..................................................... $ 27,136 25,797 26,885 ======== ====== ====== Per common share amounts Net income .............................................. $ 2.26 2.15 2.24 Dividends paid .......................................... $ 0.80 0.78 0.60
See notes to consolidated financial statements. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Net Unrealized Gain (Loss) on Common Stock Securities -------------------- Available Retained (in thousands, except per share amounts) Class A Class B for Sale Earnings Total ------------------------------------------------------ BALANCE, DECEMBER 31, 1992 .......................................... $ 57 2,562 163,027 165,646 Net income .......................................................... 26,885 26,885 Dividends, $.60 per share ........................................... (7,200) (7,200) Allocation of net income in excess of dividends and net unrealized gain (loss) on securities available for sale to redeemable class A common stock .................. (407) (1,575) (1,982) Net unrealized gain (loss) on securities available for sale ......... 5,085 5,085 ------------------------------------------------------ BALANCE, DECEMBER 31, 1993 .......................................... 57 2,562 4,678 181,137 188,434 Net income .......................................................... 25,797 25,797 Dividends, $.78 per share ........................................... (9,360) (9,360) 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 .................. 1,393 (1,315) 78 Change in net unrealized gain (loss) on securities available for sale (17,411) (17,411) ------------------------------------------------------ BALANCE, DECEMBER 31, 1994 .......................................... 57 2,562 (11,340) 196,259 187,538 Net income .......................................................... 27,136 27,136 Dividends, $.80 per share ........................................... (9,600) (9,600) Change in net unrealized gain (loss) on securities available for sale 16,559 16,559 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 .................. (1,324) (1,403) (2,727) Change in net unrealized gain (loss) on securities available for sale 16,559 16,559 ------------------------------------------------------ BALANCE, DECEMBER 31, 1995 .......................................... $ 57 2,562 3,895 212,392 218,906 ======================================================
See notes to consolidated financial statements. BREMER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 ----------------------------------- (in thousands) 1995 1994 1993 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ....................................................... $ 27,136 25,797 26,885 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses ................................. 1,780 (1,300) (1,000) Depreciation and amortization ............................. 6,525 9,531 11,521 Deferred income taxes ..................................... 1,074 (459) 161 Minority interests in earnings of subsidiaries ............ 1,277 1,271 1,408 (Gain) loss on sale of securities ......................... (304) 270 (1,785) Valuation writedown on other real estate owned ............ 13 6 235 Gains on sale of other real estate owned, net ............. (517) (1,471) (2,072) Other assets and liabilities, net ......................... 2,758 (793) (712) Proceeds from sales of other real estate owned ................... 2,192 4,466 7,590 Cash receipts related to loans originated specifically for resale 74,672 81,401 200,584 Cash payments related to loans originated specifically for resale (73,370) (79,752) (196,635) --------- --------- --------- Net cash provided by operating activities ................. 43,236 38,967 46,180 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Deposits in other banks, net ..................................... (1,396) 11 92 Federal funds sold, net .......................................... -- 21,547 (4,382) Purchases of securities .......................................... (294,049) (349,404) (557,495) Proceeds from maturities of securities ........................... 147,373 156,876 330,359 Proceeds from sales of securities ................................ 112,886 143,593 232,444 Loans, net ....................................................... (149,885) (163,484) (39,181) Business acquisitions, net of cash acquired ...................... (1,469) 1,621 (17,946) Acquisition of premises and equipment ............................ (11,540) (5,913) (5,666) --------- --------- --------- Net cash used by investing activities ..................... (198,080) (195,153) (61,775) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Noninterest bearing deposits, net ................................ 36,160 5,781 23,794 Interest bearing deposits (excluding certificates of deposit), net 16,692 (32,545) 25,661 Certificates of deposits, net .................................... 119,120 97,316 (36,245) Federal funds purchased and repurchase agreements, net ........... (16,961) 68,016 10,317 Other short-term borrowings, net ................................. 25,611 29,889 5,175 Long-term debt, net .............................................. 1,780 13,924 (105) Minority interests acquired and dividends paid ................... (1,105) (1,098) (1,687) Redeemable preferred stock ....................................... (5,108) -- -- Dividends paid ................................................... (9,600) (9,360) (7,200) --------- --------- --------- Net cash provided by financing activities ................. 166,589 171,923 19,710 --------- --------- --------- Net increase in cash and due from banks ................... 11,745 15,737 4,115 Cash and due from banks Beginning of year ............................................ 116,041 100,304 96,189 --------- --------- --------- End of year .................................................. $ 127,786 116,041 100,304 ========= ========= ========= Supplemental disclosures of cash flow information Cash paid during the year for interest ........................... $ 89,977 64,366 62,515 Cash paid during the year for income taxes ....................... 8,640 13,270 11,061 See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A: ACCOUNTING POLICIES NATURE OF BUSINESS - Bremer Financial Corporation (the "Company") is a regional multi-state bank holding company headquartered in St. Paul, Minnesota. The Company is a majority owner of fourteen 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. Additionally, the Company also provides trust, insurance, and investment services to its customers through wholly-owned nonbanking subsidiaries. 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 banks and financial service subsidiaries in which the Company has a majority interest. All significant intercompany accounts and transactions have been eliminated. CASH FLOWS - For purposes of this statement, the Company has defined cash equivalents as cash and due from banks. During the years ended December 31, 1995, 1994 and 1993, the Company received real estate valued at $1,312,000, $506,000, and $3,823,000, respectively, in satisfaction of outstanding loan balances. During the years ended December 31, 1995 and 1994, the Company issued installment notes totaling $5,577,000 and $3,801,000, respectively, and redeemable preferred stock during 1994 of $7,160,000, in connection with acquisitions. Preferred Stock issued in 1994 totaling $5,108,000 was redeemed during 1995. INVESTMENT AND MORTGAGE-BACKED SECURITIES - The Company classifies and accounts for debt and equity securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115), adopted in 1993. The Company does not engage in trading activities. 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, increased for accretion of discounts and reduced by amortization of premiums, computed by the constant-yield method. Under certain circumstances (including the deterioration of the issuer's creditworthiness or a change in tax law or statutory or regulatory requirements), securities held to maturity may be sold or transferred to another portfolio. Available for sale securities consist of debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity or changes in the availability or yield of alternative investments. These securities are valued at current market value with the resulting unrealized holding gains and losses excluded from earnings and reported, net of tax and minority interest effects and the resultant allocation to redeemable class A common stock, as a separate component of shareholder's equity until realized. Gains or losses on these securities are computed based on the adjusted cost of the specific securities sold. LOANS - Interest income is accrued on loan balances based on the principal amount outstanding. Loans are reviewed regularly by management and placed on nonaccrual status when the collection of interest or principal is unlikely. 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. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (FAS 114 and 118). Under the Company's credit policies and practices, all nonaccrual and restructured commercial, agricultural, construction, and commercial real estate loans plus certain other credits identified by the Company meet the definition of impaired loans under FAS 114 and 118. Impaired loans as defined by FAS 114 and 118 exclude certain large groups of smaller balance homogeneous loans such as consumer loans and residential real estate loans. Under these statements, loan impairment is required to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. The adoption of FAS 114 and 118 did not have a material effect on the Company's financial position or results of operations. RESERVE FOR LOAN 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 portfolio. Being an estimate, the reserve is subject to change through evaluation of the loan composition, economic conditions, and the economic prospects of borrowers. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on accelerated methods based on estimated useful lives. OTHER REAL ESTATE - Other real estate owned, which is included in other assets, represents properties acquired through foreclosure and other proceedings recorded at the lower of the amount of the loan satisfied or fair value. Any write-down to fair value at the time of foreclosure is charged to the reserve for loan 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, which is currently being amortized over a 15 year period. INCOME TAXES - Bremer Financial Corporation and subsidiaries file a consolidated federal tax return, accounting for income taxes under FAS 109. Deferred taxes are recorded to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end. Such differences are primarily related to the differences between providing for loan losses for financial reporting purposes while deducting charged-off loans for tax purposes. ESTIMATES - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. EARNINGS PER SHARE CALCULATIONS - Earnings per common share have been computed using 12,000,000 common shares for all periods. See Note N. RECLASSIFICATIONS - Certain amounts have been reclassified to provide consistent presentation among the various accounting periods shown. The reclassifications have no effect on previously reported net income or total shareholder's equity. NOTE B: RESTRICTIONS ON CASH AND DUE FROM BANKS Subsidiary Banks are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those reserve balances was approximately $12,177,000 and $9,837,000 for the years ended December 31, 1995 and 1994, respectively. NOTE C: INVESTMENT AND MORTGAGE-BACKED SECURITIES At December 31, 1995 and 1994, investment and mortgage-backed securities with amortized cost of $606,895,000 and $550,208,000, respectively, were pledged as collateral to secure public deposits and for other purposes. The amortized cost and estimated market value by maturity at December 31, 1995, are shown below (contractual maturity or, if earlier, call dates are used):
Held to Maturity Available for Sale ----------------------------------- ----------------------------------- Amortized Market Amortized Market (in thousands) Cost Value Cost Value - ---------------------------- ---------------- --------------- ---------------- ---------------- Within 1 year .............. $73,356 72,993 118,462 117,323 1 - 5 years ................ 135,218 134,816 310,333 315,976 5 - 10 years ............... 87,567 91,142 74,103 76,174 After 10 years ............. 20,764 21,428 157,631 158,390 ---------------- --------------- ---------------- ---------------- Total ................. $316,905 320,379 660,529 667,863 ================ =============== ================ ================
The amortized cost and market value of investment and mortgage-backed securities available for sale as of December 31 consist of the following:
1995 1994 ------------------------------------------ ----------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value Cost Gains Losses Value ------------------------------------------ ----------------------------------------- Governments ....... $ 76,335 851 63 77,123 79,517 -- 2,202 77,315 State and political subdivisions .. 41,500 431 8 41,923 17,486 6 91 17,401 Corporate bonds ... 48,236 130 319 48,047 43,307 7 1,312 42,002 Mortgage-backed securities .... 450,551 5,257 1,465 454,343 356,154 502 15,471 341,185 Equity securities . 33,436 2,718 15 36,139 30,549 -- 2,221 28,328 Other ............. 10,471 27 210 10,288 7,382 -- 650 6,732 ------------------------------------------ ----------------------------------------- Total ...... $660,529 9,414 2,080 667,863 534,395 515 21,947 512,963 ========================================== =========================================
(TABLE CONTINUED) 1993 ----------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value ----------------------------------------- Governments ....... 58,504 589 17 59,076 State and political subdivisions .. -- -- -- -- Corporate bonds ... 68,583 309 71 68,821 Mortgage-backed securities .... 320,180 8,415 480 328,115 Equity securities . 12,779 264 62 12,981 Other ............. 6,269 22 110 6,181 ----------------------------------------- Total ...... 466,315 9,599 740 475,174 ========================================= Proceeds from sales of investments and mortgage-backed securities were $112,886,000, $143,593,000, and $232,444,000, for 1995, 1994, and 1993, respectively. Gross gains of $938,000, $1,583,000, and $2,219,000 were realized on those sales for 1995, 1994, and 1993, respectively. Gross losses were $634,000, $1,853,000 and $434,000 for 1995, 1994, and 1993, respectively. A summary of amortized cost and market values of investment and mortgage-backed securities held to maturity at December 31 consist of the following:
1995 1994 ------------------------------------------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value Cost Gains Losses Value ----------------------------------------- ----------------------------------------- Government agencies $ 51,222 240 54 51,408 69,956 14 2,176 67,794 State and political subdivisions .. 147,293 5,160 254 152,199 159,683 1,889 4,848 156,724 Mortgage-backed securities .... 118,390 3 1,621 116,772 164,609 -- 15,594 149,015 ----------------------------------------- ----------------------------------------- Total $316,905 5,403 1,929 320,379 394,248 1,903 22,618 373,533 ========================================= =========================================
(TABLE CONTINUED) 1993 ----------------------------------------- Gross Gross Amortized Unrealized Unrealized Market (in thousands) Cost Gains Losses Value ----------------------------------------- Government agencies 72,533 922 121 73,334 State and political subdivisions .. 168,653 7,588 60 176,181 Mortgage-backed securities .... 159,094 129 1,483 157,740 ----------------------------------------- Total 400,280 8,639 1,664 407,255 ========================================= State and political subdivision investments largely involve governmental entities within the Company's market area. NOTE D: LOANS The Company is engaged in lending activities with borrowers in a wide variety of industries. Lending is concentrated in the areas in which its Subsidiary Banks are located. Loans at December 31 consist of the following: (in thousands) 1995 1994 - ------------------------------- ---------------- ---------------- Commercial and other ......... $331,605 292,643 Commercial real estate ....... 313,287 282,203 Construction ............ 31,952 26,421 Agricultural ................. 350,786 299,127 Residential real estate ...... 322,296 293,671 Construction ............ 11,511 10,577 Consumer ..................... 221,727 192,865 Tax-exempt ................... 46,936 49,135 ---------------- ---------------- Total ............... $1,630,100 1,446,642 ================ ================ Nonperforming loans were $10,248,000 and $11,165,000 at December 31, 1995 and 1994, respectively. Nonperforming loans include nonaccrual and restructured loans. Restructured loans 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. The effect of nonaccrual and restructured loans on interest income for each of the three years ended December 31 was as follows: (in thousands) 1995 1994 1993 - ------------------------------- ------ ------ ------ Interest Income As originally contracted $1,575 1,662 2,043 As recognized .......... (429) (346) (344) ------ ------ ------ Reduction Of Interest Income ................. $1,146 1,316 1,699 ====== ====== ====== Other nonperforming assets, consisting of other real estate owned, amounted to $380,000 and $1,208,000 at December 31, 1995 and 1994, respectively. Loans totaling $45,300,000 and $12,000,000 were pledged to secure Federal Home Loan Bank (FHLB) advances at December 31, 1995 and 1994, respectively. 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 $14,115,000 and $13,913,000 at December 31, 1995 and 1994, respectively. During 1995, $11,460,000 of new loans were made, repayments totaled $10,459,000, and changes in the composition of the Group or their associations decreased loans outstanding by $799,000. Rates on these loans were made at the prevailing market rates. NOTE E: RESERVE FOR LOAN LOSSES Changes in the reserve for loan losses are as follows: (in thousands) 1995 1994 1993 - --------------------------------------- -------- -------- -------- Beginning of year ..................... $ 26,946 27,624 27,344 Charge-offs ...................... (2,834) (2,065) (3,022) Recoveries ....................... 1,610 1,814 2,705 -------- -------- -------- Net charge-offs .............. (1,224) (251) (317) Provision for loan loss .......... 1,780 (1,300) (1,000) Reserve related to acquired assets 751 873 1,597 -------- -------- -------- End of year ........................... $ 28,253 26,946 27,624 ======== ======== ======== NOTE F: PREMISES AND EQUIPMENT Premises and equipment at December 31 consist of the following: (in thousands) 1995 1994 - --------------------------------- ------- ------- Land ............................ $ 6,582 5,022 Buildings and improvements ...... 47,057 43,952 Furniture and equipment ......... 35,331 30,448 ------- ------- Total premises and equipment 88,970 79,422 Less: accumulated depreciation and amortization ........... 44,718 42,719 ------- ------- Premises and equipment, net ..... $44,252 36,703 ======= ======= 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), and FHLB advances (which mature within one year). Information related to short-term borrowings for the three years ended December 31 is provided below:
Federal Funds Federal Home Treasury and Repurchase Loan Bank Tax and Loan (dollars in thousands) Agreements Borrowings Notes - -------------------------------- -------------------- ------------------- ----------------- Balance at December 31 1993 .................... $136,045 -- 12,051 1994 .................... 204,061 33,000 8,940 1995 .................... 187,100 64,500 4,927 Weighted average interest rate at December 31 1993 .................... 3.09% -- 2.70 1994 .................... 5.04 6.01 5.36 1995 .................... 5.12 5.84 5.24 Maximum amount outstanding at any month end 1993 .................... $167,949 -- 12,624 1994 .................... 233,467 69,860 14,032 1995 .................... 193,777 95,990 21,083 Average amount outstanding during the year 1993 .................... $133,107 -- 6,012 1994 .................... 162,257 29,957 6,972 1995 .................... 154,453 67,203 8,279 Weighted average interest rate during the year 1993 .................... 3.29% -- 2.69 1994 .................... 4.23 4.99 3.61 1995 .................... 5.30 6.01 5.57
NOTE H: LONG-TERM DEBT Long-term debt (debt with original maturities of more than one year) at December 31 consists of the following: (in thousands) 1995 1994 - ------------------------------------------ ------- ------- Federal Home Loan Bank borrowings ........ $16,200 14,000 Installment promissory notes issued 9/1/94 3,887 3,970 Installment promissory notes issued 2/1/95 446 -- Installment promissory notes issued 5/2/95 4,870 -- Other .................................... 165 245 ------- ------- Total ................................. $25,568 18,215 ======= ======= The FHLB borrowings bear interest at rates ranging from 5.74% to 7.35%, with maturity dates from 1996 through 2000. The promissory notes issued 9/1/94 primarily relate to notes bearing interest at 1% below the Company's reference rate of 7.50% at December 31, 1995, and are due in annual installments through 1999. The promissory notes issued 2/1/95 relate to notes bearing interest at 8.53% and are due in annual installments through 2000. The promissory notes issued 5/2/95 relate to notes bearing interest at 100 basis points above the five-year Treasury rate as of May 1, 1995, and repricing every five years. The interest rate as of December 31, 1995 was 7.83% and the notes are due in annual installments through 2007. Other long-term debt at December 31, 1995 bears interest at 6.00% and is due in annual installments through 1997. Maturities of long-term debt outstanding at December 31, 1995, were as follows: (in thousands) - ------------------------------------------------- 1996 ......................... $2,743 1997 ......................... 16,748 1998 ......................... 947 1999 ......................... 1,702 2000 ......................... 673 Thereafter ................... 2,755 ------------ Total ................... $25,568 ============ The Company had an unused line of credit of $10 million with a bank at December 31, 1995. Borrowings under this line are noncollateralized and would bear interest at an applicable reserve adjusted certificate of deposit rate. The line of credit expires on April 30, 1997. NOTE I: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with FAS 107, the Company is required to disclose the estimated fair values of the Company's financial instruments. For the Company, most of its assets and liabilities are considered financial instruments as defined in FAS 107. Many of the Company's financial instruments, however, lack an available trading market which is characterized by an exchange transaction of the instrument by a willing buyer and seller. It is also the Company's general practice and intent to hold most of its financial instruments to maturity and not engage in trading activities. Therefore, significant estimations and present value calculations were utilized by the Company for purposes of this disclosure. The use of different market assumptions and/or estimation methodologies may have a material effect on these estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to the Company as of December 31, 1995 and 1994. 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, 1995 and, therefore, current estimates of fair value may differ from the amounts presented. As of December 31, carrying amounts and estimated fair values are:
1995 1994 ---------------------------- ---------------------------- Estimated Estimated Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value - ----------------------------------- ---------------------------- ---------------------------- ASSETS Cash and due from banks ...... $127,786 127,786 116,041 116,041 Interest bearing deposits .... 3,008 3,008 1,612 1,612 Securities held to maturity .. 316,905 320,379 394,248 373,533 Securities available for sale 667,863 667,863 512,963 512,963 Loans ........................ 1,626,616 1,678,937 1,443,128 1,422,199 LIABILITIES Demand deposits .............. 1,013,415 1,013,415 954,028 954,028 Time deposits ................ 1,228,892 1,261,969 1,070,436 1,059,210 Short-term borrowings ........ 256,527 256,527 246,001 246,001 Long-term debt ............... 25,568 26,169 18,215 18,194
CASH AND DUE FROM BANKS, INTEREST BEARING DEPOSITS, AND FEDERAL FUNDS SOLD - The carrying values 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 - The fair value of loans (net of unearned discount) is estimated by discounting the future cash flows using the current rates at which similar loans would be made to qualified borrowers and for the same remaining maturities, adjusted by a related portion of the reserve for loan losses. 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 is considered carrying value. LONG-TERM DEBT - The majority of the long-term debt reprices monthly, and therefore, fair value is considered carrying value. For fixed rate debt, the fair value is determined by discounting future cash flows at current rates for debt with similar remaining maturities. 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 employee's highest average compensation during 60 consecutive months of the last 120 months of employment. The Company's funding policy is to contribute annually an amount approximating the Company's annual net pension expense. Contributions are intended to provide for benefits attributed to service to date and for those expected to be earned in the future. The following table sets forth the plan's funded status and amount recognized in the Company's balance sheet at December 31: (in thousands) 1995 1994 - ------------------------------------- -------- -------- Accumulated benefit obligation, including vested benefits of $11,302 in 1995, and $8,828 in 1994 ........................ $ 14,089 11,323 Increase due to salary projections .. 6,159 4,524 -------- -------- Projected benefit obligation for service rendered to date ....... 20,248 15,847 Plan assets (marketable securities) at fair value .................. (18,667) (13,880) -------- -------- Projected benefit obligation in excess of plan assets .......... 1,581 1,967 Unrecognized actuarial gain (loss) .. (162) (592) Prior service cost not yet recognized in net periodic expense ........ (734) (466) -------- -------- Accrued pension expense .... $ 685 909 ======== ======== Net periodic pension cost includes the following components: (in thousands) 1995 1994 - ----------------------------- ------- ------- Service cost - benefits earned during the period $ 973 1,143 Interest cost on projected benefit obligation ..... 1,434 1,279 Actual return on plan assets (3,645) 202 Net amortization and deferral 2,526 (1,258) ------- ------- Net pension cost ... $ 1,288 1,366 ======= ======= 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 were 7.5% and 5.0%, respectively, at December 31, 1995, and 8.5% and 5.0%, respectively, at December 31, 1994. The expected long-term rate of return on assets in 1995, 1994, and 1993 was 9.0%. 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 Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" (FAS 106), the Company accrues the cost of these benefits during the employees' active service. The following table sets forth the unfunded plan's accumulated postretirement obligation on the Company's balance sheet at December 31: (in thousands) 1995 1994 - --------------------------------------- ------ ------ Retirees .............................. $ 240 466 Fully eligible active plan participants 377 343 Other active plan participants ........ 1,158 875 ------ ------ Total ........................ $1,775 1,684 ====== ====== Net periodic postretirement benefit cost includes the following components: (in thousands) 1995 1994 - ---------------------------------------- ----- ----- Service cost - benefits earned during the period ................. $ 106 118 Interest cost on accumulated postretirement benefit obligation . 130 138 Net amortization and deferral .......... (106) (87) ----- ----- Net postretirement benefit cost $ 130 169 ===== ===== For the 1995 measurements, the assumed annual rate of increase in the per capita cost of covered health care benefits was 10.5% for 1995 and 9.6% for 1996; the rate was assumed to decrease gradually to 5.0% for 2001 and remain at that level thereafter. The health care cost trend assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated post-retirement benefit obligation as of December 31, 1995 by $219,000 and the aggregate of the service cost and interest cost components of net periodic post-retirement benefit cost for the year then ended by $32,000. The weighted average discount rates used in determining the accumulated postretirement benefit obligation at December 31, 1995 and 1994 were 7.5% and 8.5%, respectively. OTHER POSTEMPLOYMENT BENEFITS - The Company accounts for postemployment benefits in accordance with Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Postemployment Benefits" (FAS 112), adopted in 1994. The adoption of FAS 112 had no material impact on income in 1994. PROFIT SHARING PLAN - The profit sharing plan is a defined contribution plan with contributions made by the participating employers. 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. ContributionS expense for the plan were $1,560,000, $1,893,000, and $1,718,000 for 1995, 1994, and 1993, 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. Contribution expense for the plan was $350,000, $140,000, and $300,000 in 1995, 1994, and 1993, respectively. NOTE K: OTHER NONINTEREST EXPENSE Other noninterest expense consists of the following: (in thousands) 1995 1994 1993 - ------------------------------------- ------- ------- ------- Printing, postage and office supplies $ 4,599 3,918 3,723 Marketing ........................... 3,041 2,954 2,440 Other real estate owned ............. 84 (63) 791 Other ............................... 10,681 10,076 9,183 ------- ------- ------- Total .......................... $18,405 16,885 16,137 ======= ======= ======= NOTE L: INCOME TAXES The components of the provision for income taxes are as follows: (in thousands) 1995 1994 1993 - ------------------------- -------- ------- ------- Current Federal ........... $8,295 8,236 8,665 State ............. 2,956 2,941 3,437 Deferred .......... 1,074 (459) 161 -------- ------- ------- Total ........ $12,325 10,718 12,263 ======== ======= ======= A reconciliation between income tax expense and the amount computed by applying the statutory federal income tax rate is as follows: (in thousands) 1995 1994 1993 - ------------------------------------ -------- -------- -------- Tax at statutory rate .............. $ 13,811 12,780 13,702 Plus state income tax, net of federal tax benefits ....... 1,922 1,912 2,234 -------- -------- -------- 15,733 14,692 15,936 Less tax effect of: Interest on state and political subdivision securities ... 2,980 2,855 2,680 Other tax-exempt interest ..... 1,553 1,196 1,228 Amortization .................. (93) 105 307 Minority interest in earnings . (511) (508) (563) Other ......................... (521) 326 21 -------- -------- -------- 3,408 3,974 3,673 -------- -------- -------- Income tax expense ................. $ 12,325 10,718 12,263 ======== ======== ======== 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: (in thousands) 1995 1994 - ------------------------------------------------------- ------- ------- Deferred tax assets Provision for loan losses ........................ $11,135 10,725 Employee compensation and benefits accruals ...... 1,425 1,637 Deferred income .................................. 208 908 Unrealized losses on securities available for sale -- 8,433 Other ............................................ -- 579 ------- ------- Total ....................................... 12,768 22,282 ------- ------- Deferred tax liabilities Deferred expense ................................. 1,334 1,028 Depreciation ..................................... 1,402 1,092 Unrealized gains on securities available for sale 2,933 -- Other ............................................ 665 80 ------- ------- Total ....................................... 6,334 2,200 ------- ------- Net deferred tax assets ............................... $ 6,434 20,082 ======= ======= NOTE M: 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: (in thousands) 1995 1994 - ------------------------- -------- -------- Standby letters of credit $ 39,889 30,516 Loan commitments ........ 325,692 303,782 ======== ======== 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. 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. Collateral held varies, but includes accounts receivable, inventory, and productive assets. Under a substantially noncancelable contract, the Company is obligated to pay approximately $4 million in annual fees, through February 1997, to its data processing provider. In addition, the Company has a related contract which covers item processing services to the Company's subsidiary banks through March 1997. The costs under this contract are calculated in accordance with a volume-based fee schedule, which is subject to change annually. The Company is routinely involved in legal actions which are incidental to the business of the Company. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate liability will not materially affect the consolidated financial position or operations. The Company issued redeemable preferred stock of Dunn County Bankshares, Inc. ("DCBI") in connection with the acquisition of Menomonie, Wisconsin operation on September 1, 1994. This stock is cumulative, pays dividends of 3.85% annually, and is generally redeemable at par value plus unpaid dividends after the earlier to occur of (i) the death of the holder, or (ii) the lapse of 5 years from the date of issuance. NOTE N: 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, 1995 and 1994, 960,000 shares of redeemable class A common stock were issued and outstanding. With the exception of shares held in the Company's ESOP, these shares were subject to redemption at a price of $19.83 and $16.99 per share, respectively, which approximated book value. Shares held in the Company's ESOP were redeemed at a price of $23.75 and $21.25 per share, respectively, as determined by an independent appraiser. These shares are owned by employees and Directors of the Company and its subsidiaries and the employee benefit plans of the Company. These holders of class A common stock have the right to require the Company to purchase their shares under certain circumstances. The shares have been classified as redeemable class A common stock subject to redemption at a price, which approximates book value. It is the Company's intent that these 960,000 shares will continue to be held by employees, directors, and employee benefit plans of the Company or its subsidiaries and not be directly repurchased by the Company or the Otto Bremer Foundation. Certain restrictions exist regarding the extent to which banks may transfer funds to the Company in the form of dividends. Federal law prevents the Company and its non-bank subsidiaries from borrowing from the Subsidiary Banks unless the loans are secured by specified U.S. obligations. Further, the secured loans that may be made by Subsidiary Banks are generally limited in amount to 10% of the Subsidiary Bank's equity if made to the Company or any individual affiliate and 20% of the Subsidiary Bank's equity if made to all affiliates and the Company in the aggregate. At December 31, 1995, 1994 and 1993, no Subsidiary Banks had extended credit to the Company. Payment of dividends to the Company by its Subsidiary Banks is subject to various limitations by bank regulators, which includes maintenance of certain minimum capital ratios. As of December 31, 1995, $33,231,000 of retained earnings of the Subsidiary Banks was available for distribution to the Company as dividends subject to these limitations. Approximately $12,499,000 was available for distribution without obtaining the prior approval of the appropriate bank regulator. NOTE O: BREMER FINANCIAL CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS: BALANCE SHEET December 31 ------------------- (in thousands) 1995 1994 -------- -------- ASSETS Cash and cash equivalents ....................... $ 5,399 3,196 Marketable securities ........................... 21,091 15,805 Investment in and advances to: Bank subsidiaries ........................... 206,636 178,631 Non-bank subsidiaries ....................... 8,227 5,543 Other assets .................................... 3,814 2,397 -------- -------- Total assets ............................. $245,167 205,572 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Accrued expenses and other liabilities .......... $ 2,356 1,726 Long-term debt .................................. 4,870 -- Redeemable class A common stock ................. 19,035 16,308 Shareholder's equity ............................ 218,906 187,538 -------- -------- Total liabilities and shareholder's equity $245,167 205,572 ======== ======== STATEMENTS OF INCOME Year Ended December 31 ------------------------------- (in thousands) 1995 1994 1993 -------- -------- -------- INCOME Dividends from: Bank subsidiaries ................ $ 23,357 20,349 23,736 Non-bank subsidiaries ............ 200 190 1,061 Interest from subsidiaries ........... 248 185 184 Other interest income ................ 942 484 558 Gain on sale of securities ........... (13) -- 118 Other income ......................... 14 -- 82 -------- -------- -------- Total income ..................... 24,748 21,208 25,739 -------- -------- -------- EXPENSES Salaries and benefits ................ 621 640 602 Operating expense paid to subsidiaries 1,165 1,402 1,327 Interest expense ..................... 266 -- -- Other operating expenses ............. 546 215 166 -------- -------- -------- Total expenses ................... 2,598 2,257 2,095 -------- -------- -------- Income before income tax benefit . 22,150 18,951 23,644 Income tax benefit ........................ 747 773 528 -------- -------- -------- Income of parent company only .... 22,897 19,724 24,172 Equity in undistributed earnings of subsidiaries .................. 4,239 6,073 2,713 -------- -------- -------- NET INCOME ................................ $ 27,136 25,797 26,885 ======== ======== ======== STATEMENTS OF CASH FLOWS
Year Ended December 31 -------------------------------- (in thousands) 1995 1994 1993 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ............................................ $ 27,136 25,797 26,885 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed earnings of subsidiaries (4,239) (6,073) (2,713) (Gain) Loss on sale of securities .............. 13 -- (118) Securities amortization ........................ 185 279 116 Other, net ..................................... (1,080) (271) (394) -------- -------- -------- Net cash provided by operating activities .. 22,015 19,732 23,776 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in and advances to subsidiaries, net ....... (10,332) (5,729) (22,420) Purchases of securities, net .......................... (28,127) (14,428) (4,036) Proceeds from maturities of securities ................ 13,968 -- 16,000 Proceeds from sales of securities ..................... 9,409 -- 2,144 Long term debt, net ................................... 4,870 -- -- -------- -------- -------- Net cash used by investing activities ...... (10,212) (20,157) (8,312) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid ........................................ (9,600) (9,360) (7,200) -------- -------- -------- Net cash used by financing activities ...... (9,600) (9,360) (7,200) -------- -------- -------- Increase (decrease) in cash and cash equivalents ........... 2,203 (9,785) 8,264 Cash and cash equivalents Beginning of year ..................................... 3,196 12,981 4,717 -------- -------- -------- End of year ........................................... $ 5,399 3,196 12,981 ======== ======== ========
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF BREMER FINANCIAL CORPORATION We have audited the accompanying consolidated balance sheets of Bremer Financial Corporation and subsidiaries (the Company), a subsidiary of the Otto Bremer Foundation as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 1995. These 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the consolidated financial position of Bremer Financial Corporation and subsidiaries as of December 31, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Notes A and C to the consolidated financial statements, effective December 31, 1993, the Company changed its method of accounting for certain investments in debt and equity securities to conform with Statement of Financial Accounting Standards No. 115. Deloitte & Touche January 26, 1996 Saint Paul, Minnesota 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, 1995. PART III. Items 10 through 13 of the Form 10-K are omitted because the Company will file on or before April 29, 1996 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, 1995 and December 31, 1994 Consolidated Statements of Income - Years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Shareholder's Equity - Years ended December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows - Years ended December 31, 1995, 1994 and 1993 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 1995 Executive Incentive Compensation Plan for Group Presidents. 10.2 Bremer Financial Corporation 1995 Executive Incentive Compensation Plan for Retail Banking Services Director. 10.3 Bremer Financial Corporation 1995 Executive Incentive Compensation Plan for President and CEO. 10.4 Bremer Financial Corporation 1995 Long-Term Incentive Compensation Plan for Group Presidents and Retail Banking Services Director. 10.5 Bremer Financial Corporation 1995 Long-Term Incentive Compensation Plan for President and CEO. 21 Subsidiaries of the Company. 27 Financial Data Schedule. The following exhibits are incorporated by reference to Exhibits 10.2, 10.3, 10.4, 10.5, 10.6, 10.7, 10.8, 10.9, and 10.10, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1994: 10.6 Resolutions of the Board of Directors of the Company adopted on April 29, 1994 amending the Employment Agreements incorporated by reference as Exhibits 10.15 and 10.16 and Exhibits 10.21 through 10.24 (inclusive). 10.7 Bremer Financial Corporation 1994 Executive Incentive Compensation Plan for Gene H. Sipe and Duaine C. Espegard. 10.8 Bremer Financial Corporation 1994 Executive Incentive Compensation Plan for Kenneth P. Nelson. 10.9 Bremer Financial Corporation 1994 Executive Incentive Compensation Plan for Stan K. Dardis. 10.10 Bremer Financial Corporation 1994 Executive Incentive Compensation Plan for President and CEO. 10.11 Bremer Financial Corporation 1994 Long-Term Incentive Compensation Plan for Group Presidents and Retail Banking Services Director. 10.12 Bremer Financial Corporation 1994 Long-Term Incentive Compensation Plan for President and CEO. 10.13 Deferred Compensation Plan for Directors of Bremer Financial Services, Inc. 10.14 Bremer Financial Corporation Supplemental Executive Retirement Plan (Effective January 1, 1994). The following exhibits are incorporated by reference to Exhibits 10.2, 10.4, and 10.5, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1992: 10.15 Employment Agreement by and between Bremer Financial Services, Inc. ("BFS") and Brent J. Gray dated March 27, 1992. 10.16 Employment Agreement by and between BFS and Ernest (Bud) Jensen dated March 27, 1992. 10.17 Resolutions of the Board of Directors of the Company adopted on February 9, 1993 amending the Employment Agreements filed or incorporated by reference as Exhibits 10.15 and 10.16 and Exhibits 10.21 through 10.24 (inclusive). The following exhibits are incorporated by reference to Exhibits 10.3, 10.4, and 10.5, respectively, to the Company's Annual Report on Form 10-K for the year ended December 31, 1991: 10.18 Stock Purchase Agreement among Fiserv, Inc., First American Information Services, Inc., and Bremer Financial Corporation dated March 2, 1992. 10.19 Item Processing Service Agreement between Fiserv, Inc., and Bremer Financial Services, Inc. dated March 2, 1992. 10.20 Agreement between Fiserv, Inc. and Bremer Financial Services, Inc. dated March 2, 1992, regarding data processing services. 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. The following exhibits are incorporated by reference to Exhibits 3.1, 10.3, 10.4, 10.5, 10.7, 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. 10.21 Employment Agreement by and between Bremer Financial Services, Inc. ("BFS") and Terry Cummings dated January 9, 1985 and Amendment thereto dated March 23, 1988. 10.22 Employment Agreement by and between BFS and Duaine Espegard dated January 2, 1986 and Amendments thereto dated October 28, 1987 and March 23, 1988. 10.23 Employment Agreement by and between BFS and Kenneth Nelson dated January 2, 1986 and Amendments thereto dated October 28, 1987 and March 23, 1988. 10.24 Employment Agreement by and between BFS and Gene Sipe dated January 2, 1986 and Amendments thereto dated October 28, 1987 and March 23, 1988. 10.25 Bremer Financial Corporation Employee Stock Ownership Plan and Trust Agreement. 10.26 Bremer Banks Profit Sharing Plus Plan, as amended and restated effective January 1, 1986, and Amendment No. 1 thereto. 10.27 Bremer Banks Profit Sharing Plus Trust Agreement dated October 1, 1986 and Amendment No. 1 thereto. 10.28 Bremer Banks Retirement Plan as effective April 1, 1985. 10.29 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 1995, which ended December 31, 1995. (The remainder of this page was intentionally left blank.) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 29, 1996. Bremer Financial Corporation By: /s/ Terry M. Cummings Terry M. Cummings Its President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed below by the following persons on behalf of the registrant on March 29, 1996 in the capacities indicated. /s/ Terry M. Cummings Terry M. Cummings, President, Chief Executive Officer and Director /s/ William H. Lipschultz William H. Lipschultz, Chairman of the Board and Director /s/ Charlotte S. Johnson Charlotte S. Johnson Vice President and Director /s/ Sherman Winthrop Sherman Winthrop Director /s/ Brent J. Gray Brent J. Gray, Senior Vice President and Chief Financial Officer /s/ Stuart F. Bradt Stuart F. Bradt, Controller (Chief Accounting Officer) INDEX TO EXHIBITS Description of Exhibits Page 10.1 Bremer Financial Corporation 1995 Executive Incentive Compensation Plan for Group Presidents. 10.2 Bremer Financial Corporation 1995 Executive Incentive Compensation Plan for Retail Banking Services Director. 10.3 Bremer Financial Corporation 1995 Executive Incentive Compensation Plan for President and CEO. 10.4 Bremer Financial Corporation 1995 Long-Term Incentive Compensation Plan for Group Presidents and Retail Banking Services Director. 10.5 Bremer Financial Corporation 1995 Long-Term Incentive Compensation Plan for President and CEO. 21 Subsidiaries of the Company. 27 Financial Data Schedule. EX-10.1 2 EXHIBIT 10.1 BREMER FINANCIAL CORPORATION 1995 EXECUTIVE INCENTIVE COMPENSATION PLAN Group Presidents Contained herein is a detailed outline of the Executive Incentive Compensation Plan which has been designed for Bremer Group Presidents. A. Purpose 1) To provide an annual incentive award to Group Presidents who contribute significantly toward the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well-being. B. Eligibility 1) Participants will be Group Presidents. C. Plan Year 1) The Executive Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the President of Bremer Financial Corporation to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, award payments will be recommended and approved. 2) Award payments will be made in the first quarter, following the end of defined incentive plan year. E. Potential Awards 1) The target (planned) and maximum potential award, stated as a percentage of base salary, will be: Target Maximum ------ ------- Group Presidents 20% 40% F. Performance Measures and Determination of Award 1) Corporate RORE 40% of the target incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award -------------- ---------------- 10.50 0% 11.50 4.0% 12.50 TARGET 8.0% 13.50 9.6% 14.50 11.2% 15.50 12.8% 16.50 14.4% 17.50 and over 16.0% 2) Other Measures 60% of the target incentive award is based upon achievement of work plan objectives, and/or region RORE, or as otherwise defined by the President of Bremer Financial Corporation. Percentage of Salary Earned on Other Measures Target 12.0% Maximum 24.0% G. Moderator To protect the Foundation's investment in Bremer Financial Corporation and to insure the awards payable under this plan are not disproportionate with the return to Bremer, a moderator has been established. The moderator will be applied to the total award as calculated under item F above. Corporate Moderator - a return for Bremer Financial Corporation will be selected that is a minimum needed to award full incentives. As the return is less, the percentage of individual incentive is reduced, but not lower than 50%. Each year the President of Bremer Financial Corporation will set the corporate moderator and communicate it to you. Outlined below is the approved moderator for 1995: Return on Percent of Average Realized Equity - BFC Incentive Award Payable ----------------------------- ----------------------- (greater than or equal to) 9% 100% 6-8.99% 75% (less than) 6% 50% H. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Award may be deferred. I. Administrative Procedures 1) Addition to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board of Directors of Bremer Financial Corporation. Criteria for award is subject to approval by the President of BFC. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so s/he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- Eligible employees who terminate during the plan year will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval by President of BFC. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- Eligible employees who have a change in position during a plan year will have their incentive award calculated under both plan award levels and prorated by the months of service at each level. 4) Interpolation -- When actual performance falls between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent, the President of Bremer Financial Corporation has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The President of Bremer Financial Corporation has the authority to determine and approve all such exceptions. J. Amendment and termination 1) The Board of Bremer Financial Corporation may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board of Bremer Financial Corporation may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. ___________________________________________ ______________________ NAME GROUP CALCULATION OF GROUP PRESIDENT INCENTIVE AWARD Plan Year 1995 Percentage of Salary To Be Awarded F-1 - Corporate RORE Corporate RORE _______________% _______________% F-2 - Other Measures Attach a description of "Other Measures" _______________% to be awarded and how they will be measured. Indicate ratings for each measure. Total Award Earned as % of Salary _______________% (F-1 + F-2) X 1995 Salary $_______________ = 1995 INCENTIVE AWARD $_______________ Approved: ______________________________ _______________________________________ Date President, Bremer Financial Corporation EX-10.2 3 EXHIBIT 10.2 BREMER FINANCIAL CORPORATION 1995 EXECUTIVE INCENTIVE COMPENSATION PLAN Retail Banking Services Director Contained herein is a detailed outline of the Executive Incentive Compensation Plan which has been designed for the Retail Banking Services Director. A. Purpose 1) To provide an annual incentive award to executives who contribute significantly toward the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well-being. B. Eligibility 1) Participant will be the Retail Banking Services Director for Bremer Financial Services, Inc. C. Plan Year 1) The Executive Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the President of Bremer Financial Corporation to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, an award will be approved. 2) Award payments will be made in the first quarter, following the end of defined incentive plan year. E. Potential Awards 1) The target (planned) and maximum potential award, stated as a percentage of base salary, will be: Target Maximum ------ ------- Retail Banking Services Director 20% 40% F. Performance Measures and Determination of Award 1) 40% of the target incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award -------------- ---------------- 10.50 0% 11.50 4.0% 12.50 TARGET 8.0% 13.50 9.6% 14.50 11.2% 15.50 12.8% 16.50 14.4% 17.50 and over 16.0% 2) Other Measures 60% of target incentive award is based upon achievement of work plan objectives or as otherwise defined by the manager of the Retail Banking Services Director. Percentage of Salary Earned on Other Measures ------------------------ Target 12.0% Maximum 24.0% G. Moderator To protect the Foundation's investment in Bremer Financial Corporation and to insure the awards payable under this plan are not disproportionate with the return to Bremer, a moderator has been established. The moderator will be applied to the total award as calculated under item F above. Corporate Moderator - a return for Bremer Financial Corporation will be selected that is a minimum needed to award full incentives. As the return is less, the percentage of individual incentive is reduced, but not lower than 50%. Each year the President of Bremer Financial Corporation will set the corporate moderator and communicate it to you. Outlined below is the approved moderator for 1995: Return on Percent of Average Realized Equity - BFC Incentive Award Payable ----------------------------- ----------------------- (greater than or equal to) 9% 100% 6-8.99% 75% (less than) 6% 50% H. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Award may be deferred. I. Administrative Procedures 1) Addition to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board of Directors of Bremer Financial Corporation. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so s/he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- Eligible employees who terminate during the plan year will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval by President of BFC. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan year. 3) Change in Position -- Eligible employees who have a change in position during a plan year will have their incentive award calculated under both plan award levels and prorated by the months of service at each level. 4) Interpolation -- When actual performance falls between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent, the President of Bremer Financial Corporation has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The President of Bremer Financial Corporation has the authority to determine and approve all such exceptions. J. Amendment and termination 1) The Board of Bremer Financial Corporation may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board of Bremer Financial Corporation may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. ___________________________________________ ______________________ NAME TITLE CALCULATION OF EXECUTIVE INCENTIVE AWARD Plan Year 1995 Percentage of Salary To Be Awarded F-1 - Corporate RORE Corporate RORE _______________% _______________% F-2 - Other Measures Attach a description of "Other Measures" _______________% to be awarded and how they will be measured. Indicate ratings for each measure. Total Award Earned as % of Salary _______________% (F-1 + F-2) X 1995 Salary $_______________ = 1995 INCENTIVE AWARD $_______________ Approved: ______________________________ _______________________________________ Date President, Bremer Financial Corporation EX-10.3 4 EXHIBIT 10.3 BREMER FINANCIAL CORPORATION 1995 EXECUTIVE INCENTIVE COMPENSATION PLAN President and CEO of Bremer Financial Corporation Contained herein is a detailed outline of the Executive Incentive Compensation Plan which has been designed for the President and CEO of Bremer Financial Corporation. A. Purpose 1) To provide an annual incentive award to the President of Bremer Financial Corporation for the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities which will positively affect the Corporation's financial well- being. B. Eligibility 1) The President and CEO of Bremer Financial Corporation is the participant in this plan. C. Plan Year 1) The Executive Incentive Compensation program will begin on January 1 and will end on December 31. D. Payment of Award 1) At year end, formal reviews will be conducted by the Board of Directors of Bremer Financial Corporation to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, an award will be approved. 2) Award payments will be made in the first quarter, following the end of defined incentive plan year. E. Potential Awards 1) The target (planned) and maximum potential award, stated as a percentage of base salary, will be: Target Maximum ------ ------- 30% 60% F. Performance Measures and Determination of Award 1) 100% of the target incentive award will be based upon Corporate RORE. The following table will be utilized to determine the actual percentage of salary to be granted. When performance falls between the RORE percentages shown, interpolation will be utilized to determine the actual percentage of salary to be awarded. Corporate RORE Percentage Award 10.50 0.0% 11.50 15.0% 12.50 TARGET 30.0% 13.50 36.0% 14.50 42.0% 15.50 48.0% 16.50 54.0% 17.50 and over 60.0% G. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. 3) Award may be deferred. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board of Directors of Bremer Financial Corporation. However, the size of their awards will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid-year so he has six (6) months of eligible service. - Calculated incentive award is $15,000 - $15,000 X 6/12 = $7,500 2) Terminations -- If the eligible participant terminates during the plan year, the incentive award will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year, based on approval of Board of Directors of BFC. - Retirement/disability -- incentive award prorated by number of months of service during current incentive year. 3) Change in Position -- If the eligible participant has a change in position during a plan year, the incentive award will be calculated under both plan award levels and prorated by the months of service at each level. 4) Interpolation -- When actual performance falls between cells on the appropriate element, the individual completing the formula should interpolate to the actual percentage to be awarded. 5) Performance -- If a participant's performance rating for the plan year is less than fully competent, the Board of Directors of Bremer Financial Corporation has the authority to reduce partially or totally the incentive payout that would normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The Board of Directors of Bremer Financial Corporation has the authority to determine and approve all such exceptions. I. Amendment and termination 1) The Board of Directors of Bremer Financial Corporation may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board of Directors of Bremer Financial Corporation may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. ________________________________________________ NAME CALCULATION OF PRESIDENT OF BFC INCENTIVE AWARD Plan Year 1995 Percentage of Salary To Be Awarded F-1 - Corporate RORE Corporate RORE _______________% _______________% Total Award Earned as % of Salary _______________% (F-1) X 1995 Salary $_______________ = 1995 INCENTIVE AWARD $_______________ Approved: ______________________________ _______________________________________ Date Board of Directors of BFC EX-10.4 5 EXHIBIT 10.4 BREMER FINANCIAL CORPORATION 1995 LONG-TERM INCENTIVE COMPENSATION PLAN Group President Retail Banking Services Director Contained herein is a detailed outline of the Long-Term Executive Incentive Compensation Plan which has been designed for the Group Presidents and Retail Banking Services Director. A. Purpose 1) To provide a long-term incentive award to the participants for the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities that will have an impact on the Corporation's long-term financial wellbeing. Those activities include long term profitability, growth through acquisitions, and maximization of efficiencies resulting in high productivity. B. Eligibility 1) The Group Presidents and Retail Banking Services Directors are the participants in this plan. C. Plan Years 1) The Executive Incentive Compensation program will begin on January 1, 1995 and will end on December 31, 1997. D. Payment of Award 1) At the end of 1997, formal reviews will be conducted by the President and CEO of Bremer Financial Corporation to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, an award will be approved. 2) Award payments will be made in the first quarter of 1998, or may be deferred. E. Potential Awards 1) A target (planned) and maximum potential awards, stated as a percentage of base salary will be: Target Maximum ------ ------- 45% 105% F. Performance Measures and Determination of Award Return on Realized Equity 100% of the target award will be based upon the simple average of the Corporate RORE(1) for the years of 1995, 1996, and 1997. When performance falls between the RORE percentages shown, interpolation will be used to determine the actual percentage of salary to be awarded. Base salary at the time the payout is determined will be utilized. RORE Percentage Award ---- ---------------- 13.00 25.0% 14.50 TARGET 45.0% 16.50 and over 105.0% G. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board of Directors of Bremer Financial Corporation. However, the size of their award will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid 1995 so s/he has eighteen (18) months of eligible service. - Calculated incentive award is $100,000 - $100,000 X 18/36 = $50,000 2) Terminations -- If the eligible participant terminates during the three-year plan. the incentive award will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan 3 year period. 3) Change in Position -- If the eligible participant has a change in position during the three-year plan, their incentive award calculated under both plan award levels and prorated by the months of service at each level. 4) Interpolation -- When actual performance falls between threshold, target, and maximum, the individual completing the formula should interpolate to the actual percentage to be awarded. (1) RORE excludes from equity the FAS 115 net unrealized gain or loss on securities available for sale. 5) Performance -- If a participant's performance rating for any year within the three year plan is less than fully competent, the President and CEO of Bremer Financial Corporation has the authority to reduce partially or totally the incentive payout that would be normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The President and CEO of Bremer Financial Corporation has the authority to determine and approve all such exceptions. J. Amendment and termination 1) The Board of Directors of Bremer Financial Corporation may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board of Directors of Bremer Financial Corporation may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. _________________________________________ NAME CALCULATION OF INCENTIVE AWARD Plan Year 1995 - 1997 Percentage of Salary To Be Awarded F-1 - Return on Realized Equity a. 1995 _____________________% b. 1996 _____________________% c. 1997 _____________________% Simple average equals a + b + c ________________% --------- 3 X 12/31/97 Salary $_________________ = 1995-1997 INCENTIVE AWARD $_________________ Approved: _____________________________ ___________________________________________ Date President and CEO, BFC EX-10.5 6 EXHIBIT 10.5 BREMER FINANCIAL CORPORATION 1995 LONG-TERM INCENTIVE COMPENSATION PLAN President and CEO of Bremer Financial Corporation Contained herein is a detailed outline of the Long-Term Executive Incentive Compensation Plan which has been designed for the President and CEO of Bremer Financial Corporation. A. Purpose 1) To provide a long-term incentive award to the President of Bremer Financial Corporation for the achievement of Bremer Financial Corporation's goals and objectives. 2) To focus attention on those activities that will have an impact on the Corporation's long-term financial wellbeing. Those activities include long term profitability, growth through acquisitions, and maximization of efficiencies resulting in high productivity. B. Eligibility 1) The President and CEO of Bremer Financial Corporation is the participant in this plan. C. Plan Years 1) The Executive Incentive Compensation program will begin on January 1, 1995 and will end on December 31, 1997. D. Payment of Award 1) At the end of 1997, formal reviews will be conducted by the Board of Directors of Bremer Financial Corporation to determine and measure performance. Upon completion of the measurement of the participant's goals and objectives, an award will be approved. 2) Award payments will be made in the first quarter of 1998, or may be deferred. E. Potential Awards 1) A target (planned) and maximum potential awards, stated as a percentage of base salary will be: Target Maximum ------ ------- 60% 120% F. Performance Measures and Determination of Award Return on Realized Equity 100% of the target award will be based upon the simple average of the Corporate RORE(1) for the years of 1995, 1996, and 1997. When performance falls between the RORE percentages shown, interpolation will be used to determine the actual percentage of salary to be awarded. Base salary as of December 31, 1996 will be utilized. RORE Percentage Award ---- ---------------- 13.00 33.0% 14.50 TARGET 60.0% 16.50 and over 120.0% G. Administration 1) The plan shall be subject to the approval of the Board of Directors of Bremer Financial Corporation which shall have sole authority to establish the terms and conditions under which the plan will be administered. 2) The Executive Incentive Compensation Plan and awards are not transferable or assignable. H. Administrative Procedures 1) Additions to Plan -- Eligible individuals will be added to the plan at any time upon the approval of the Board of Directors of Bremer Financial Corporation. However, the size of their award will be prorated by the number of months they were eligible to receive an award. An example would be: - Employee "A" is added to plan in mid 1995 so s/he has eighteen (18) months of eligible service. - Calculated incentive award is $100,000 - $100,000 X 18/36 = $50,000 2) Terminations -- If the eligible participant terminates during the three-year plan. the incentive award will be handled as follows: - Voluntary resignations -- no incentive award. - Involuntary terminations for cause -- no incentive award. - Involuntary termination without cause -- incentive award prorated by number of months service during current incentive plan year. - Retirement/disability -- incentive award prorated by number of months of service during current incentive plan three year period. 3) Change in Position -- If the eligible participant has a change in position during the three-year plan, their incentive award calculated under both plan award levels and prorated by the months of service at each level. 4) Interpolation -- When actual performance falls between threshold, target, and maximum, the individual completing the formula should interpolate to the actual percentage to be awarded. (1) RORE excludes from equity the FAS 115 net unrealized gain or loss on securities available for sale. 5) Performance -- If a participant's performance rating for any year within the three year plan is less than fully competent, the Board of Directors of Bremer Financial Corporation have the authority to reduce partially or totally the incentive payout that would be normally be due the participant. 6) Exceptions -- Upon occasion, there may be specific reasons for exceptions to the incentive compensation program for events beyond the control of the participant in the plan. The Board of Directors of Bremer Financial Corporation has the authority to determine and approve all such exceptions. J. Amendment and termination 1) The Board of Directors of Bremer Financial Corporation may at any time amend the plan for the purposes of satisfying the requirements of any changes in applicable laws or for any purpose which may be permitted by law. The Board of Directors of Bremer Financial Corporation may also terminate the plan at any time. No such amendment or termination shall, however, adversely affect the rights of any participant (without his/her prior consent) to any award previously approved. _________________________________________ NAME CALCULATION OF PRESIDENT OF BFC INCENTIVE AWARD Plan Year 1995 - 1997 Percentage of Salary To Be Awarded F-1 - Return on Realized Equity a. 1995 _____________________% b. 1996 _____________________% c. 1997 _____________________% Simple average equals a + b + c ________________% --------- 3 X 12/31/97 Salary $_________________ = 1995-1997 INCENTIVE AWARD $_________________ Approved: _____________________________ ________________________________________ Date Board of Directors of BFC EX-21 7 EXHIBIT 21 Subsidiaries of Bremer Financial Corporation Name of Subsidiaries and State or Other Jurisdiction of Incorporation as of March 29, 1996: State of Minnesota: First American Bank of Alexandria First American Bank of Brainerd First American Bank of Breckenridge First American Bank of Detroit Lakes First American Bank of International Falls First American Bank Metro First American Bank Southwest First American Bank of Willmar Bremer Financial Services, Inc. Bremer Investment Services, Inc. First American Insurance Agencies, Inc. First American Trust Company of Minnesota First American Services, Inc. State of North Dakota: First American Bank North Dakota First American Bank West First American Insurance Agencies, Inc. First American Bank Valley First American Bank of Wahpeton State of Wisconsin: Dunn County Bankshares, Inc., parent of First American Bank Wisconsin and Premium Finance Corporation State of Arizona: Bremer First American Life Insurance Company United States (National Bank Act): First American Bank, National Association, Crookston, Minnesota First American Bank, National Association, St. Cloud, Minnesota EX-27 8
9 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 127,786 3,008 0 0 667,863 316,905 320,379 1,626,616 28,253 2,812,232 2,242,307 256,527 38,633 25,568 2,144 0 21,654 225,399 2,812,232 141,754 57,845 182 199,781 84,872 99,136 100,645 1,780 304 87,296 39,461 39,461 0 0 27,136 2.26 2.26 4.33 8,392 2,504 1,856 0 28,253 2,834 1,610 1,780 1,780 0 751
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